What are some of the worst case scenarios stemming from Covid-19? Here are some worst case scenarios, two specific and one general.
The Covid-19 virus seemed to come out of nowhere. A few short months ago few if any would have predicted a virus outbreak which would see the quarantining of entire cities in both China and Europe. I thought the virus would be a non-event outside China, but it seems to have the potential to have serious and perhaps lasting effects across many countries across the globe. I’m not qualified to comment on the virus from an epidemiological or medical point of view but I might be qualified to discuss some of the potential economic and political consequences. This post might come off as quite alarmist as I want to discuss some scenarios which would be very troubling were they to come to be. I’m by no means saying that these scenarios are likely just that these are some of the ways the virus outbreak could do more damage than it already has.
The first scenario I worry about is in regard to Italy, and it’s the scenario I find the least unlikely. Italy already has a fair amount of confirmed cases in the north and Rome has issued a decree banning people from entering and leaving large parts of northern Italy, in effect quarantining some 17 million people (1). I believe that Italy will get the outbreak under control, the question is if it can do so without triggering a large demand shock. If there’s a large demand shock one would expect to start seeing lay-offs which would obviously be tragic for those affected but could also create a major headache for the Italian state. Northern Italy is richer and more productive than the south which means that the north has a larger tax base in terms of income tax and value added tax. This is important given Italy has a large public debt at almost 135 % of GDP (2), which would be a lot more difficult to service with the north being shut down while the virus is being dealt with. I’m not saying that Covid-19 will force Italy to default, but it does become less unlikely and any sign of weakness will make investors holding Italian bonds want a higher interest rate which exacerbates the problem.
The second scenario I worry about is if the virus were to get a serious hold in an important financial or legislative centre. This might be a non-issue given that many finance professionals or civil service professionals might be able to work remotely, but the it might cause serious uncertainty. Even if there were no tangible economic effects of a major political or financial centre being infected could be a problem from an optics point of view. Seeing Tokyo, New York or London being quarantined could make the virus seem totally out of control which would not only cause economic damage but might also dent faith in politicians and the state’s ability to handle health crises.
The last scenario I want to discuss is the virus getting a foothold in especially vulnerable places like Syria and/or Greece. This one is not all that likely in my view given that Idlib province and the migrant camps in Greece are locations most wouldn’t visit if they didn’t have to. Though if the virus were to start spreading in war-torn areas like Syria’s north west or Yemen could kill far more than in other areas. War and pestilence go hand in hand, as history has shown, and the virus is most dangerous to those with pre-existing health problems which you can expect find in droves among those fleeing from or being caught in conflict areas.
What do you think about the virus? Am I overly pessimistic? Or perhaps overly optimistic? I’d love to hear your thoughts in the comment, and please recommend this post to a friend or co-worker if you found it interesting. You can read last week's post here.
Written by Karl Johansson
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Cover Photo by Anna Shvets from Pexels
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