Financial crisis: Act Two

Since 2008, governments have spent 20,000 billion dollars for bank bailouts and economic stimulus, with the logical consequences for their debt levels. In relation to their economic output, emerging countries have even provided more money than the industrialized ones, and thanks not least of all to their «underdeveloped» financial markets, they have weathered the crisis surprisingly well. This massive expenditure has averted the collapse of the banking system and the world economy. Months ago the signs were that the recession had also been overcome in the industrial countries and that their economies were again showing growth.

Then the euro crisis broke. Its roots lie in the imbalances in the euro zone that have existed since its inception. Germany is financing the current account deficits of the weaker euro countries by means of credits, in turn selling its surpluses to them. Germany's growth has been generated mainly in other euro countries even as the German domestic market stagnated thanks to enforced wage «restraint».

Something similar is happening on the world scale. China and others are funding the USA's double deficit so as to be able to sell their massive surpluses to that country. But there is one essential difference: the USA has its own currency, which depreciated on the back of the crisis thereby reducing its current account deficit. Not so for Greece. It must grapple with domestic deflation, in other words, cuts in state spending and wages, and this is a sure way to descend into depression and persistently high debt levels.

In the autumn of 2008 most governments displayed a «Keynesian» reaction to the financial crisis, as illustrated by the 20,000 billion. Today they are reverting to orthodoxy. In May the OECD recommended the ending of economic stimulus programmes, the raising of base rates and the reduction of government debts – and this although it foresees no strong medium-term surge in inflation, but on the other hand persistently high joblessness. In a way this amounts to generalizing the Greek programme to everyone. Europe's ruling elites seem more inclined toward this path than the USA. It would appear that as Latin America celebrates 200 years of independence from Europe, the old continent is bent on experiencing its own «lost decade», with uncertain implications for the world economy and for the continent’s political and social equilibrium.

Peter Niggli, Director Alliance Sud