How COVID-19 is changing the economy – and what we can do about it, according to Christine Lagarde

Recovery from the economic setbacks induced by the pandemic will demand close cooperation between the public and private sectors, says Christine Lagarde, President of the European Central Bank.

In conversation with Børge Brende, President of the World Economic Forum, during the Forum’s Pioneers of Change summit, Lagarde outlined the challenges facing the global economy. She also described what kinds of response she would like to see and explained why there might be grounds for cautious optimism.

Many rivers to cross

“We were stuck,” Lagarde says of the fallout from COVID-19. “We were standing on one side of a massive river of uncertainty and hardship, both from the health and economic point of view. And we couldn't even see the other side of the river.

“Thanks to the fantastic hard work put in by some companies in Germany, and in the US and in various corners of the world, we are now seeing the other side of the river because we know that vaccines are on the horizon.”

Getting to that other side is where the cooperation between public and private comes in. That means a determination to make sure structural economic changes are positive and that everyone continues to invest in the future.

Digital transformation has been accelerated in many aspects of life – both professional and personal – as people have adapted to remote working and education, ecommerce is booming, and people are getting more of their recreational activities via the internet. A survey carried out early in the pandemic found that 32% of people in the US were arranging virtual parties with friends or family.

Services: From local to global

“Digitalization will have an impact in terms of how services are provided,” Lagarde says. “They will probably be less local and more from anywhere in the world. And in the same vein, businesses providing those services will be more challenged from a competition point of view, which may bring about improved productivity.”

The private sector has an important role to play in creating jobs and income for people through ongoing innovation that brings new products and services to market. But at a time of economic uncertainty, this is a challenge for many businesses. It could cause some to adopt a more cautious outlook, paring back on any investments that aren’t absolutely necessary.

Lagarde calls for the private sector to rise to the challenge and says there is an important supporting role for the public sector in enabling that to happen.

“We need to provide the appropriate business environment where innovation will thrive. I think policy-makers are doing their best to remove the uncertainties. But it is the case that at the moment the private sector has put on hold a lot of their research and development efforts.

“Hopefully the private sector will get back into the swing of things and invest in research and development, because in Europe, in particular, they provide about two thirds of research and development.”

Past economic setbacks have helped fuel innovative growth, Lagarde says. “The 2003 SARS outbreak precipitated an acceptance by Asia Pacific economies to develop stronger digital infrastructure, which increased ecommerce massively. In the same way, after the financial crisis we had in 2008, we saw an increase in something the World Economic Forum has championed – social entrepreneurship.”

Crushed dreams and job creation

The economic fall-out from the pandemic has been felt around the world. Young people have been particularly hard hit, according to the International Labour Organization (ILO).

The pandemic’s impact on young people has been “systematic, deep and disproportionate,” the ILO says. This has led to what Lagarde describes as the “crushed dreams” of young people who are joining the job market and “finding nothing”.

Countering this will call for a joined-up response from both public and private sectors leaders, she says. For while private sector businesses will create much-needed jobs, they will need help during the economic uncertainty – the kind that comes from policy-makers and legislators.

“Clearly, the environment that will be conducive to young companies to actually employ will be vital because it is those young companies, those companies that are under five years of age, that are providing the essential bulk of job growth,” Lagarde says. “From that perspective, I appeal to the private sector to continue to invest in research and development.”

It is important, she continues, that businesses make every effort to be open to digitally literate jobseekers that are keen to join the job market “so that these dreams do not get crushed”.