Who will be the next black swan?


At a time when the speed of response to the – often consecutive – crises also defines the success of their outcome, Europe should take immediate action, rather than observe how they add up. Meanwhile, the question arises: What is the next invisible iceberg in front of us? Who will be the next black swan?

One crisis after another. A war with untold economic cross-border implications amid an incomplete recovery from an unprecedented global pandemic crisis. This is the case of the war in Ukraine, which was waged in the midst of a COVID-19 pandemic, upsetting the prospects of the global effort to recover from the economic fallout of an unprecedented health crisis.

The present juncture gives food for thought regarding the need for more systematic management of mixed crises and disasters, not only at the operational level, but also in terms of dealing with their exponentially growing economic ramifications.

It all comes down to economics

An important chapter in the management of crises and disasters is the treatment of their economic effects. Even if they are caused by factors exogenous to the economy, disasters can cause major shocks in the economic life of a place, often spreading beyond the boundaries of the affected area in the age of globalization.

The impact of a single disaster on the economy can be quantified to a sufficient degree, so that the economic recovery mechanism can be implemented immediately and in parallel with the operational response planning.

However, the same does not happen so easily with crises and disasters of uncertain extent and duration, as well as with the spatio-temporal coexistence of two or more disturbances. Circumstances of this kind put an exponent on the magnitude and number of economic consequences and further complicate the management scheme for economic reconstruction.

In general, geopolitical and epidemiological crises claim a large share, if not in the total number of disasters, certainly in terms of the number and extent of their consequences. Also, even if the human, material and environmental losses they cause complete their cycle, their economic effects continue to unfold. Their combination multiplies the impact and makes their management more complex.

Characteristic historical examples of the coexistence of these two types of crises are the flu at the end of World War I, the black plague in the middle of the Hundred Years’ War, the Plague of Athens in the second year of the Peloponnesian War (5th century BC), the Ebola epidemic in war-torn Democratic Republic of the Congo.

The recent events constitute a valuable example of an ongoing case study and demonstrate that the possibility of mixed disasters, i.e. the occurrence of more than one crisis at the same time or in direct time sequence, must be taken into account in the risk analysis scenarios and need a particular immediate systematic interdisciplinary and multidisciplinary response.

Not quite a black swan

The Covid-19 pandemic has created new and exacerbated existing economic pathologies. Planning for economic recovery was based on scenarios based only on the time horizon and lethality of the virus. The potential interaction of a second exogenous adverse factor was not accounted for. According to estimates shortly before the outbreak of the war, the cost of managing the pandemic was projected to rise to $12.5 trillion. until 2024.

The Russian invasion of Ukraine came two years after the outbreak of the pandemic. It was not a completely unpredictable confounding factor, although it was initially characterized as such, even in formal analyzes such as those of Choudhary, Saied et al. The continuous violations of the Minsk agreements were known even though they did not receive much coverage from the international media, except for minimal references to the possibility of escalation and interaction of consequences with those of the coronavirus, with the most typical example of a study by Quinn et al, as early as last year.

It has, however, moved to the forefront not only of the geopolitical but also of the economic agenda, as it has been added as an independent variable of overturning the prospects and strategies of recovery from the pandemic, triggering diverse but powerful additional effects, which are diffused in all economic zones and in each branch of economy.

The fronts of the double crisis

A blow to growth and a burst of inflation are the two main fronts of the emerging economic crisis due to the outbreak of war in the shadow of the pandemic.

Every country has now experienced this crisis fueled by sanctions, growing food and energy insecurity, shocks to trade and supply chains. Every household also experiences the accuracy of prices, progressively already and the shortage of goods.

Effects by economic sector

The war worsens the conditions in critical sectors of the economy, already affected, or in a phase of incomplete recovery from the sufferings of the pandemic. The sanctions and the duration of the war determine the extent of the consequences, being factors intertwined with the already existing pandemics (duration of the pandemic, possibility of future outbreaks, etc.).

The energy and food sectors are directly affected, as Ukraine and Russia are hubs of global grain production and fossil fuel exports.

The World Bank says this is the highest rise in commodity prices in 50 years.

The relevant analyzes published also warn of distortions in the financial system and the trading circuit, disorientation of international immigration policy due to mass population displacement, deglobalization, obstacles to European integration, fiscal burdens, market uncertainty, which come to be added to the already large burdens brought by the pandemic on transport, production, raw materials, energy, etc.

This year’s World Economic Forum also placed high on the agenda the influence of the pandemic and the war on climate change policy-making, due to shifting priorities, reallocation of funds and the need to accelerate an energy transition to wean off Russia.

The 6th package of sanctions brought tremors not only to the Russian economy, but also to international trade, foreign direct investment, shipping and real estate, as a result of the terms of the ban on Russian oil and real estate transactions with Russians.

And all this without taking into account the cost of equipment and re-equipment. As documented at this year’s Forum on the Arms Trade, significant parts of the budgets of superpowers as well as neighboring small economies will be channeled into destruction, rather than recovery, and defense against climate change.

Impacts by economic region

Undoubtedly, Ukraine and Russia are experiencing strong economic shocks. However, other countries are also at risk of falling into recession this year, while it is unlikely that even a small percentage of the world will be unaffected.

In its recent revision of the World Economic Outlook (July 2022), the IMF further cuts global growth forecasts, shoots up inflation estimates and quadruples the risk of a recession for the G7 economies, with Germany leading the pack. The European Commission’s summer Economic Forecast reiterates that Europe was at an advanced stage of recovery from the pandemic at the outbreak of the war, but gives even lower expectations for growth and a further spike in inflation than in the spring report.

In the US, the economy is already overheating, with inflation at a 40-year high. Another rate hike has recently come to add to the Fed’s recent rate hike, the biggest in 22 years, which although planned well in advance, came late according to the market, at a time when some local indicators such as the Fed’s GDPNow of Atlanta indicate that a technical recession may have already begun.

High variation in economic consequences is found by economic region in the rest of the world. Countries with over-indebtedness, low employment rates, limited fiscal space are suffocating further. Developing economies have the largest growth slowdown maintained in the respective forecasts and in 2023. The special conditions in China at the level of Covid and also the real estate market create more financial spillovers worldwide.

Risk of deglobalization?

In the meantime, the voices for possible deglobalization are increasing. Whether these voices are echoing inflated trend readings or perhaps even affected pole placements of influence, one thing is certain. The mixed global crisis we are going through is causing significant tremors, but it is not enough to divert the rough course of international economic policy.

However, patterns of anticipation, preparedness and management of both the present and corresponding future situations should be explored. To be addressed with a proactive interdisciplinary approach, so that the joint management of multiple crises and disasters in the near future is not activated exclusively after the fact and ad hoc. Instead, develop safeguards and reflexes for prevention and/or early, more effective response, and their economic impacts, which largely determine recovery success at all levels. Let’s not wait for the next black swan. Let’s wait for him.

The article is in Greek

Tags: black swan

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