This crisis is most definitely different

This century has been remarkable for its crises. Nonetheless, financiers are still the masters of the universe. Rising inequality and social networks flushed up new types of politicians, but power structures remained in place. The elites in 2015 were fairly similar to those in 2005. It was the digital revolution and globalisation that changed business models, but the crisis left them unaffected.

However, the pandemic is a wholly different event. Global supply-chain manufacturing became the first victim of the crisis. In Germany there is now concern about the future of Adidas, which was still raking in huge profits in 2019. The company has now asked for a rental holiday for its German stores, because it is financially not in a position to pay what it owes to their landlords. The German newspaper Die Welt notes that the event reflects a collapse in the company’s business indicators. Adidas is now trying to switch from high-street to online retail, but in such a move, the company will be likely unable to maintain its ultra-high margins.


A category of business that will see a much longer lock-downs than the rest of the economy are those that depend on large crowds. Trade fairs, a big business in Germany, will become less frequent. So will business travel in general. The fuel-driven motor car may get a short stay of execution because of cheap diesel prices. However, the wider auto industry will no doubt use this crisis as a way to bring forward long-overdue shifts in production and product development.

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Schumpeterian creative destruction is the oxygen of our economies, but it does not come in the shape of a V or necessarily any other known letter of the western alphabet. Expect the US and the Anglosphere, along with Japan, to come out of this crisis with new élan. There will be some of that happening in the eurozone too, in Germany for example. However, the eurozone will be much more inwardly focused, hampered by huge imbalances between countries. New investments in the health sector would benefit some European companies. Europe is still a force in healthcare. With deficient healthcare systems virtually everywhere, countries now have an excuse to invest. Just as Germany needed the Marshall plan in the 1950s, a Schumpeterian process also needs a fiscal jump-start. There will be less of that in the eurozone, where the discretionary element of fiscal policy is much smaller.

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Aside from Schumpeter, the political economist Mancur Olson is also relevant to this situation. Olson was famous for explaining the bargaining power of trade unions. He used the same methodology in his Rise and Decline of Nations to explain why Germany and Japan did so well after the second world war and then started to decline in the 1970s. His theory is that the war destroyed power relationships and industrial lobbies. From the ashes of the war, a new entrepreneurial class rose up, unhindered by lobbies. That more than outweighed the almost total destruction of the capital stock during the war. To some extent, Germany has still been living from the legacy of its entrepreneurship in the 1950s, one of the most Schumpeterian periods in the country’s history. Germany has been good at managing technological development, but the country’s biggest weakness is adapting to change. Digitalisation is still a big issue .

A short lock-down, of a month or less, would not be enough on unleash a Schumpeterian dynamic. Unfortunately, most European countries are now looking at longer lock-down periods, until late May or June. This may be followed by a phased relaxation that might not conclude until next year, when vaccination against the virus could become widely available.

The ban on large gatherings, like football matches, might continue for a while yet, much to the chagrin of Liverpool supporters!!! It is clear that football will not survive a one-year quarantine unscathed. It is now suspected that it was aChampions League match that brought the virus to Bergamo, and it was the carnival celebrations that brought it to a hotspot in Germany near the Dutch border. It would be irresponsible to re-open the football stadiums before most of the population is immune to the virus.

And, without football, what will happen to Adidas’ football shoes? What will happen to the car industry when there are no motor shows, or to the fashion industry without fashion shows? Or when people work from home and decide that they no longer need to drive so much?

It seems extremely implausible that life will return to the status-quo-ante, which is the underlying presumption of virtually all the forecasts right now.

However, a word of caution against much of the gloom. A look back in history at past plagues suggests an alternative narrative. As the vale of tears lifts, it is not surprising that euphoria often follows. When the ravages of the Black Death finally passed, spending patterns changed dramatically, with the demand for luxury goods shooting up (and not only among the most wealthy). As recent research on skeletal remains in London has shown, diets improved as people spent more on food, presumably also a reflection of their desire to enjoy the finer things in life — and to live in the here and now, rather than save for a rainy day that one might never see.

Something similar happened after the end of the First World War and once the Spanish Flu had finally passed. The decade that followed became known as the Roaring Twenties, a time of enjoyment, of decadence and even of early sexual liberation, for war and disease throw up unusual winners and losers. Conspicuous among those who finally made progress were women, who first gained the right to vote in the Russian empire after a protest on March 8, 1917, which is why International Women’s Day is now celebrated on that date each year. Euphoria is not uniform, though, and the relief of threats and challenges that have passed can be manipulated to frame aggressive calls for rebirth, renewal and revenge. The gilded 1920s of The Great Gatsby, flapper dresses and Model T cars tells only part of the story; another part is told by the rise of populist leaders in Italy, Germany, the new Russia and elsewhere who captivated their followers with their calls to make their countries great again.

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That certainly seems to be the most important trend that is likely to follow as Covid-19 eventually subsides. Before it started, powerful forces in almost every country were pulling the globalised world in different directions. We were living in a “me first” world where states were increasingly seeing each other as competitors and looking to consciously de-couple. Those trends may accelerate as a result of the pandemic, threatening supply chains that took advantage of our interconnectivity and helped to widen choice and reduce price. Or it might be that the difficulties we are all facing do not just turn us into a more compassionate global community but one that recognises that closer co-operation is needed. If that happens, one beneficiary will be the climate: after all, the world’s lungs are already breathing more easily thanks to the collapse of industrial production. Who is to say that this pandemic does not provide a turning point in world history.

With so many pessimists predicting doom and gloom, here’s to a ray of sunshine and hope at a time that is difficult, even if it is not, in fact, unprecedented.

Nicholas H Glinsman

EvoCapital LLC

Twitter: @nglinsman