This paper analyses the Great Recession: the major economic crisis that began in 2007-08 and continues today. The author argues that many factors caused the crisis and stresses that it is not just a financial crisis, like most writers claim. Instead, the author He says it is a systemic crisis that includes overproduction, falls in business profits, environmental problems, and a stubborn insistence on an economic policy driven by austerity. The author defends the importance of economic history, which provides economists and social scientists with an essential reference for understanding the recession. He also proposes solutions to end the crisis, solutions that are completely different to those proposed by major European governments, led by Germany. Manera thus adopts what is a heterodox approach in economics making this paper different to the more conventional academic literature on economics. The paper is highly critical of the economic policy coming out of Berlin and Brussels, in which ultra-neoliberal orthodoxy is the predominant form of action. The author believes this is the wrong path to take and will only prolong the crisis for the most vulnerable members of society and for the middle classes. The author argues that Germany should lead Europe (rather than leading Germany) and that the European Central Bank should broaden its objectives and become more concerned with economic growth policies.
KEY WORDS: Great Recession, economic crisis, European economics
JEL: B51, E02, F01, N10.
“New” globalization, as opposed to “old” globalization (which economic historians place in the late 19th century, despite some people questioning this), is producing a plethora of literature aiming to explain, from different standpoints, how capitalism works at what is considered to be a time of readjustment (De Vries, 2009; Williamson, Rosés, O’Rourke, 2008; Williamson, Pamuk, 2000; Williamson, O’Rourke, 1999. Various slants have been looked at, with the most observant analysts seeing the emergence of possible new powers that will come to the fore very soon. This is the direction taken by the most recent academic works on the vast Asian region, which look at how production systems, education and cultural elements affect growth patterns. In short, these works predict that Asian countries will go on to dominate the global economy, leading to industry relocations and short-term crises (Rowley, Benson, 2000; Rowley, Fitzgerald, Stewart, 2000).
There is also a mountain of literature on the economics of China, underlining the progress made by the ancient Cathay area over the last twenty years. This progress is occurring at vastly different speeds: crisis-ridden regions and sectors and archaic equipment coexist with dynamic regions and industries that are using modern technology. Although authors agree that official Chinese figures are unreliable, China is still growing much more quickly than other developing countries and has consistently been closing the gap to richer countries. The compound datum given shows that China has been ranked among the top three global exporters since 2000 thanks in part to its capacity to attract foreign capital and companies seeking to reduce their wage bill and environmental costs. In this new phase of globalization, dominated by business relocations and firm commitments to the latest technologies, the imposing Chinese colossus has become the “world’s workshop”, as Françoise Lemoine put it, a description that reminds us of the pioneering British industrial revolution (Lardy, 2002; Lemoine, 2003; Renard, 2002; Studwell, 2002).
- America in recession
In this context, it is interesting to consider the leading role to be played by America, which despite the restructuring of the global economy remains the world’s biggest power. The more orthodox academic contributions emphasize the potentialities of American government policies, especially under Republican administrations, which deregulate the economy and financial system in a misconceived sense of the “invisible hand” of the markets. These authors overlook the massive deficits under the presidencies of Ronald Reagan and the two Bushes simply because they were not a result of benefits provided to those most in need or by government investment in health and education, but by lavish tax cuts for top earners – using the flawed Laffer curve as an alibi – and increased spending on the American military complex, with clear if indirect connections between political and economic power. Other academic authors, however, reject these arguments from an economic history and economics standpoint.
Robert Brenner has published game-changing research on the shift from feudalism to capitalism. The vastly experienced economic historian has come to blows with Neo-Smithian Marxism embodied first by Paul Sweezy then by Immanuel Wallerstein. He has also written an extraordinary book on 17th-century English tradesmen and has shed interesting light on the current crisis (Brenner, 1976, 1993, 2006). Brenner’s approach is clear: the world economy has failed to overcome the long decline that began with the 1973 crisis, so for him the outlook is gloomy. Excess capacity in global industry is the main economic cause of the situation, and the eruption of new technologies made the situation worse. Business profitability, he argues, declined greatly (by around 20% between 1997 and the turn of the century in non-financial activities) because of over-investment that fed this huge speculative bubble in stock market movements. This process has been aided by the main economic institutions, particularly the Federal Reserve, which gave incorrect signals to the markets and has fed this disproportionate investment. This led to the collapse of some sectors of the economy, including telecommunications. According to Brenner, who cites other experts’ contributions to theories on excess capital accumulation, these are the foundations of the current recession. This theory has been circulated at other times from historical, economic and sociological perspectives by Samir Amin, Hosea Jaffe and André Gunder Frank, who adapted the Kondratieff waves of technological change. More recently, Immanuel Wallerstein blamed the US’s reduced capacity since the early 1970s on the rise of Japan and Europe and claimed we were witnessing the decline of American dominance. In an intelligent, well-documented work, the French historian Emmanuel Todd likened US expansion to that of Ancient Rome as the Empire began to crumble. He found new patterns in the fall of empires, including the massive cost of maintaining them and the drain on public finances. So according to Brenner, Wallerstein and Todd, we are witnessing a grave systemic crisis led by a weakened United States, which now has more consumers than producers and is seeing new protest movements within the country whose calls are quite different from those of the more conventional political left. This recession is bringing about a productive transformation that is redefining the “centre” and the “periphery”, to use Wallerstein’s terminology. Other countries are being called to the economic fore – not the military fore – of globalization (Brenner, 2002; O’Connor, 1984; Todd, 2003; Wallerstein, Arrighi, Hopkins, 1989).
The most direct source of the crisis began in 2000, resulting in a marked loss in profits. Excess production capacity drove down prices, bursting the first stock-market bubble, the dot-com bubble. The bubble was fuelled by deregulation of the financial markets and the search for investment funds by companies that were losing profitability. The situation was made possible by the disinformation provided by top executives, who were paid with stock options based on dwindling profits. In 2000, telecommunications, which accounted for 3% of US GDP, had a stock portfolio worth 2.7 trillion dollars, or 15% of non-financial corporations in the United States, but still needed funding. The amount of funding grew by 15% a year between 1996 and 2000.
This process led to more than 300,000 new jobs, resulting in economic patterns similar to those seen in other technology sectors, which had similar opportunities at obtaining cheap capitalization. The Nasdaq index shot up at an astonishing rate, higher than that achieved by the Dow Jones, thus inflating a bubble fed by links with the real economy: household debt and higher imports. We were thus seeing very strong knock-on effects: higher demand was aided by a strong dollar that encouraged purchases from abroad, notably high-tech components from Asia, especially Japan, and cars, machines and other products from Europe, benefiting Germany and Italy in particular. The more this model set in, the wider the trade deficit became, with the US buying more than it sold and spending more than it earned. The result: a clear deficit scenario caused by various related factors, so it would be short-sighted to act on only one of those elements, as the Federal Reserve did by cutting interest rates. The path towards the Great Recession of 2007-08 was being laid out.
Against this backdrop, the outbreak of corporate scandals was just the tip of an iceberg immersed in a sea of opacity. Over-investment in technology sectors generated by completely asymmetric information (on this point see Joseph Stiglitz’s groundbreaking academic contributions) led to bankruptcies in the telecommunications sector and left more than half a million people jobless Akerlof, 1970; Stiglitz, Weiss, 1981). Excess production capacity gave rise to excess supply that the market was unable to absorb. The data provided by Brenner say it all: annual growth in investment plummeted from 12.5% to 0.1% in 2000, then shrank by 5.2% in 2001 and 3% in 2002, while exports stagnated. Wider deficits, aggravated by less attractive US assets, put pressure on the dollar and weakened it against the euro. Foreign direct investment into the US fell by 60% in 2001, while purchases of American shares fell by more than 35% in the same year. Despite the weaker dollar, the trade balance didn’t recover, with the Asian markets and Canada continuing to feed the consumer society in the US, while the European economy was contracting and beginning to experience bigger blows due to the drop in American demand.
Stiglitz complements Brenner’s perspective, although he mounts a vehement defence of Clinton’s economic policy, especially the big reduction in the pre-existing deficit and the tangible concern for social problems and environmental externalities. The latter led to heavy investment in updating facilities in the public and private sectors, a marked increase in productivity (Brenner also highlights this), new jobs and control of inflation. So despite the many points shared by Brenner and Stiglitz, the latter has a much less pessimistic view of how the American economy evolves. However, Jeff Madrick has said that, unlike in the past, this boom in the American economy was not accompanied by major productivity improvements. According to his data, growth averaged 2.85% for 1947-73 and 1% for 1973-2000, so it was much lower during the period in which production processes and services were being computerized. This has led some to believe that perhaps this is a technologically advanced era with a small-scale economy based on the skills, knowledge and ingenuity of workers and small-business owners, rather than on the strength of big companies and chains of distribution. As you will gather, this is a highly contentious issue. While there are signs that US productivity growth is accelerating thanks to what has been dubbed the “new economy”, some authors such as Paul Krugman are sceptical, questioning the method used to calculate the productivity of the services sector, which is much more volatile than manufacturing.
Madrick’s figures do not differ much from those of Manuel Castells, who is convinced that the world economy played a vital role in increasing productivity (Stiglitz, 2002, 2003; Madrick, 1998; Castells, 2000, 2004; Krugman, 2003). But despite these criticisms, Stiglitz offers a mosaic of major indicators regarding Clinton’s presidency, which summarizes a virtuous process: strong growth, without major price changes, control of the deficit and more employment. Unemployment was as low as 3.9% in 2000, without inflationary spikes, and according to Stiglitz this reduced poverty and dramatically reduced crime. Nevertheless, he is self-critical, saying that focusing the economy on finances, the deficit and inflation meant putting aside commitments to poorer parts of the population and to the environment. It is those commitments, according to Stiglitz, that distinguish Democratic Keynesianism from Republican Keynesianism, which throws all its investment into the military.
Nevertheless, despite the different interpretations in economics literature, there is a certain consensus regarding the causes of the crisis:
- a) The irrational exuberance of the stock market bubble. Stiglitz puts it bluntly, saying that asset prices were completely independent of their underlying values. Billions of dollars were poured into profitless companies, which then requested additional funding by trading in the securities market. This was all made possible by creative accounting: basically falsifying accounting entries. Companies considered to be completely solvent were pilloried when this came to light. Economic agents and political leaders were left in a state of disbelief, distrust and panic. Consortia such as Enron, Global Crossing, Qwest, World.com, Merck, Xerox, and Vivendi, along with financial institutions such as JP Morgan Chase and Merrill Lynch and auditing firms belonging to the Arthur Andersen group, all took a knock, to varying degrees, because of the white-collar theft of some of their executives. The guilty executives advised buying still more shares in their companies so they could make further investments; but they did quite the opposite, selling assets to inflate their own bank balances in a way never seen before. As Charles Kindleberger has shown us, economic history is littered with cases that remind us of what has happened either side of the new millennium. But clearly few lessons have been learned (Kindlerberger, 1985, 1986).
- b) The Federal Reserve’s misguided policy. Alan Greenspan is part of the unleashing of Wall Street. That was the conclusion shared by authors like Brenner, Stiglitz and Krugman. Bob Woodward, the famous journalist who wrote a panegyric praising former Reserve chairman Greenspan, talks of Greenspan’s euphoria in front of the computer screens watching the variables fit together in a veritable “virtuous circle” – as the head of US monetary policy put it – that imbued the lower inflation, unemployment and deficit and the higher productivity. The Federal Reserve gave enormous importance to the financial markets, continuing in its fascination with bolstering stock prices despite clear signs of the growing deficit. Greenspan offered his unequivocal support for George W. Bush’s tax cuts. This policy clearly benefited the most powerful sectors of society, making the bubble even fatter. There was vitriolic criticism of this strategy. The Chairman of the Federal Reserve became embroiled as an accomplice in crucial aspects of fiscal policy rather than acting more moderately and focusing more strictly on monetary policy.
- c) The proliferation of asymmetric information. Brenner and Stiglitz conclude that the “invisible hand” referred to by Smith does not exist. Instead, they adopt a position similar to that developed by the Nobel laureate Kenneth Arrow in collaboration with Gérard Debreu, in that a series of conditions must be set for the market to be balanced and to work without outside interference (Arrow, Debreu, 1954: 265-290). One of those requirements is for perfect information, which companies can then use to forecast how their goods and services, and therefore their factors of production, will evolve. Stiglitz has investigated what happens when these conditions are not met, i.e. when the information is imperfect and asymmetrical, when not everyone has the necessary data to make rational choices. He reaches a stark conclusion: that even in the most developed countries the markets function differently from what the perfect-market theories predict. In fact, the terrible decisions seen at the microeconomic level are the result of disinformation given by many people involved in finance, including, albeit to a lesser extent, the Federal Reserve. It is difficult to make correct decisions when the information is asymmetrical and the main guardians of economic orthodoxy steer clear of major commitments and get caught up in the speculative wave (Stiglitz, Weiss, 1981: 393-410).
- d) The government’s negligible role in providing balance. The economic downturn is attributed to the lack of government action. The totemic view of a deregulated market has brought about apathy in government in highly speculative areas. The most illustrative example was the cut in capital-gains tax in the US, a crucial issue that has showcased to the entire population how wealth can be generated quickly without tax constraints. In other words, those who make big profits on the stock markets end up paying less tax, which in turn encourages even bigger investment in stock-market assets, further inflating the bubble. Stiglitz argues that it would have been more beneficial to invest in education, infrastructure and R&D programmes to provide a more solid foundation for the improved productivity. This is a contentious issue, because the undeniable macroeconomic advances are distorted by the illusory phenomena of the stock market, which all economists are seduced by. It’s a pity that Kindleberger’s shadow was not cast more intensely on President Clinton’s economic advisers. On this point, Stiglitz says principles were put to one side and skewed visions of reality were adopted, fuelled by the success of large macroeconomic aggregates. Two centuries of experience (economic history, again) of the problems caused by conflicts of interest and data that are neither homogeneous nor available to all economic stakeholders were disregarded.
- e) The obsessions with deficits and inflation. Reducing the deficit does not always solve economic downturns in the short term, and can even harm growth. Authors such as Brenner, Stiglitz and Krugman believe government should give more slack when dealing with deficits – except trade deficits – in certain carefully selected areas, especially technology projects, education, infrastructure and R&D initiatives. In other words, they believe governments should stimulate an economy with a high added value. Higher debt would increase corporate assets, so reducing the deficit would reduce those assets and make the country poorer. The symbiosis between economic policy and fiscal strategy is obvious: if the yields on investment are higher than the low interest rates on government borrowing, taxes on the rest of the economy can be cut. If these premises were applied to European economies, we would have a very different roadmap before us. If governments’ ability to borrow were severely limited in favour of an investment policy like the one described above, it would have a negative effect on any possible productivity gains. Furthermore, a monetary policy based on inflation is bad news in economies that have come dangerously close to having negative inflation, like America and certain European powers (Burdekin, Siklos, 2004). The Federal Reserve has acted with greater conviction to prevent this, acting resolutely to lower interest rates (although it acted less rationally towards the end of Greenspan’s reign). The situation was different at the European Central Bank, which was dominated by over-rigid orthodoxy and unnuanced approaches, such as carefully monitoring price developments without considering the possible levers for economic growth. The economic “fat” that is gained when inflation rises above a certain level is not negative for economies that need sure-fire boosts to their jobs market and to education, technology and research.
Having looked at these causes, which on their own already suggest fairly clearly that there was oversaturation and too much volatility on the stock markets (although this is easy to see in hindsight, and much harder to spot when the process is starting out), we can now look at some essential indicators that highlight the imbalances that existed in the US:
- Office of Management and Budget figures for 2003 and 2004 showed fiscal deficits of more than $500 billion due to lower income and higher expenditure. This was caused by a “war budget” that promoted investment in security and defence and Bush’s generous fiscal policy for those in the highest tax bracket.
- Department of Commerce data show that America’s trade deficit increased, despite the dollar weakening against the euro. Changes in the country’s trade structure provide an explanation: Canada and the EU were America’s main markets in 1995, but from 2003 the Chinese market exploded, and a year later trade barriers with Canada and Mexico were lifted thanks to the North American Free Trade Agreement. In these new trade areas, the US dollar remained a benchmark currency, so its price against the euro had little relevance.
- Office of Management and Budget figures show there were almost three million job losses between 2003 and 2005, revealing how the US jobs market was being chipped away at just over three years before the 2008 crisis burst onto the scene.
In short, the existing imbalances – which I have tried to summarize – combined with a dwindling jobs market are the difficult contrasts that question the most solid American macroeconomic data while establishing the foundations for the Great Recession.
- Finances and the real economy: the outbreak of the 2008 crisis
Shortly before the summer of 2007, nobody was talking about a global economic crisis. The data I have discussed above, which at the very least forewarned of a difficult economic situation, did not change people’s perception of how the global economy would evolve. As in 1928 and a few months before October 1929, well-respected analysts, political experts, leading economists, consultancies, universities and politicians were stating categorically that the economy was healthy and the outlook was positive for the next few years. A plethora of literature has emerged on this topic, but some works deserve more attention than others, as many an opportunist has jumped on the economic prophecy bandwagon and claimed that he or she predicted everything, but hasn’t told us where or when. We shouldn’t pay much attention to these new gurus who, incredibly, are rather prominent in certain media.
Based on the above, we can deduce that the crisis could be detected in the crazy boom in technology stocks at the start of the new century, when dangerous seeds were being sown with the expansion of the derivatives markets and the over-permissiveness of the banks, which completely infected private debt and alarmingly threatened to transform it into government debt. But all of this comes from how we see things in hindsight, and not how we saw them at the time. It’s easy to say now that the bull has already run through the china shop and created all the damage we’re analysing. The economic slowdowns were not a major focus of concern for governments, but only for operators in close contact with the system for processing derivatives and their tempestuous inner workings, those who could see a bigger picture of what was happening and had the capacity to make the right decisions. Despite this, the government leaders who had accurate data on the financial situation unquestionably continued to trust in the very liberal axiom of giving the markets free rein to operate without any hindrance and to search for the optimal points and best fit between supply and demand. This is all very ideological, spurred on by a blind faith in deregulation that was flooding the fiat money markets without any real support.
In this respect, Michael Lewis believes two forms of conduct help explain the current banking crises (Lewis, 2010; Sorkin, 2009; Carbajo, 2011): greed and incompetence. There are many examples of both. It was greed that led banks to issue sub-prime mortgages – loans to borrowers who were quite likely not to be able to repay them. We must take two facts into consideration:
- As long as house prices continued to rise, the property would cover the value of the loan. Originators didn’t record loans on their balance sheets because they would sell the loans on to Wall Street investment banks. The investment banks would then turn the loans into collateralized debt obligations, or CDOs. CDOs are a type of security backed by an institution’s assets – in this case, mortgages. All this would form a kind of pyramid-shaped gear system (CDOs have various grades and are grouped according to the level of risk), with the summit being what rating agencies rate as AAA. CDOs were a lucrative product for many financial institutions, because they offered higher yields than other investment opportunities.
- These products, which were already viewed with suspicion by some quarters from a business point of view, needed some kind of guarantee. Because the system was so sophisticated, another product needed creating – the credit default swap, or CDS – to insure a certain amount of capital. It is the equivalent of taking out insurance against a default. But like any financial products, a CDS can be used to cover risks, but also to take them on – in other words, to speculate. CDSs also have a feature that distinguishes them from other insurance products: they can be sold to third parties. The resulting scenario seems flawless: a CDS is taken out as protection against banks that are laden with CDOs (which are overvalued). Operations equivalent to investment funds, which specialize in investing in CDOs (which were formed by sub-prime mortgages), were formed too. However, this whole mesh of derivatives, which formally are very solid and boost market confidence, have one thing in common, given the catastrophic end we have already discussed. They are all fuelled by greed, incompetence, and repeated harmful actions, affecting society by raining ruin and misery on many sectors of the population. The only way to prevent these recurring crises is to step up government regulation of financial institutions.
But greed and incompetence were not the only causes of the crisis. They were accompanied by other factors, including speculation, over-indebtedness, new financial instruments that do not reduce risk, the dubious role of ratings agencies, the collapse of the control mechanisms imposed by financial market regulation, and ultimately, the lack of government intervention in these tumultuous circumstances. Government intervention is a crucial factor, and needs to be very different from how it was during the recessions that immediately preceded the current major crisis. Let’s remind ourselves of what has happened:
- a) In reaction to the dot-com bust in 2000 and the uncertainty caused by 9/11, the Federal Reserve’s monetary policy was very lax. This led to falling interest rates, which in turn sparked additional residential property demand, greater household and company debt, and higher property prices. The actions and approaches adopted by the chairman of the Federal Reserve were clearly based on the belief that economic cycles had disappeared. This belief comes from poorly conceived philosophies such as the end-of-history theory, which lavishes praise on neo-liberal economics. The Federal Reserve’s actions infected the whole system. The ideology of economics meant the defeat of a process of economic growth that seemed unstoppable.
- b) The European Central Bank adopted a more moderate policy, but it was not enough to contain the speculative bubbles in countries like Spain and Ireland. The rise in interest rates in 2006 to cool the overheating economy pushed up mortgage prices just as oil prices had increased too. This had immediate consequences, with housing demand and prices dropping and arrears and defaults becoming more frequent. The economic picture was very different across Europe with big variations in the indicators (government debt, debt-to-GDP ratio, inflation, unemployment, growth prospects) and measures that were particularly harmful to countries on the periphery of the European Union, such as Spain, Portugal, Greece and Italy.
- c) Governments began to intervene in financial institutions they considered too big to fail under any circumstances. This notion, excellently analysed by Gary Stern and Ron Feldman (Stern, Feldman, 2004), was first applied in 1985 to save the major American bank Continental Illinois, but has been repeated by government so many times that powerful banks have embarked upon high-risk investments knowing full well the government won’t leave them in the lurch and will make taxpayers foot the bill. It is these government moves to bail out troubled financial institutions that turn private debt into public debt, and this affects the solvency of many developed countries. This is nothing new. As far back as 2005 there were already worrying signs that America’s sovereign debt was too high, and Carmen Reinhart and Kenneth Rogoff said that in the coming years this would increase the debt of the worst affected countries by around 80% (Reinhart, Rogoff, 2009). One cannot neglect considering causes of the 2008 crisis from a more historical perspective. There were causes linked to crucial factors like industrial over-production and financial wealth, which reveal the excess savings in the world – liquidity that has no plausible route into the real economy and is therefore thrown into the financial markets. This idea is salient in the works of Brenner and Stiglitz, and ties in with perspectives of classical economics.
A deeper analysis of the situation reveals the following:
- Over-production has brought about huge trade imbalances and financial dysfunctions. In the United States and Europe, higher industrial productivity led to excess stocks that were not met by demand. At the same time, Western companies were offshoring even bigger parts of their production processes to emerging countries like China and India. This strategy brought wages down in developed countries and pushed up total industrial production. There was also a substantial shift in the area of trade, with the increased production flooding the more developed markets (in Europe and the US), bringing down prices and pushing up unemployment. This is a powerful reminder of the similar explanations given for what sparked off the 1929 crisis, when over-production and low consumption determined the depth of the recession in the real economy.
- In the finance sector, capital began to flow from emerging to developed countries for the first time ever. Starting in the 1990s, loans from emerging countries and innovations in financial products helped significantly increase consumption in developed countries, even over and above their means. In developed countries, imports far outweighed exports, while current-account balances were plunging further and further into the red and balances of payments were becoming negative year after year (see Table 1 and Figure 1).
The data, which are for an important set of European countries, show Germany’s economy powering forward while other economies are contracting. Germany’s economic power is clearly manifest in its current-account balance as a percentage of GDP, which is positive for the periods 1971-78, 1982-90 and 2001-08. These figures, always positive, show the extent of Germany’s export capacity and the strength of its services sector. It is important to note that when Germany adopted the euro it strengthened its position, sending the country’s current-account balance to record levels while that of other countries fell below zero. The best example is France (the other European powerhouse): its balance had been positive from 1992 to 2004, but turned negative as the country became less competitive. The same happened in Italy, where the new industrial economy in the industrial districts boosted exports, giving the country positive balances between 1993 and 2000 before it joined the bulk of countries that repeatedly had negative balances. We can clearly, albeit superficially, see in these data the “two-speed economy” so often referred to by politicians and economists.
Table 1. Current-account balances as percentages of GDP
SOURCE: The data are given in current dollars. Produced by the author based on figures from the IMF’s Balance of Payments Statistics Yearbook and data files.
*Figures for 1990 and earlier are for West Germany.
|Figures 2 and 3|
SOURCE: The data are given in current dollars. Produced by the author based on figures from the IMF’s Balance of Payments Statistics Yearbook and data files.
*Figures for 1990 and earlier are for West Germany.
The data in Figure 1 are even more powerful, because they refer to the full balance of payments, and they back up the observations made above: the curve for Germany rises way above all the others, while for France and Italy the curve begins to rise before falling away precisely when the single European currency is introduced. Figures 2 and 3 further confirm the hypothesis: the German economy takes off at the end of the 1990s and begins to soar at the start of the new century. The other countries, meanwhile, despite some variations, lose capacity and economic strength. Together, these data suggest that monetary union made the German economy even more dominant, contrary to what Eurosceptics say. They also suggest that the way the changeover to the single currency was designed gave Berlin the opportunity to shape the ECB’s monetary policy. Given this context, it is hard to explain why highly orthodox economists tout German losses in the big European consortium and completely ignore how Germany has profited from its involvement in creating the economic structure, an event that now seems long ago given the complex transformations the European economy has been through since the turn of the century.
- There are imbalances in international trade. Structural deficits set in while the US Federal Reserve was introducing expansive fiscal policies. The markets were at saturation point for goods and liquidity, leading to bubbles in asset prices. Governments were so passive, so entrenched in a distorted idea of laissez-faire, that they almost led the American economy to ruin, with immediate consequences for European economies. Since 1992, the United States had been consolidating its growing public and private demands, while the Japanese economy was beginning to stagnate and the EU was adapting its macroeconomy to the criteria set by the Maastricht Treaty. Emerging countries, meanwhile, were taking different steps. First, they were building up dollar reserves to protect them against financial instabilities (which were emerging as a result of the rampant deregulation promoted by those running Wall Street, with the blessing of the Federal Reserve). And second, the main oil producers in the Middle East were reducing crude oil supplies to the bare minimum to prevent a fall in oil prices. Meanwhile, countries with a trade surplus (China and Germany) were enlarging their economic capacity in order to invest in areas with a trade deficit. Finally, new World Trade Organization regulations forced emerging powers to introduce drastic changes to their exchange rates – mainly depreciations to continue helping exports to foreign markets. As exports grew, these countries were able to obtain new reserves, which they transferred to their aggregate savings, thus providing still more financial resources to the United States and other countries that were spending more than they could earn. This situation couldn’t go on any longer, with the growth of the world’s biggest economic power resting on a fragile foundation of cheap borrowing. The great paradox is that the world’s last self-declared communist nation was and is providing the lion’s share of the money borrowed by capitalism’s superpower.
- Financial panic erupted, driven by the opaque information and rumours regarding the reliability of derivatives, so the American, British and German governments came to the banks’ rescue with huge cash injections that affected those countries’ budgets. The central banks, meanwhile, cut interest rates, but this failed to make commercial banks, which were wary of each other’s credit portfolios, open the credit taps. Stiglitz believes this had lethal consequences on the real economy: households were hurt by the drop in property prices; savings increased, driven by fear and uncertainty; credit became scarce, making the investment situation of businesses and families worse; and consequently, aggregate demand was blocked. The first quarter of 2008 thus saw the start of a poor economic cycle with very worrying results, including lower GDP and higher unemployment (Stiglitz, 2010; Fontana, 2011; Comín, 2011).
- According to reports published in early 2010 by reliable institutions, there was a high risk of the global economy entering recession towards the end of 2009. But experts still spoke of a positive outlook, albeit with certain poor indicators. The December 2009 edition of the Consensus Forecast, a monthly publication that pulls together the opinion of various institutions regarding the developments of the main economies, stressed how deviations from GDP growth forecasts for 2010 were, on average, 50% greater than normal. Table 2 shows a summary of data for the main institutions, with major errors in the forecasts. All of them show major errors for all countries, but the errors are greater for Germany. So the situation was anything but normal. And the risks being detected were related to the need to standardize fiscal and monetary policies, which would be the key to spurring a recovery. The authorities needed the accuracy of a brain surgeon: acting too quickly could stifle the stimuli, and acting too abruptly could weaken the recovery.
The precedents in economic history could not be more frightening. If governments want to avoid making the same mistakes, the policies adopted by Japan in the 1990s provide a perfect guide as to what not to do. At the same time, drawing up a global plan for all countries presented a fundamental problem: not all countries’ economies were in the same position, and there were major contextual differences between one country and another. A clear dilemma was presented to the Spanish finance ministry and treasury, and by extension to all governments: they could either pursue the policies labelled at that time as Keynesian, or return to more orthodox policies, dominated by specific aspects of economic monetarism. This was a clear reminder of the debate that took place in America between 1931 and 1933.
Table 2. Errors in economic forecasts
The response was a return to a more orthodox economic policy based on observations of the data from Germany. In Europe’s leading economy, gross fixed capital formation had fallen by well over 5% between the start of 2008 and around March or April of 2009 and exports had dropped by 12%, but the stimulus policies enabled by the laxity regarding the government deficit limits (which Merkel raised from 3% to 6% of GDP) put the German figures back in the black. Then, starting in May 2009, and particularly the last quarter of that year, Germany saw a marked recovery in investment and exports, which caused a rethink into the cold fiscal stimulus strategy that had been planned and that would affect all of Europe.
At the same time, other EU countries were experiencing a similar recovery. The stimulus policies were clearly working, supporting investment and economic growth and helping reduce or ease unemployment. The only bad side was that they were pushing up government debts and deficits. These improvements were made despite dwindling private investment, prudence and caution in businesses, and a big upsurge in private savings, which was an unequivocal symptom of a drastic decline in consumer spending.
The financial crisis spread to markets that had invested heavily in American financial assets. This contamination between economies also had ideological and methodological precedents. Those at the top of the Wall Street hierarchy, prestigious universities, the most ultra-liberal political leaders and the Federal Reserve successfully lobbied for deregulation, and this deregulation soon became part of Britain’s and Germany’s financial fabric. British and German banks had amassed large amounts of US mortgage bonds, which is why the fall of Lehman Brothers affected the main groups in the financial system, which then tried to sell stock market assets at a time when pressure to sell was increasing by the hour. The assets lost value on the stock markets, resulting in widespread defaults. The Ponzi effects spread like wildfire, as predicted years earlier by Hyman Minsky, an economist who was as unknown at that time as he was quoted ad nauseam in the weeks after the economic bubbles burst (Minsky, 2008a, 2008b).
State interventionism was the order of the day in economic policy, with a clear plan: to save the financial system, whatever the cost, and thus prevent a domino effect and a chain of defaults not just of banks but also insurance companies closely involved with CDOs and CDSs. Drastic measures have been taken to nationalize banks, such as in Britain, and masses of government money have been lavishly poured into banks by the US, Germany and France in astonishing events that have affected people’s consciousness (the Keynesian “animal spirits”), as well as academic and political departments and experts around the world (Akerlof, Shiller, 2009). The situation, which people have come to believe is unprecedented, grossly shunning the lessons from economic history, casts doubt on ideals and premises that were thought to be untouchable: economic liberalism, the weight of civil society and the central doctrine of equilibrium in deregulated markets. There has even been some talk of re-engineering capitalism. Interest in Keynes has thus returned, and his old heated debates with Hayek, with their respective unwavering viewpoints, are being remembered again, although the initial, instinctive temptation is to follow the advice of Keynes. While Hayek blamed the 1929 crisis on inflation, caused by excess credit, which led to an unsustainable capital structure, Keynes believed it broke out because there was too little investment and demand was unable to match existing production. Robert Skidelsky draws a parallel between these postulates and the current crisis. He says Hayek’s argument suggests the recession is due to lax monetary policy, which allowed banks to lend more money to businesses than the public could save on their current income. Therefore, “bad” investments were being financed by credit creation rather than by savings. This led to bubbles that fuelled a consumption boom, and when the whole thing collapsed the American economy slumped. The parallel with Keynes is that recession begins when profit expectations fall relative to the amount being saved. When that happens, businesses prefer liquidity over investment. The obvious consequences are higher interest rates precisely when they need to be lower. So the crisis was caused by lack of investment rather than too much debt; high debt was a consequence of the recession, not a cause (Skidelsky, 2009).
The Keynesian arguments were gaining weight all the time. For instance, in its World Economic Outlook the IMF warned governments they needed to intervene in their banking systems using taxpayers’ money to neutralize the effects of damaged, toxic assets. The report urged governments to do everything they could to prevent a repeat of the 1930 collapse. In the IMF’s most important reports (Global Financial Stability Report and World Economic Outlook), it directly and indirectly defended government intervention in economic activity through public-spending increases to offset the decline in aggregate demand. As we have said, we were witnessing, albeit fleetingly, the return of Keynes.
In this respect, there is one essential factor we must consider: that Germany has been one of the hardest-hit developed economies in the Great Recession, with GDP declining by more than 5%. In 2009, the German government reacted by cancelling the Stability and Growth Pact along with its EU partners and permitting eurozone countries to have a budget deficit of up to 6%, as we have already seen. But in 2010, when the global economy began to pick up and there was greater potential for German exports, Chancellor Merkel decided to return to the original Maastricht Treaty limit of 3%. Keynes had once again been expelled to the tomb of oblivion. The fiscal stimulus approach had been short-lived, and starting in May 2010 all governments began to adopt rigid economic conservatism in the form of rampant austerity programmes. Germany began to set its own terms, followed some way behind by France, forcing all countries to adopt tough austerity measures that are having terrible consequences for society. Thus the German giant does not act as a leader of the European economy but rather it establishes a more “nationalist” view of the economic situation by prioritizing its own status. The country’s position would perhaps not be so worthy of criticism if its influence were limited, or if its indicators were worrying. But Germany’s economy is one devoid of over-indebtedness, with excess private savings and a strong current-account surplus. It would have been more reasonable for Germany to adopt a more expansive fiscal policy, but in no way comparable with that of other countries with much more worrying macroeconomic data, countries that are Germany’s financial and commercial customers. These economic policies have resulted in a credit crunch and a decline in aggregate demand, and this has deepened the recession.
We have seen that it is very difficult to change economic policy in such circumstances, given the utter ideological domination of neo-liberalism and its advocates. For Antón Costas and Xosé Carlos Arias (Costas, Arias, 2011), four factors contribute to this. First, there are the interests of the finance industry and the inertia of old ideas. Second, the crisis has not yet renewed interest in collective involvement in public affairs, so factors affecting individuals come before those affecting the public at large. Third, mistrust among more conservative quarters towards politics and the democratic state has pulled everything towards technocracy, towards an explosion of “professionals”, such as in Italy and Greece, where executives, who despite their defects were democratically elected, have been replaced by unelected teams of technocrats from the circles of Goldman Sachs. And finally, there have been no political innovations – no progressive taxation measures – to help spread the wealth. The crossroads of the world economy is well lit, but politics is unable to negotiate it.
Despite all these theoretical reflections, which have empirical support in the case of European and South American regional economies (Llopis, et al., 2003; Cafagna, 1989; Capello, 2006), we have not lost sight of the fact that economies have, we believe, certain generic objectives that affect the whole of society and that fit the agendas of other experts. These objectives all have one thing in common: the vital role of economic history, which takes into consideration the following points (Sylos Labini, 2005; Rifkin, 2011):
- The urgency to understand a volatile, changing world that is immersed in a systemic crossroads. Globalization has seen the emergence of a world broken into five major economic areas according to Paolo Sylos Labini. First there is Europe, which has stretched eastwards despite initial difficulties due to the lack of convergence between new and more established countries (Fontana, 1994; Alesina, Giavazzi, 2009). Second is the ever-expanding Asian region, which as noted in a previous chapter is dominated by two giants, China and India. Both these countries can still be considered to be part of the so-called Third World, but as we know, both are without doubt leaders in international trade and technical skills in human capital (especially in fields related to telematics) and in the financial resources they possess from more advanced countries (Arrighi, 2007; Landes, 1998; Nayyar, 2013). The third area is Latin America, which has come through tough times, with very difficult political scenarios and lethal public- and private-debt crises, but which has a very clear economic leader in Brazil, which has recently seen massive growth (Marichal 1989, 2009). Fourth is sub-Saharan Africa, which is cut off from northern Africa, whose most symbiotic relations are with the entire Mediterranean basin and whose economic flows are with the energy markets. Black Africa is rich in resources but lacking in political, social and tribal cohesion and plagued by perennial wars. Despite its extreme social poverty, the region has become a fundamental objective of new capitalist expansions, and the origins of this intense greed that wants to profit from all kinds of natural resources are to be found in New York, London, Paris…or Beijing (Fontana, 2011: 10-16; Bodomo, 2011). Finally, the fifth major economic area is the United States, a power that is currently in a crisis and is being challenged by the dynamic of this new globalization, but still has latent capabilities in different fields of scientific and applied knowledge (Mokyr, 2002; Fontana, 2011).
- The environment, from a social perspective. Two contradictory observations are often made regarding environmental problems (Jacobs, 1991). One is that the environment is specifically a middle-class problem. They say that only people with high incomes can afford to worry about quality of life, and lobby groups concerned for the environment are mainly formed by middle-class people. The other observation is that because the environment is shared by everyone, differences in income and status are irrelevant. They say the environmental crisis signals the end of so-called old-school politics, based on class differences. Both arguments are shaky. First, the fact that poor people can’t afford to buy a good quality of life does not mean they don’t want to. The idea that they don’t is based on the fallacy that market demands directly reflect consumer desires. It is true that market demand is sustained by consumers. But consumer desires are not always compatible with the resources those consumers have to satisfy their desires. Surveys show that blue-collar workers are just as concerned for having a clean environment as those who are better off. But for poorer people, who must manage scant resources, other needs are a higher priority. Furthermore, in industrialized countries, primarily the middle classes form or join pressure groups, although this does not reflect the scope of environmental concerns in society. But in poorer countries, the environmental-protection movement is primarily led by poor, humble folk, since environmental damage is much greater there. This reveals the flaw in the second argument: it seems untrue that because environmental problems are shared by everyone income differences are irrelevant. Nevertheless, it is true that we all experience effects such as global warming. Pollution shows no respect for residential boundaries either. But not everyone feels the impact of the environmental crisis equally, so the benefits and costs of the environment are distributed unevenly (Naredo, 2006).
- The ever-worsening problems associated with income disparities. Since the 1980s, inequalities between countries have widened. The ratio of the difference in income between the 20% of the world’s population living in the richest countries and the 20% living in the poorest countries was 74:1 in 1997, 60:1 in 1990 and 30:1 in 1960. If we delve further into the past we see that the figures were 11:1 in 1913, 7:1 in 1870 and 3:1 in 1820. By the end of the 1990s, the 20% of the world’s population living in countries with the highest income accounted for 86% of global GDP (the 20% living in the countries with the poorest income accounted for only 1%). The rich countries also provided 82% of global exports (vs. 1%), 68% of foreign direct investment (vs. 1%), and 74% of the world’s phone lines (vs. 1.5%). Meanwhile, the net wealth of the world’s 200 richest people more than doubled in the four years leading up to 1998, surpassing $1 trillion. The assets of the top three multimillionaires is higher than the total GDP of all the least-developed countries and their more than 600 million inhabitants put together. In 1993, just 10 countries were responsible for 84% of global spending on research and for 95% of US patents registered in the last two decades. Despite the efforts made by certain institutions and economists to convince us that inequalities have been reduced in recent years, the data available says quite the opposite, with pessimistic data clearly dominating over more rose-coloured views of the economy and possible advances in poorer parts of the world.
I- BALANCE SHEETS OF EUROPEAN COUNTRIES
SOURCE: Produced by the author based on figures from the IMF, the Balance of Payments Statistics Yearbook and data files.
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 See also a co-integration analysis that gives a detailed description of a common market for trading cereal crops between the 16th and 18th centuries based on fluctuations in the prices of basic food items in the Spanish Mediterranean region (Manera, Sansó, 2006; Manera, Jover, Sansó, 2011). Victoria N. Bateman also examines the trade of crops in this period, but looking at a wider picture (Bateman, 2011).
 The combination of deregulation of the economy, cuts to social services and large tax cuts for the rich are part of supply-side economics, a school so dear to neoconservatives. However, even David Stockman, who was Reagan’s budget director and a firm believer in this school, was willing to admit in February 2011 that there was no evidence proving that tax cuts guaranteed growth, and he even added that growth was achieved once the tax burden was increased after 1982. The subsequent ultra-conservative fiscal policies of the two Bushes massively increased government debt to hard-to-sustain levels, which could reach 180% of GDP by 2035 (Fontana, 2011: 615-617).
 The periods determined in the Kondratieff waves are widely known, although also widely disputed. Each cycle is divided into an ascendant and a downward phase, so the movements within each phase are much shorter (Kitchin and Juglar). Amin, Gunder Frank and Jaffe emphasized the magnitude of technological change in the ascendant phase of the long-term cycle (50 to 60 years), a time when they believe the capitalist system was in a sense competing for its own survival (Amin, Gunder Frank, Jaffe, 1976).
 The notion of systemic crisis – that is, a large, structurally deep crisis that raises questions regarding much of the economic system – is also defended by De la Dehesa (2010), a work containing a wealth of facts and analyses that in its diagnosis calls for more efficient regulation and supervision. Amartya Sen, on the other hand, says we are not witnessing a systemic crisis, nor do we need to “re-engineer capitalism” – as the French president Nicolas Sarkozy once put it in a clear moment of panic. The eminent Indian economist believes we need to recover the ideas of the great Scottish economist Adam Smith related to the morality of human activity (the reference work is The Theory of Moral Sentiments, published in 1759, in which Smith proposes actions that go beyond mere financial gain; Sen, 2009: 16-23).
 I am following Brenner’s arguments here.
 “Great Recession” is the name that has stuck for the crisis that began in 2007-08. Carmen Reinhart and Kenneth Rogoff have also called it a “Great Contraction”, in an analogy with the term “Great Depression” coined by Milton Friedman and Anna Schwartz for the 1930s crisis. Reinhart and Rogoff believe the word “contraction” better summarizes the complete collapse in the credit markets and asset prices and the fall in employment and production (Reinhart, Rogoff, 2009; general overviews can be found in Caballero, Garza, 2010).
 Krugman’s stance on this issue is in line with the theses defended by William Baumol in his renowned concept that economics literature has dubbed “Baumol’s cost disease”. Basically, Baumol argues that imbalances between sectors of the economy can lead to a relocation of resources, which are redirected towards activities with little or no growth, such as services, which stalls aggregate growth. For Baumol, the work factor explains the differences in productivity between sectors. He says that in what he calls the “progressive” sectors (those related to industry and manufacturing), work is an instrument, while in the “non-progressive” sectors (the services), it is usually an end in itself. In an economy where wages are set according to productivity growth, costs in non-progressive sectors will be higher than in industry. The “disease”, therefore, is a downward trend in economic growth and aggregate productivity coupled with rising prices of services (Baumol, 1985; a broader analysis in Maroto, Cuadrado, 2006, 2009).
 The authors of this work argue that a fall in consumption can greatly affect prices in both developed and emerging countries, and that this scenario is much more worrying than inflationary pressures.
 It has often been repeated that the economist Nouriel Roubini, in a speech he delivered at the World Economic Forum in Davos in 2006, was the first to warn that a major economic crisis was imminent and would have drastic consequences for Europe’s peripheral countries (see also Roubini, Mihm, 2010). However, in Spain the economist and environmental expert José Manuel Naredo had already written papers long before the crisis warning of the difficulties of maintaining an economic structure held up by a bloated construction sector and the resulting speculation on the property market (Naredo, 1998, 2002).
 Excess savings are also related to growing income inequalities caused by the neo-liberal era, as can be inferred from the 2011 OECD report Economic Outlook, 90 (2011).
 One fascinating author, Max Otte, in his very blunt but precise style, argues that the eurozone needs somehow to be segmented. He says Greece, Ireland, Portugal and Spain should be separated, with their debt partially cancelled, and then their national currencies should be reintroduced so they can adopt their own economic policy with an unequivocal focus on currency devaluation strategies to make their economies more competitive (Otte, 2010a, 2010b).
 There were two essential causes of the Japanese economic bubble: deregulation of the banks and monetary policy. These are the very same causes of the current crisis in the main Western economies (Tsuzu, 1996; Torrero, 2011).
 In this respect, Gaspar Feliu and Carles Sudrià stressed that the 1931 and 1932 banking crises were recurrent. The administration’s passivity was due to a belief that it was appropriate to clean up the financial sector. Everyone therefore thought that letting banks that had engaged in speculation collapse would be a good thing. The problem with this strategy, as Feliu and Sudrià point out, is that it means the innocent pay for the sins of the guilty. A second factor to consider is the gold standard that was in place at the time. If the Federal Reserve wanted to maintain convertibility between US dollars and gold, it was extremely limited in the amount of credit it could grant. The very crisis fuelled demand for conversions and forced restrictive policies to be maintained. Britain’s abandonment of the gold standard in 1931 put tremendous pressure on the dollar, which led to an even tougher monetary policy. In that situation, only policies to stimulate demand, i.e. directly related to the real, productive economy, would provide a way out of the crisis. However, a change of presidency, among other measures, was needed first (Felíu, Sudrià, 2006).
 Data taken from Deutsche Bundesbank and from La Caixa’s, Monthly Report, 331 (2010).
 The financial crises have fuelled a series of publications that attempt to reveal the mechanisms that spread viral attacks from one economy to another. A recent assessment, with a lengthy econometric analysis, can be found in Dungey, 2011; Kolb, 2011.
 Countries like Spain and Canada, which have stricter regulations preventing banks from taking on toxic assets like the American junk mortgages, were better at resisting the contamination produced by the globalization of the financial crisis. But things took a turn for the worse in Spain, because its banks were dependent on the performance of the property markets, which were expanding strongly everywhere (García Montalvo, 2009).
 As you would expect, Skidelsky proposes a much more profound theory on the present-day relevance of the great Cambridge economist’s ideas. Skidelsky goes beyond the occasional, often shoddy, references to Keynes and his works. We need only look at the two major contributions Keynes made to the Bretton Woods Agreements: despite losing the negotiations, he was influential through his contributions on exchange-rate adjustments (i.e. moving away from the inherent rigidity of the gold standard), which enabled currency devaluations, and on control of capital movements. Keynes’s deep reflection on the 1930s crisis enabled him to make these two contributions, which were vital to the post-war global economic recovery.
 This idea of excessive individualism in today’s societies is also prominent in the writings of the influential philosopher Zygmunt Bauman, who introduced the interesting concept of “liquid modernity”. Regarding the topic at hand, Bauman explains that the super-individuality of this “liquid modernity” generates fears and reduces one’s capacity to deal with adversity. He says the indignados protest movement in Spain is fuelled by emotion but lacks thought. “Without thought”, he says, “you get nowhere.” This notion is valid for predicting the future (a job normally required of economists), but Bauman’s conclusions are not very encouraging: he says nothing can be predicted, everything changes, and what really matters is the present (Bauman, 2010, 2011, in which the author presents a more collective vision and warns of the danger of social exclusion and a loss of cohesion among those he labels the “marginal class”. He says they are the collateral damage of the crisis, since they are completely separated from the policy of wealth redistribution. This marginal class suffers from the cuts to public services, welfare and extremely lax taxation, which reduces government income).
 The figures are taken from the United Nations Development Programme (UNDP) reports for different years. Historical data for income are found in Maddison, 1996.
 The countries chosen are Greece, France, Germany, Portugal, Spain, Turkey, UK, Cyprus and Italy. We focused on the Mediterranean area (with disparate economies such as Greece, Italy, Spain and Cyprus where the services sector is important, especially tourism) and Europe’s most powerful economies (Germany, France and the UK).