Covid-19 needs a sustained fiscal response

The policy response to the current economic downturn will not be a rerun of the response to the 2008 global financial crisis. Many commentators have been highlighting the parallels between the two crises, but this time the situation is different so the responses must be different.

In 2008-09, led by the US, the steps take were: interest rates cut to near zero, large fiscal stimulus, unconventional monetary policy, and fiscal tightening to rein in public debt. This was possible for two main reasons: the crisis came after almost two decades of growth and price moderation, and monetary policy had considerable scope for action.

On the back of the Covid-19 outbreak, the monetary policy response came first, and the fiscal policy measures followed. Compared with 2008, monetary policy is now considerably limited in scope (the Fed rates were around 5% in 2007, compared to around 2% in 2019). Hence, the rational has been to provide plenty of liquidity to prop up the banking and financial sector – as opposed to using monetary policy as a tool to stimulate economic growth.

The current fiscal policy response has been much larger than in 2008 as concerns about the size of public spending have been put aside.  So far, the total fiscal measures worldwide amount to 11.7 trillion dollars, or 12% of global GDP – an amount that is most certainly bold. Like in the case of monetary policy, the objective has been to prevent the collapse of the real economy – “to save lives and protect livelihoods”, as the IMF MD Kristalina Georgieva said – rather than of stimulating GDP growth.

The critical point is that the world economy went into the pandemic in a weaker position than when it faced the global financial crisis. The real GDP annual growth rate for the world economy was 5.5% in 2007, compared to just 2.8% in 2019. Furthermore, many countries and people feel some crisis fatigue after the prolonged recovery from the 2008 crisis that has been emerged, among others, in extreme politics.

This said, we should expect a strong rebound in real GDP growth (5.2% for the world economy in 2021 against a 4.4% drop this year), followed by a slowdown in the subsequent years. The bottom line is that the world economy will need time to recover from the losses caused by the pandemic and the recovery will have significant country/regional differences. This outlook is based on the assumption that everything stays the same, i.e. that we will eventually switch back to the pre-pandemic world. But we know that this is unlikely.

Against this background, we need to ask how economies will be supported through the current second wave of contagion. Most of all, how will a broad and robust recovery be engineered? It is critical to achieve GDP growth rates that not only allow losses to be recovered but also create more output. This is essential to make the current fiscal effort – and in particular the growing debt – sustainable over the long run.

Given the current circumstances, the correct policy response requires more fiscal stimulus in the short to medium term. So expect more debt. If fiscal action is directed towards long-term economic growth, then servicing the debt should not be a problem – and indeed, it is not the sheer size of debt that matters, but whether or not it is sustainable against future economic activity. Low interest rates should also help – and they should remain low for longer.

There is also a political argument that suggests that withdrawing the fiscal stimulus as soon as the recovery is under way – as happened in 2010 – is no longer feasible. The post-2008 recovery pushed the burden of adjustment on the labour market and on public spending. Wages were frozen or dropped in real terms while public spending was curtailed. Nowadays, this adjustment would be politically unfeasible. There are a number of scenarios that could play out as the crisis subsides, but which one occurs depends on how the burden of adjustment is distributed. This can happen through higher tax rate, inflation, regulations, or even debt restructuring. Any of these – or their combination – will depend on the political environment and the robustness of the recovery when it will be eventually under way.

The Cost of Free Money – Reviews

At the beginning of August The Scotsman published a review of my latest book The Cost of Free Money (July 2020, Yale University Press). As more reviews are steadily coming in, I thought it would make sense to create one place where they can be accessed easily. You can find the list below, which I’ll update as needed.


  • “A stack of new books wants to disabuse you of these ideas and many more. Though the books all look like general studies of money, they are not (except for the most important and difficult of them, Paola Subacchi’s The Cost of Free Money. Rather, they are concerned with the US dollar and, chiefly, with the oversized place of money and budgets in US political rhetoric over the past forty or fifty years. They aim to change all our thinking not just about money but about politics and society as well. ” Rebecca L. Spang, The Times Literary Supplement (July 2021)
  • “This book is an ambitious attempt to bring together several threads relating to globalization, multilateral institutions, and national economic power. A world of free trade and (especially) capital flows requires multilateral governance institutions to avoid contagious liquidity and solvency crises. The rise of China and other developing countries means that such institutions must be more inclusive than in the past. However, waning US interest in global leadership combined with mistrust of Chinese influence makes a smooth transition much harder. Finally, the lack of an alternative to the US dollar as a reserve currency adds to the tensions in the global monetary system and acts as a stumbling block to the emergence of alternatives. In the author’s words, ‘‘I ask what happens when competition for markets and resources, especially among contrasting systems led by states determined to pursue their own domestic interests, spreads into open rivalry’’.” Arslan Razmi, Journal of Economics (February 2021)
  • “Just as we are getting used to the existence of  ‘magic money trees’ which have helped finance the massive  stimulus packages we have seen during the pandemic (some 12% of GDP in the UK and the US for example, so far), here comes this excellent book to remind us that there is no such thing as free money.” Vicky Pryce, The Society of Professional Economists (8 March 2021)
  • “Paola Subacchi gives a brilliantly clear and concise analytical history of monetary management from the Gold Standard, through Bretton Woods, the Washington Consensus, into the post crisis period.” Originally posted on Amazon (25 February 2021)
  • “Paola Subacchi’s book helped me, as a non-economist, to understand what it means to live in a world with low or negative interest rates. For governments and international institutions to run up debts seemingly without limits goes against everything I thought I had learned. But there is no free lunch and this book explains why!” Originally posted on Amazon (9 January 2021)
  • “I was delighted to find the writing crisp and fluid. The explanations of the current monetary system are characterized through the wide lens of history. Instead of a chronological survey, they form a causal analysis of the monetary agreements, systems, and institutions that we take for granted today. A such, The Cost of Free Money makes for an entertaining, informative, and thought-provoking read.” Originally posted on Amazon (4 January 2021)
  • Una recensione (in italiano) di The Cost of Free Money su Aspenia 91, 2020. Andrea Goldstein offre spunti interessanti e una chiave di lettura efficace. Per esempio, il rapporto tra interdipendenza e cooperazione internazionale: “[…] lungi dal rappresentare elementi di vulnerabilità – come invece nella tradizione realista – l’interdipendenza rappresenta un elemento posi- tivo perché incita alla cooperazione. Subacchi identifica alcuni problemi fondamentali cui solo un’azione comune può dare risposta – la difficile e forse impossibile convivenza tra paesi strutturalmente in avanzo e paesi in disavanzo, l’eccessiva libertà di movimento di capitali di cui godono gli speculatori e l’abbondanza di buchi nelle maglie comunque tutt’altro che strette della regolamentazione della tassazione internazionale.”
  • The Cost of Free Money was named one of the Best Economics Books of 2020 by the Financial Times; “Subacchi, an expert on global financial and monetary systems, lucidly describes the failings of the international monetary “non-system” that emerged after the collapse of the Bretton Woods system in the 1970s, the dominance of the dollar, and the need to restore a co-operative and global monetary and financial order.” (Martin Wolf, 17 November 2020)
  • “The problem with economic globalisation is not, as many leftists have it, free trade, but rather the free movement of capital, argues economist Paola Subacchi.” Money Week (Matthew Partridge, 28 August 2020)

You can also read a preview of the book on Google Books here.

The Cost of Free Money – Panel Discussion, 14 July 2020

To mark the publication of my latest book The Cost of Free Money (July 2020, Yale University Press) we organised an online panel discussion looking at the future of the global economic order. I was delighted to be joined by a stellar panel of thinkers, including Barry Eichengreen, University of California Berkeley; Danny Quah, National University of Singapore; and Martin Wolf, Financial Times. 

Paola Subacchi, Barry Eichengreen, Winnie King, Paul van den Noord, David Vines, Martin Wolf, Danny Quah

You can now stream the panel discussion (password: 5C#f7&Fw)

Our discussion began with a question central to the book: what happens when competition for markets spreads into open rivalry? And what happens when this rivalry is between states with conflicting domestic political systems, as we see today between the United States and China? The panel agreed that achieving a better balance is going to be an even more arduous task in a post-covid-19 world. 

Among other topics, we further discussed who gets to decide the shape and form of the international order, the dollar, the new regional institutions in Asia, and how climate change and public health must be at the forefront in the future. 

There was wide agreement among the panel that Europe’s prospects in the global economic order are looking radically brighter now than they did before covid-19, and that only Europe has the capacity to move from theorising to action. While Barry Eichengreen predicted that the euro will have come to surpass or match the dollar within three decades time, Paul van den Noord intervened and commented that we might expect this to happen sooner. 

Danny Quah – who played the role of devil’s advocate in the debate – took a different stance: “I would put my bets on new parts of the world that we haven’t thought about historically – not the US, not Europe, not China. We’ve spent the past quarter of a century lifting hundreds of millions of people out of poverty, not all of them in China alone. We have brought scores of nations out of the periphery where they used to be, to be central now. They need to have more of a say in how the international system evolves and that’s where I’m going to put my money.”