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Expert opinion on globalization and the economic consequences of the coronavirus pandemic

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University of Bayreuth, Press release No. 042/2020, 23 March 2020

Prof. Dr. Bernhard Herz is chair of Economics I - International Economics and Finance at the University of Bayreuth. The economist deals with monetary theory and monetary policy as well as international economic relations. Herz expects the production of strategically important products increasingly to take place domestically in future, and that companies will set up their supply chains less globally.

Prof. Dr. Bernhard Herz hat den Lehrstuhl für VWL I - Geld und internationale Wirtschaft an der Universität Bayreuth inne. iconZoomOverlay

What consequences will the coronavirus pandemic have on the international economy?

The special thing about the coronavirus pandemic is that so many countries have been affected more or less simultaneously. In order to protect their populations and ensure adequate care for the sick, these countries are     taking similar measures. These restrictions affect the economy on both the supply and the demand side. Companies' production capabilities are restricted when employees are no longer able to work to full capacity. Working from home can mitigate this effect, but not completely prevent it. In a globalized world with international supply chains, these negative effects can be exacerbated if, for example, Production is lacking important preliminary products because they are not being produced abroad. On the demand side, there are individual industries that are directly and very severely affected by government restrictions and bans, such as airlines, cinemas, and restaurants. There could be far-reaching consequences for everyone if the pandemic unsettles private households to such an extent that they permanently reduce their consumption expenditure. Although it is to be expected that many of these postponed purchases will be made once the pandemic has ended, i.e. there could even be a post-crisis boom, it remains uncertain as to what extent this will be the case.

Does this give reason to question globalization and worldwide trade?

In principle, the international division of labour makes sense and will be continued. However, it is questionable whether this should be the case to the same extent as it has to date. Many companies will examine how they can better hedge against disruptions to supply in the future. The government will also have to decide to what extent strategically important products, such as certain drugs, should be produced domestically.

Are these consequences especially severe because we live in a globalized world?

The pandemic and its economic repercussions would have affected us even in a world without globalization - but the effects are more severe today. International supply chains are more vulnerable to government intervention such as border closures and production stoppages abroad.

Are the repercussions comparable with 2008?

The causes of the crisis are obviously different today than in 2008. The origin of the financial crisis lay in excesses in the financial sector, and in the weakness of many banks. At the time, the aim was to prevent the problems from spilling over into the real economy. Now the problems are in the real economy and it is important that they do not create problems for the banking sector. The measures proposed so far by the German government, such as loan guarantees and liquidity assistance, are headed in the right direction. If they succeed, the recession that is now looming cannot be prevented, but its course can be mitigated. As the pandemic dies down, there should then be a rapid recovery.

Is there reason to be worried? 

To be sure! In addition to the terrible consequences for people's health and lives, there will also be an economic decline. Paradoxically, the more we succeed in slowing down the course of the pandemic and extending it over time, the greater the decline will probably be. This is because production losses will then last longer and consumer uncertainty could increase. At the same time, however, it is also clear how companies and their employees can be helped to cope better with the consequences of crisis, such as short-time working, financial aid for companies, tax deferrals, and additional spending programmes. And thanks to its much-maligned zero-deficit policy, the government will now not have to take any half-measures. In any case, necessary aid is not likely to be withheld for lack of financial resources. 

Contact:

Prof. Dr. Bernhard Herz
Chair of Economics I - International Economics and Finance
University of Bayreuth
Phone: +49 (0) 921/  55- 6321
Mail: bernhard.herz@uni-bayreuth.de 
http://www.giw.uni-bayreuth.de


Editorial office:

Anja-Maria Meister
Press & PR Manager
University of Bayreuth
Universitätsstr. 30 / ZUV
95447 Bayreuth
Germany
Phone: +49 (0)921 / 55-5300
E-Mail: anja.meister@uni-bayreuth.de

Translation:

Ralph Reindler​

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