The global economy could be facing a make-or-break moment in the Covid-19 pandemic as governments' ability to cover the mounting costs nears its limits, the chief of the OECD warned.
Angel Gurria, who spent 14 years as the head of the Paris-based body, said while governments were right to open the spending taps this year to counter the worst recession in living memory, many are close to running out of fiscal firepower. Without greater efforts to coordinate, the next stage of crisis could see a fragmentation in the global economy with gaps widening between rich nations and cash-strapped economies.
His comments sound the alarm for world leaders as they gather for a Group of 20 meeting Saturday amid concern that the global recovery from the pandemic-induced recession could be derailed.
"Right now you really are seeing the limitations of some of the fiscal capacities with the economic realities," Gurria said in a Bloomberg interview. "It's not the last few months where you will see the damage that was done -- it's going to be in the next few months."
Due to retire next year, the 70-year-old has been a witness to many of the crunch discussions among leaders and central bankers as they tried to save the global economy from multiple blows this century. The coronavirus outbreak is just the latest in a litany of upheavals he's faced, from the shocks of the 2008 global financial crash and the euro-area debt crisis to long-running structural issues like inequality and unemployment.
Reflecting on his time at the OECD, Gurria says there have been "ups and downs" in the G-20's success in rising to challenges. While the group has sometimes shown a united front, it's also been a source of tension over issues such as trade policy, climate change and currency weakness.
He said the 2009 meeting in London, which produced a pledge for $1.1 trillion program of support for the global economy, marked a quantum leap in coordination. But other efforts, like the 2014 goal of increasing global growth by 2%, have failed because of a lack of cooperation.
"It tends to be more effective when there is a fire to fight, like the one now," Gurria said. "My biggest concern is that the awareness of the need for further coordination and cooperation may not be as obvious, and my greatest hope is that it will be."
Another problem for G-20 leaders now is gauging how much will need to be spent in the Covid crisis. It was perhaps easier in 2009, Gurria said, as governments knew what was required to bail out a carmaker, or pay creditors of a failed lender.
"The big difference with today's situation is that you don't have a known cost, you do not have a finite number," said Gurria, an economist and former Mexican finance minister.
That idea terrifies governments, many of whom have racked up record debts and are already thinking about ways to get their finances back in order. For others, it's too early to start that process and the focus must stay on crisis fighting.
Still, the OECD chief said fiscal and monetary policy have done a better job of working together in the Covid-19 pandemic than in the financial crisis. Central banks have overcome barriers on asset purchases, and governments have stepped in with massive guarantees and furlough programs provide a "continuum."
"The question is, how many countries can actually do that and keep debt within a reasonable limit," he said. "The answer is, not many."
Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement