Covid-19 in 8 Verticals
COVID-19 in 8 Verticals
Martin Bartels
15 March 2020
Introduction
Following the logic of Donald Rumsfeld‘s 2009 lesson on the degrees of uncertainty
https://www.youtube.com/watch?v=GiPe1OiKQuk,
given in a completely different context, the pandemic haunting us now has become a “known unknown” through Larry Brilliant’s 2006 TED speech:
https://www.ted.com/talks/larry_brilliant_my_wish_help_me_stop_pandemics.
We should have acknowledged that it was coming. Since December 2019 it is a “known known”. Now we perceive it primarily as a risk factor that threatens our health and that of our loved ones.
Our best researchers worldwide are working on medical solutions. We can be confident that they will succeed and free humanity from this threat.
It is time to realise that the health crisis is nothing more than a tiny needle that causes a big beautiful balloon to burst. It is putting an end to a state of over-extension. The impact of the “COVID-19 needle” on the global economy is more serious and lasting than the health dimension of the change.
Such phenomena are not unusual: The reason for WW I was not the fact that Archduke Franz Ferdinand’s driver got lost in Sarajevo on 28 June 1914 and accidentally turned into a street where there happened to be an Austro-sceptic with a pistol in his pocket. The real reason was a complex state of tension that nobody wanted to admit at that time.
Through often tragic detours, we have learned in the meantime to deal with health crises more rationally than e.g. at the time of the “Spanish” flu. Presently we are mostly impressed by the way our governments accept the guidance of first-class scientists and adjust their crisis management accordingly. The scientists use clear language that every interested listener understands. People and governments accept their conclusions. This is both a necessary and pleasantly surprising qualitative leap forward.
The virologists exchange information globally with each other, and their scientific approach, which is committed to rationality, saves human lives. Of course we are worried, but we are better off by following the wisdom embedded in Mark Rylance’s “Would it help?” question.
So it is only reasonable to take the virologists as an example and search for the causes of tension with a medical mindset. Sentimentality and too much attachment to old thinking habits would jeopardise or prevent adequate treatment.
The perspective presented here is that over the past few decades value chains for many important industrial goods have developed into a state of over-extension. Cost advantages from the relocation of industrial production to distant locations became risk factors. The costs now caused by a pandemic indicate that these risks have materialised to a large extent already.
The necessary repair work needs to be carried out rationally. This means that scarcer resources must be used strategically with a longer term perspective. The aim is to restructure national economies in a cautious and circumspect manner. Each sector has its own logic. And of course there will always be regional differences.
It is now possible, with probabilities of well above 50%, to deduce which change is imminent in which sector. Some of the expected developments have already begun. There will be winners and losers. Both sides deserve support. Otherwise we would endanger the stability of our societies.
Our “COVID-19 Impact Chart” browses though the expected changes from an EU perspective. This chart is an attempt to describe medium term effects of the pandemic. It is widely self-explanatory. Some points may give rise to discussion, but a consensus on the direction of developments is quickly reached.
(1) Production
The EU is a region with few natural resources. So it is competitive production that is predominantly responsible for the region’s prosperity. There is growing consensus that value chains need to be shortened. The point is that the lower cost of human resources in distant locations can be compensated, gradually, by automated production in the Union or in its vicinity.
In the field of financial services, regulators have for some years been emphasising the importance of moving critical IT systems out of offshoring. They wish them to be developed and operated within the Union: "nearshoring". This way of thinking is now being transferred to the industrial sphere.
Cost advantages can still be achieved with nearshoring, but the decisive effect is the reduction of exposure to shortfall risks.
Nearshoring may also allow additional risk reductions by diversifying production sites within the Union or in neighbouring countries.
There are already painful bottlenecks in the pharmaceutical industry resulting from excessively long value chains. Probably the most critical vulnerability we have is in IT hardware.
The very important automotive industry is struggling with technological bottlenecks because consumers are still waiting for drive technologies that offer or surpass the performance of combustion engines. The pandemic is increasing consumer reluctance, which has built up over the years.
Aircraft technology will suffer from a new and powerful trend against flying, partly driven by ecological arguments. Public transport will benefit somewhat, but overall Europeans will travel less. The lifestyle adopted in quarantine with less movement over distances has found followers.
(2) Infrastructure
Large parts of Europe suffer from inadequate telecommunications infrastructures. The pandemic made this deficiency abundantly clear. Compensating for this competitive disadvantage will boost the growth of equipment suppliers.
The need to renovate the railway network and, to a lesser extent, the motorway and road networks, is significant.
Additionally, discontinued railway lines can be reactivated.
The construction of new railway lines may be hindered by legal obstacles and tendering procedures that lead to unsatisfactory results. Nevertheless, the renovation works will entail a significant boost in demand for the construction industry.
Ports and airports will feel a reduction in the use of transport routes.
(3) Services
Over the last 20 years, there has been a pressure to cut costs in the health sector almost everywhere in the Union.
At the same time, professional and tourist mobility has expanded to such an extent that existing infrastructures have often reached their limits and many people have increasingly found their own behaviour stressful. The crisis triggered a reversal of trends in both areas. The effects will diminish, but will also continue.
First-class electronic means of communication with video functionality have proven their value in the crisis. However, a significant economic impact in the telecommunications sector is unlikely, as these services are rapidly becoming low-cost or even free.
(4) Retail trade
The pandemic has done great damage to the retail sector and has given wings to online business.
The effects on European urban structures are painful and only partially reversible. The trends have existed for years and have now become established.
The demand for food from the region has increased.
Established discount chains have the best chances for growth, if they continue to improve the quality of their product range. Specialist shops will find it more difficult to cover their costs in view of online business.
(5) Real estate
Some companies have been experimenting for years with the relocation of electronic work to “home offices”. Since March 2020 this suddenly became a necessity. Despite widespread difficulties with inadequate hardware and unstable access to corporate servers, there is now a consensus: the imposed experiment is a success.
If employees no longer come to the office every day, less office space is needed. At the same time, the workplace at home becomes more valuable. This should result in a reduction in demand for office space and a strengthening of demand for residential property.
The demand for industrial real estate should also increase where new production facilities are to be built, to shorten global value chains.
(6) Financial services
The crisis of 2020 is not coming from the financial sector. But it is having an impact there by reinforcing existing trends.
The contraction of the economy will lead to credit defaults. Not all bank branches that were closed during the quarantine will resume their operations, some will be closed after a few months. Online services will fill the gaps.
At the same time, the Europeans' love of insurance policies will remain intact.
(7) Political system
There are no arrows in this vertical. They might give the reader the impression that we are talking about simple changes in volume. But reality is more complicated:
Still reeling from the impact of the last crisis in 2007/2008, public administrations are once again faced with major responsibilities. Governments must understand the structural changes that are taking place and reinforce trends in sectors where new opportunities are emerging. They must also mitigate change in sectors with a clearly negative outlook, without making vain attempts to stop it. Wrongly allocated tax money will be lacking in those areas where the foundations for new prosperity need to be laid. The strategically correct distribution of subsidies is a demanding task. At this stage we need the advice of first-class macro-economists and deafness to lobbyists.
The life-saving contribution made by scientists during the health crisis before the eyes of the public results in acceptance. Citizens are showing gratitude for the advice of experts to an extent never seen before. This has a lasting impact on gaining social consensus in general. In the future, citizens will expect more scientific support for economic decisions than in the past.
Public sector disaster protection is well developed, yet it must take into account that disasters, even if not correlated, can cumulate and be mutually reinforcin:
The capacities for this function must be further developed.
When governments are called upon to reorganise and revitalise economies as quickly as possible, this cannot be a free lunch. Comparable to the “solidarity surcharge” for the economic reconstruction of East Germany, special taxes will be necessary for a few years. The states of the Union need to communicate this to their citizens in an understandable way and with the help of first-class economists. A lack of clarity can provoke or intensify social unrest.
Europeans must also be prepared to accept that the road out of the crisis will be longer or not at all successful unless they embrace an immigration policy that contradicts their traditional attitude: The Union will not be able to provide the urgently needed economic recovery with its own human resources. Immigration laws must be adapted so that valuable expats, in particular highly qualified engineers from all over the world, can easily enter Europe and feel that a red carpet is being rolled out in front of them. With new guests, there is more food on the table for everyone involved, European traditionalists included. Half-heartedness is tantamount to decline. Fortunately, there are befriended countries from which we can learn a lot in this field. We should ask them for guidance.
This section has no box for the unconditional basic income project (“UBI”). The question undoubtedly concerns us, but in view of the tasks now facing us, it cannot be tackled in the medium term.
(8) Science + education
Europe has a historically developed excellent public and private infrastructure for training technical specialists and for research. There is every reason to expand and strengthen it, also by inviting more experts from overseas. The electronic video media, which have now become popular, can help to meet the growing demand with high-quality teaching or consultation with overseas partners.
And we should buckle up for the next major industrial impulse: the very significant investments made over decades in research in many areas of energy production and storage are gradually leading to the conclusion that the bottleneck factor "expensive energy" will soon be matter of the past. This change is still a "known unknown", but well on the way to becoming a “known known”. When it materialises, we will experience this improvement as a structural crisis before we reap the benefits.
For now, the opportunities and risks of COVID-19 continue to deserve our full attention. It is unlikely that the Union will initiate a change process which overseas partners will find very disruptive. Globalisation won’t end, but its structure will change for good, gradually.
Suggested further reading:
The stumbling block
The issue of immigration is stirring up emotions all over Europe, but in order to consider the appropriate rational response, we need to first distinguish between the different forms of migrations. In fact, only one of the four categories of immigration distinguished below is to be classified as a challenge:
- Migration of High-Net-Worth Individuals (HNWI)
Let's start with the probably smallest group of migrants, which is also the least debated: very wealthy people who are able to move from one country to another with ease. Members of this group seldom encounter rejection and in some cases are actively sought after by countries.
HNWI can weigh up their motives and choose their targets according to their criteria. These include, for example,
- security for personal life and wealth
- personal freedom
- quality of life
- quality of the healthcare system
- landscape or climatic preferences
- tax rates
- family ties
- cultural affinity
- language
- quality of schools and universities.
Protection of wealth is frequently a major motivation for migration among the super wealthy and countries with low or no income tax are popular in this regard. On the other hand, while certain countries encourage HNWI to migrate to them, the benefits are not always as great as they might expect, especially when the migrant’s assets do not always accompany them to the country they are settling in. Furthermore, with laws that say an individual faces taxation if they spend more than 182 days in a country, those wishing to avoid this, simply rotate through different countries each year thus avoiding paying any income tax at all.
The number of migrants from this group is increasing, and the countries concerned are well known.
This group of migrants does not pose major challenges to European states.
2. Migration within the European Union: everyone with an EU passport
Article 45 of the Treaty on the Functioning of the European Union and Regulation (EU) No 492/2011 on freedom of movement for workers within the Union guarantee the freedom of every EU citizen to take up a job in any other state of the Union and to settle there with their family. This freedom of choice is a cornerstone of the European Union. It has led to significant migratory movements, which, due to the enlargement of the Union into Central Europe, have been accelerating gradually since the 1990s. In most cases, families put down roots in their new place of residence and do not move back to their countries of origin, although they maintain ties there.
The disadvantage of this migration is that citizens whose education took place at the expense of their home states now move to member states with higher wage levels and better career prospects, in effect creating what is known as an internal ‘brain drain’ scenario, where talented workers move out of the country of origin, depleting the national workforce. The receiving states thus strengthen their national economies at almost zero cost to them and at the expense of domestic countries responsible for their education and socialization.
These implications were clear from the outset, but the net benefits from a large economic area with free movement of people, capital and goods outweigh the drawbacks. Free movement has had a predominantly positive impact on the prosperity of citizens. Changing this structure and enacting new restrictions on internal migration would have a negative impact on the powerful new industrial structures that have emerged over the years.
Traditionalists should be very careful when they argue against free migration within the Union as there is a long-standing practice of it within the continent. The last two centuries have seen massive migrations within the area that now makes up the European Union: the countries of origin were mainly Italy, Poland and Greece. These movements are themselves a valuable component of European identity and increased wealth.
3. Migration from outside the European Union: skilled labour
While the world population is still increasing, a simultaneous decline in birth rates has been evident worldwide for many years. The trend is more pronounced in Europe, where population numbers are increasingly moving towards shrinkage.
European economies today face an irreversibly negative trend with an average in the area of 1.5 births by women combined with an increasing shortage of skilled labour. The labour bottleneck is particularly severe in the areas of construction, healthcare, science, information and communications technology, engineering and mathematics. For Europe, the scarcity of skilled human resources reduces the economic strength of a continent that has few natural resources and is compelled to rely on competitive industries to prevent its decline.
Clearly it is not possible to fill the gaps in the labour market out of the continent's existing population. This would not change even if Europeans could be persuaded to sharply increase the current birth rate. In that unlikely case it would take at least two decades for a generation to become visible in the labour market.
Many industrial processes and services can be designed through additional automation in such a way that even fewer human resources are needed than now. This may mitigate the bottleneck somewhat, but would not eliminate it.
If there is no quick turnaround, Europe’s economies will inevitably enter a shrinking process.
The only possible countermeasure is to enter the global competition and attract talent for the known gaps in the labour market. This has been crystal clear for a long time, but fear of traditionalist and conservative voters’ sensitivities has led to most governments to only address the issue in the abstract and try to cook the necessary debates on a low flame. Slogans like "We are not a country of immigration" earn significantly more public applause in Europe than "We urgently need lots of immigrants". Yet everyone knows from their own experience that when a tooth hurts, it is better to go straight to the dentist. Postponing the treatment makes the pain worse.
Nevertheless, increasingly fierce competition at the international level has developed to bring as much talent as possible into the countries. In the process, even industrialised countries are taking skilled workers and students away from each other. The expression "skills wars are the new trade wars" is not an exaggeration.
The fight for human talents is not much different from the struggle for other scarce resources such as raw materials or technical components. The difference is that the competition for material things is rarely a source of cultural friction. Imported goods and commodities don’t arouse sensitivities among traditionalist voters. When it comes to human migration however, public decision makers tend to tread more cautiously and thus do not give the issue the visibility which corresponds to its actual relevance.
The Europeans are now operating a "Blue Card" system, which allows people from outside the Union to take jobs offered to them and apply for nationality after five years. This is a relatively arduous path for applicants. The “Blue Card” approach is less attractive than the more successful American "Green Card" system in which holders are granted permanent residency from the outset, and after five years they can apply for US citizenship.
Under the present circumstances the winners in the competition for talent are likely to be those countries that have a tradition of continuous immigration, have a long history of selective immigration and have the lowest bureaucratic barriers for immigrants who fit into their labour markets. These would be, for example, Canada, the USA and Australia.
4. Migration from outside the European Union: refugees, skilled or unskilled
The right to be granted asylum is not only enshrined in national constitutions and laws, it is also based on:
- Article 7 of the International Covenant on Civil and Political Rights of the United Nations
- the 1951 Refugee Convention
- the 1967 UN Protocol relating to the Status of Refugees
- Article 18 of the Charter of Fundamental Rights of the European Union
- the European Convention on Human Rights (ECHR)
The right to asylum protects people irrespective of their origin who are exposed to political, racial or religious persecution in their home country. These rules, born out of painful historical experiences that includes the societies of Europe itself, are more than set in stone. All European national states are firmly bound by them. Debates about their abolition are as pointless as those about the abolition of gravity. Yet they are common.
The legal criteria do not extend to refugees who seek to migrate to another country for economic or climatic reasons and who are therefore unlikely to be regarded as refugees from a legal perspective. In order not to be classified unfavourably, refugees may exaggerate or embellish stories of persecution in their country of origin. It is difficult for the authorities of the receiving countries to properly verify the truth of such statements.
The examination procedures are complicated and take a long time. Even if an application is rejected, expulsion to the country of origin tends to be the exception. Suffice it to say that the length of procedures creates new social realities as applicants more or less take root, children are born and are shaped by the national school system.
Growing influx of refugees
The number of refugees is considerable and on average it has been increasing strongly over the years. According to Eurostat's findings, the number of asylum seekers in the Union in 2022 was 881,220 persons, up by 64% compared with 2021. Once individuals have been recognised as eligible for asylum, a second wave of immigration begins when family members are allowed to join them.
Some member states of the Union pursue a restrictive policy by enforcing the legal requirements very strictly or selectively, or even by infringing them. This leads to greater refugee flows to those countries that comply more closely with the rules.
As the authorities of the countries with the highest numbers of refugees become increasingly overloaded with examination procedures, processing times are getting longer. The accommodation of asylum seekers in camps is pushing municipal administrations to the limits of their capacity.
Xenophobic currents in the public debate are gaining support. Surprisingly, part of the growing opposition consists of former refugees and their descendants born or raised in the country who have obtained citizenship and successfully achieved social status in their new homeland.
Counterproductive impulses
When frightened or even traumatised people from a different cultural background enter a European country for the first time, their first impressions have a powerful influence on how they think and feel. In the case of many refugees, their first experiences are often crowded refugee camps, questioning, long waiting times, further questioning, etc. Bureaucracy weighs them down, and there is no end in sight.
While they are in limbo for a long time, the idea that dealing with bureaucracy is the way to a better life is imprinted in the immigrants' minds. This puts people on the wrong mental tracks and impairs their chances to settle in an industrial society. While they may become adept at filling out forms, they are missing essential cultural impulses and opportunities to learn and improve on valuable skillsets for an industrial economy.
The material interests of the immigration countries
If the member states want to maintain their prosperity, a proper discussion on immigration would mean that all four categories need to be considered.
The first two categories (HNWIs and citizens of other EU countries) do not pose major problems.
The third category ("Blue Card programme") is presently far too small. So a more thorough approach is needed.
This thorough approach could involve giving priority to pre-skilled immigrants from outside the European Union. Labour offices and companies know exactly which human resources are needed. This can be done with low bureaucratic barriers, high-quality language courses to introduce immigrants to the national mentality, help in finding accommodation and schools for children, advice on access to banks and tax advisors, and perhaps even tax holidays for a few years. The threshold before obtaining citizenship should be low for people who prove to be valuable contributors. Employers can be involved in the process of accelerating integration as they themselves have a legitimate interest of their own and will be supportive.
The approach to dealing with the fourth category (asylum seekers) can be to abandon the illusory goal of carefully assessing at the outset whether an asylum seeker has a legal right to stay. Any person whose identity has been verified, who has not already applied for asylum in another member state of the Union and against whom there are no security concerns, should immediately be offered a language course and a first job determined by the labour authorities. This is inconvenient for the applicants, but it provides them with a primary orientation and momentum. It is also more beneficial to their human dignity than the endless dependency on bureaucratic processes. If they prove themselves within a year, for example, they should be given a residence permit and the right to choose a job. This would also give a chance to people who would not be entitled to asylum but who fit into the labour market.
Formal procedures for asylum applications would be resumed only for applicants who cannot be integrated into the country's labour market. Applicants who do not meet the criteria for asylum should be included. Delinquent applicants should be excluded.
For the labour market, the reason for entering the country is not relevant. What counts is a committed and reliable workforce. So the primary responsibility here should lie with labour ministries and administration, while the overburdened immigration authorities are given some air to breathe.
War-disabled, traumatised and seriously ill people should continue to be given special protection and attention. Unfortunately, their number is not small.
Canada, a country with not quite 39 million inhabitants, is an example of a country that derives and updates its demographic needs very accurately from the labour market. There are numerous national and regional programmes that make it easy for needed immigrants to quickly gain a foothold in the country. And the country additionally uses the pool of asylum seekers to enrich the labour market.
“ . . . the Government of Canada is maintaining its target of 485,000 permanent residents for 2024 and completing the final step to reach 500,000 in 2025. Starting in 2026, the government will stabilize permanent resident levels at 500,000, allowing time for successful integration, while continuing to augment Canada’s labour market.”
Conclusion
The demographic gap in European countries is a well-documented fact. The EU's population is ageing and shrinking, and there are not enough people to replace the working population.
This demographic contraction will lead to a decline in economic performance and prosperity. The only way to avoid this is through well-managed immigration.
Traditionalists and xenophobes are against immigration, but they have no realistic solutions to the demographic gap. If we give in to them, we will condemn our economies to decline.
To develop a successful immigration programme, we should look to countries with a long history of immigration . These countries have shown that it is possible to manage immigration in a way that benefits both the host country and the immigrants.
Authorship disclosure:
Fully human generated