Learning from the financial crisis

There is no doubt left: it is the worst crisis of global capitalism, at least since the 1930s. The International Monetary Fund forecasts the harshest global recession of the last sixty years. The “masters of the universe”, Wall Street’s golden boys and their indolent regulatory authorities, could have hardly made a worse mess.

Captive to the financial crisis, the globe is struggling to escape. In Woody Allen’s screwball comedy with the appropriate title “Take the money and run”, five life convicts attempt a collective escape, chained up with one another with heavy chains around their feet. If they want to save themselves the convicts have to move all together in a coordinated fashion. If one of them stops, he stops the others as well. If one of them falls, he entangles the rest. If they run in different directions the team paralyzes. The current crisis demonstrates the close global interdependency.

The financial crisis increases the victims of globalization. In fear of social turbulence, governments are tempted to translate the demand for social protection into a call for economic introversion and protectionism. From Germany, who initially attempted to face the crisis by free riding on the stimulus packages of other economies, to the US “buy America” approach, to Britain where workers held strikes against the presence of other EU workers, to “I-cultivated-corn-speculating-on-price-increases-and-now-that-the-prices-collapsed-I-demand-a-government-subsidy” Greece, national protectionism is an impending international threat. Like Woody Allen’s chained convicts however, divergent national policies lead nations to joint failure.

Protectionism generates trade wars. It arises as a poor substitute for reform failure, policy inefficiency and inability to implement supranational regulation. Protectionism threatens with de-globalization and a reversal of the European single market. However, the way out of this once-in-a-lifetime crisis of globalization is not to abandon globalization, but the exact opposite: to implement a qualitative deepening of globalization, to establish institutions for its regulatory and political governance. As for the European single market, we owe it the acquis of EU solidarity, structural funds and cohesion policies. Advanced economies know well how to combine free trade with social solidarity: Europe’s most open economies (Germany, the Netherlands, Scandinavian countries) have always had the highest levels of social expenditure.

Protectionism reduces the appetite for international and European integration. However, the imperatives deriving from the current crisis may ultimately end up leading us to more integration. Then, supranational governance does not come galloping but sneaking in as a last-ditch solution. Take as example the current Eurozone crisis, and the possibility of a member state finding itself incapable of financing its debt. A highly pragmatic proposed solution suggests the Eurozone taking over that country’s debt, while Brussels imposes restrictive fiscal adjustment conditionality. Some European leaders suggest directly that a joint euro-bond be issued, which would further tighten European economic integration. Thus, thanks to the crisis, the dreams of even the most ambitious of Europeanists would materialize!

Last lesson: A financial crisis prompts three levels of policy adjustment. The first is adjustment of prices: we lower interest rates, raise spending. The second is change of policies: deregulation of financial markets is out; regulatory oversight and prudential supervision are in. The third, deeper level of change concerns the economic model itself, the ideological “paradigm”, a revisiting of concepts and values. Over the recent period, the US exhibited impressive economic growth rates. We now know that this growth was neither socially beneficial, nor sustainable. In future, we must pay less emphasis on GDP growth as sole measure of economic progress, posing some further questions as well. How much does a model of growth whose profits accumulate at the top of the pyramid, contribute to societal welfare? If a country’s residents rode to work on a bicycle instead of a car, and if the economy utilized wind and solar energy instead of over-consuming oil, then the national product could perhaps grow slower, but wouldn’t societal welfare be greater? How reliable is GDP growth as a progress indicator when it does not distinguish government spending for prisons from spending on schools, when it fails to take into account health, education and “green economy” indicators?

At the end of the day, the most important learning experience is not about learning, but mostly about being ready to unlearn…