COVID-19 Geopolitical Challenges
Analysis Economics

COVID-19: The Path to Financial Stability, Policy Responses, and Geopolitical Challenges

Technically, de-urbanization would further slow down economic growth. Unlike developed nations, the continuous movement of individuals from rural regions to expanding city areas has become vital to reduce poverty in developing countries. That said, there is a need for better economic policies to ensure financial stability for cosmopolitan cities that may have long-term consequences.

Responses to Policies and Consequences

The continuous stream of stimulus through monetary policies, at most, facilitates the growth of the financial markets. However, it has now become a dilemma for most of the nations across the globe amidst pandemic.

Besides, traditional monetary policy revolves around cutting or raising interest rates to stimulate or decrease the demand. Conversely, more stimulus through monetary policy no longer works. The ideal course of action would be the distribution of funds to companies that are struggling.

The direct policy response is more appropriate as the COVID-19 continues to bring new challenges to the financial markets. If countries intend to deal with the outbreak in the foreseeable future, the policy response should be a combination of monetary and fiscal. On the other hand, it is hard for policymakers in certain European countries to calibrate the response size.

Financial Stability of the System

It is true – unpreceded liquidity injections in the financial system may hamper the stability of the economies. Technically, the equity indexes may not be the right criteria for predicting financial markets’ future stability.

Currently, the US economy is on its path to gradual recovery due to sustained expansion. Apart from the market liquidity injections, the underlying pricing is now relatively less stressed. The road to complete recovery and bridge the economic gap will take time.

However, there is a certain degree of pricing uncertainty in the market. It would be fair to say that the US economic recession needs more observation throughout the recovery. Contrary to misguided perception, it is not a typical recession. The market contraction may be more than financial experts realize.

The key, however, should be not to let the economy spiral out of control and turn to a financial crisis. That said, financial experts hope that the future of the financial market depends on whether or not the Coronavirus will mutate in the upcoming months.

Dynamics of Financial Shift?

Is the world heading towards a debt crisis? Mainly, it is a long-term concern for the economies. Simultaneously, the speed of policy response is crucial to thwarting a long-term debt crisis. It is vital to maintain the current short-term constructive economic environment.

There will have to be continuous supportive economic policies in the future to resolve the financial legacy issues due to COVID-19. It means the fiscal position of countries needs to be strong in the coming years to avoid a prolonged debt crisis.

The Rising Geopolitical Tensions

Germany and Switzerland, for instance, have had a perfect policy response that other countries can follow. Ordinarily, countries don’t have to succumb to complicated debt-resolve management processes. Realistically, a slow economic recovery policy would fair well.

Conversely, some countries may want to inflate their way out of it. However, “how” a county grows out of a debt crisis will result in various geopolitical tensions. Naturally, not every policy would have precisely the same results on the economy, as some financial specialists anticipate.

Practically, several countries will have to go through debt restructuring for years to come. Still, the goal of these countries should be to revert the economies to normalization. And that means less division between monetary and fiscal policymakers.

Furthermore, countries with past conflictual history will have to collaborate and work together for the sake of their economies. Traditionally, there are boundaries between monetary and fiscal policy. But countries are retorting to coordinated effort to eliminate the financial hurdles.

Just like individual conflict, geopolitical conflict arises from economic disparity. Therefore, nations should have a shared understanding to increase their economic prosperity. EU coalition, for instance, is not at risk so long as it works in favor of countries collectively.

However, there is a divergence when it comes to the US and China. The strategic approach to China’s tech-centric economy and the traditional side of the US economy will have minor to major economic clashes. Concurrently, investors are justifiably concerned about the future of these economies.

Final Thoughts

In hindsight, the return to normalized economic order will be a gradual and continuous process. The framework of the policy should be able to avoid the acceleration of the inflation rate in the future. Currently, it is a good sign that the American and Chinese capital markets have ownership and portfolio assets with strong merits.

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