Will Covid-19 be the spark for the next global debt crisis?

Karl Marx begins his 1852 essay “The Eighteenth Brumaire of Louis Napoleon” with the world famous reference to Hegel, according to which all important facts of history happen twice. Marx adds his own rejoinder: “the first time as tragedy, the second as farce”.

As a well-trained philosopher, Marx knew exactly what he was writing about here. In a tragedy, the central actors suffer from unforeseen events and get into trouble because they are unable to react in a timely and effective manner. In a farce, the audience is smirking because they foresee the events before the actors on the stage do, and when the catastrophe actually happens, the tension is discharged into laughter.

If world history is shaken by unexpected events, nobody knows what will happen next, but the chance to fix broken paths and to change the trajectory of events also becomes apparent – at least to some. The first time, the surprise and shock at the occurrence of the unexpected might be so prevalent, that the advice for changing paths and develop new, bolder ways to deal with a problem might fall on deaf ears. This is the tragedy we have seen unfolding in the aftermath of the global financial crisis of 2007.

Today we are seeing a repeat of similar trends haunting the world economy, spurred by the economic crisis set in motion by the disruptions caused by Covid-19. But the avoidable catastrophe, sadly, might turn into a farce – we know it might end badly, and we might end up laughing bitterly, as states and financial institutions repeat the same mistakes, when they have had plenty of warning, and alternative options to explore.

The 2007-08 global financial crisis

I remember an interview with philosopher Jürgen Habermas in the German weekly "Die Zeit" in November 2008, some seven weeks after the collapse of the US investment bank Lehman Brothers. Habermas spoke of a shift in the social imaginaries of political alternatives. He thought nothing less than the end of neoliberalism was possible, and he was not alone in this hope. Today, we know better. The political responses to the financial crisis of 2007 went in the opposite direction.

The crisis was caused by the trade of debt-based financial products (which included the now notorious “derivatives”). Commercial banks took loan contracts (such as home mortgages or credit card agreements) at different risk levels, and bundled them into new financial products to be sold anew on the market. This meant that a default on payments by the debtors of the original loans that the new products were based on, could make these new assets worthless. In order to sell the latter, banks glossed over this risk.

Instead of applying responsible risk management, the commercial banks were busy denying risk. They made huge profits from this high risk trade. But the risks eventually became known and accepted by the various market players, leading in 2007 to the collapse of value of these new financial products. Commercial banks were becoming over-indebted, having accumulated large amounts of “junk debt”. But these were the same banks where people and businesses deposited their money, so governments used taxpayers’ money to bail out the banks in trouble, to reduce losses for depositors.

Governments accumulated significant debts to rescue the banks, and the compounded effect of the threat of collapse of the big banks with the increasing public debt, slowed economic growth considerably, leading many countries into recession.

The bank managers that were responsible for the collapse of financial markets generally got away with impunity, the economic and debt crisis that ensued in the years after 2007-08 caused massive unemployment, lower wages and longer working hours for those who still had a job, higher taxes, and deteriorating public services due to austerity policies that slashed government budgets.

The long shadow of the 2007-08 financial crisis set in motions other events that led to the eurozone crisis of 2015, with Greece being the hardest hit by austerity programmes imposed by the International Monetary Fund (IMF), the European Commission and the European Central Bank.

Across Europe, the same austerity measures also likely cost many human lives this year, as cuts in health budgets reduced the number of intensive care beds needed to treat patients with severe cases of Covid-19, and generally diminished the health infrastructure capacity to deal with the current pandemic.

Latin American and African countries had already experienced something similar (in much harsher form) with the structural adjustment programmes imposed by the IMF and World Bank in the 1980s and 1990s, with devastating effects on public services such as health and education, and on the wages and working conditions of workers.


It is true that, after 2007, the global regulation of banks was improved. Governments introduced “stress tests”, which means that banks were made more robust. But banks are still engaged in the creation and sale of debt-based financial products, with all the risks that these activities entail.

At a more structural level, the key issue remains that debt, both private and public, is leveraged to strengthen the position of the creditors at the expense of the debtors. And if states and citizens are not protected from such attacks and speculations, the outcome is increasing socio-economic inequalities, impoverishment and exploitation.

This is what happens when banks repossesses somebody’s home because they cannot service their loans, even for reasons outside their control (e.g. losing one’s job in an economic crisis caused by the irresponsible actions of bankers), or when international financial institutions and bond managers impose the privatisation of strategic public assets, such as ports or electricity distribution grids, in exchange for some debt relief, so that creditors and other actors with big amounts of available capital can make significant gains, while states and citizens pay a heavy toll.

So how is it possible that so little has changed since 2007, given the long list of negative outcomes I have outlined before?

For most academics, the financial crisis of 2007-08 came as a surprise. Critical economists and social scientists had sounded alarm bells about the increasing financial instability and growing inequality before the crisis. But on the whole, there was a sense that politicians in power, financial institutions and technocrats would use their institutional power to prevent a full-blown crisis, and that market players would self-regulate by reducing risky trades, if the dangers for the global economy became too high. Instead, even with the negative data from the debt markets, bankers went on throughout the great part of 2008 with business as usual, until collapse was imminent and governments bailed the banks out. Up until the bail out, politicians and economists were at a loss and did not know what to do.

As for critical social scientists, the tragedy was that while many of them, like Habermas, were able to quickly diagnose the reasons for the crisis and provided a rigorous critique of the mistakes of neoliberal economists, they were unable to sketch alternative ways out of the crisis.

Critical social scientists too had, on the whole, failed to engage with the public, and to work with activists and political and social movements on the creation of viable social alternatives.

There have been notable exceptions, such as the involvement of economic anthropologist David Graeber in the Occupy Wall Street social movement (largely started as a response to the troubles caused by the 2007-08 financial crisis). But for the most part, social scientists continued to engage with social movements to collect data, rather than supporting their work actively or developing practical solutions to the problems of the economy.

2020 onwards: history repeating itself?

Earlier this year, politicians of many governments, especially in Western countries, found themselves unprepared for what was to come. In February, the German Health Minister publicly stated that a pandemic was an “unrealistic notion”. The UK government underestimated the threat posed by Covid-19 as late as mid-March, when death rates in Italy were already spiking.

But then, with often spectacular U-turns in policy, many governments around the world embarked on bold lockdowns, with politicians proclaiming that Covid-19 would be the biggest challenge of our lifetimes.

The economic implications of the lockdowns were sudden. The interruption of global mobility resulted in a shortage of urgently needed products. Belief in economic globalisation crumbled further, when it became apparent to all that local supplies, from food to personal protective equipment, depended on transcontinental production networks.

The management of hospitals on economic “efficiency” grounds and the abandonment of a policy of stockpiling medical supplies were criticised, with a growing consensus that a strong health care system is more important than the budget needed to achieve it.

Other key social work such as care for elderly people and for children became public topics of debate, delinked from the usual economic discussions about productivity and costs.

The idea of a basic income to be given to all, without strings attached, and delinked from the conventional notion of “unemployment subsidies”, rapidly gained ground, also as a response to the crisis of a labour system where there is increasingly less work available and at increasingly exploitative and precarious conditions.

Social scientists with a critical attitude towards globalisation and the unregulated advance of free markets were not surprised. To cite one example, in September 2019, an international conference titled “The Great Transformation: On the Future of Modern Societies” was held at the University of Jena in Germany, organised by Klaus Dörre, Stephan Lessenich and Hartmut Rosa.

Hundreds of contributors claimed that rapid economic growth has only increased social inequality, exploited the natural resources, extended precarious working conditions and poverty, and endangered many cultural lifestyles. The call for an alternative path of development was accepted as common sense. Similar proposals have informed the progressive campaigns of Bernie Sanders in the US and Jeremy Corbyn in the UK, or popularised accounts of alternative economic theories such as Paul Mason’s book PostCapitalism: A Guide to Our Future.

Despite this prolific production that, unlike the early days of the 2007-2008 financial crisis, has increasingly been discussed in key political debates, the available critical analyses have not yet been translated into alternative political imaginaries offering a clear set of policy tools and actions that can be implemented in the current moment.

At the same time, narratives that make capitalism the “only” way forward have resurfaced with force in the last few weeks, as the negative economic effects of lockdowns have begun to hit people’s wages and livelihoods. After an immediate shift of policy embracing full lockdowns, we are now seeing equally rushed reopenings, often delinked from epidemiological considerations. In the last days, we keep on hearing the mantra that, if we do not restart the economy, we will just be doomed to catastrophe. The “economy” here stands for the same neoliberal system that ran the pre-pandemic world.

Public debt has forcefully re-emerged as a contested topic and as a major risk for the global financial system. More than 90 countries around the world have asked the IMF for financial assistance to face the burden of the evolving economic crisis. But the IMF continues with business as usual, providing the old recipe of loans with conditionalities – read: more cuts and privatisations.

Financial institutions, the international banking system, the EU Commission, and many governments bent on neoliberal policies, continue to advocate for the principle that debt should be held as leverage over the debtors’ heads, so that the creditors can continue to profit, while citizens in debtor countries bear the devastating effects of dwindling public services and privatisations.

So what can be done to change course? A different path of development needs much more than critical scrutiny of the current economic policies.

It requires the collective engagement of social scientists in public policy and their close collaboration with a critical mass of political actors, with the practical goal of developing alternative frameworks for providing people with livelihoods that are not based on the principles of debt repayment and wage earning.

There is still a lot of work to be done. It is what is needed to avoid a repeat of the same play we have already watched in 2007 as a farce – a farce that would tragically unfold on a real life stage that could be devastated by even more deaths, trauma and suffering.

Jürgen Schraten is a sociologist at the University of Giessen (Germany), specialised in economic, political and historical sociology. He works with colleagues from Germany, Lesotho, South Africa and Poland.

The views expressed in this article are those of the author and do not necessarily reflect Corona Times' editorial stance, or the position of any institution or association.

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