Hercules or Sisyphos: The Economic Policy Agenda


The U.S. is in recession, the Eurozone will stagnate during the next quarters, the large countries, France, Germany and Italy being hit strongest. The UK is already in a recession, being especially vulnerable to the finance-sector-led slowdown of the non-financial economy.

The previously booming countries of Eastern and Southern Europe have still better growth prospects than their more developed Western neighbors, but are also faced by a significant slowdown in growth.

And even the large emerging economies, China, India, Brazil and others, are experiencing significant falls in growth, thus being threatened to having the recent success stories in alleviating poverty reversed. While a few months ago the sudden spectre of raw-materials-price driven inflation and food shortages and price increases were at the center of the global policy debate, now it is the financial crisis and – in its wake – the fear of deflation.

How did this happen? The refusal of the U.S. government to bail out Lehmann Brothers (like a number of its “luckier” sisters) led to the sudden freeze of the interbank market which is so vital to our credit driven, highly leveraged economy. If credit is the basis for doing business in the “real sector” – and the raison d’etre of the financial sector – its drying up stops economic activity cold. Businesses can no longer get credit, not only for investments, but also for financing their working capital and wages; mergers and acquisition activity stops without credit; foreign direct investment which drove the recent boom in emerging and developing countries has come to a halt; consumer goods financing is only trickling, as the most recent data on new car purchases show. And when the largest economy, the U.S., is in recession, because their mortgage-driven financing consumer boom has stopped, production in all countries exporting to the U.S. is being hurt.

These effects on the real economy shape the confidence and outlook of the citizens and firms: not only does rising unemployment reduce household incomes, but lacking demand will delay investments in capacity expansion. Trust in the banking sector has fallen, more in the countries in transition where a creditable banking sector is still in the process of being built up with the help of Western banks and international financing institutions, like the World Bank and the EBRD: many citizens withdraw their savings from the banks, change them into hard currency and either put them in the banks’ save deposit boxes or under their mattresses. Even production firms are hoarding cash. This again weakens the banking sector. In Russia, for instance, during the last month around 30 bill $ were withdrawn and transferred out of the country.

The interest rates which banks in emerging and transition countries, but also in the more advanced countries, have to pay for credits have increased tremendously – differentiated by the financial markets’ perception of riskiness.

The IMF and the European Union and the World Bank have come to the rescue of Iceland, Hungary, Ukraine, Belarus and Serbia. Turkey is experiencing problems in spite of large progress in reform. Pakistan needs rescue, Russia’s and Kazakhstan’s oil reserve funds are being drained by large packages to the country’s largest banks. Many countries exchange rates have fallen drastically, many stock markets have lost 2/3 of their (book) value.

There are signs that the (more or less) concerted international efforts to stabilize the world’s financial systems may have been successful – at least for the time being. But the impending recession will again feed back into the frail banking sector – and need further very strong policy action. There are also signs that some of the global economic imbalances – while still strong – have narrowed: the U.S. current account deficit is falling, albeit still high, the Chinese surplus getting smaller, the EU has recently recorded a small deficit in the current account, but falling raw material prices might reverse that.

National Banks have once more lowered interest rates: Europe still has room for manoeuvre, the U.S. Fed – with policy rates there at 1% already very low – is soon running out of steam. The UK engineered the largest-ever reduction in the interest rate on Nov. 6. The European Union countries have decided – represented by their finance ministers – against a joint package to stabilize the real economy, in favour of country-by-country initiatives. The European Commission has signalled that there is “fiscal space” for deficit spending, but this space is very different from country to country, given their respective budget deficits. Now it becomes clear once more that too little budgetary discipline during the past “good” years restricts leeway during the recession.

Three challenges need to be tackled simultaneously at global and national levels:

a)     The stabilization of the financial sector needs to be continued, with the aim that the banks take up lending to the real economy and the consumers again – without engaging in the excesses of the previous years. Supervision, especially of systemic banks, needs to be put on a global level.

b)     A deepening of the recession must be prevented, with its effects on incomes, employment and again on the financial sector

c)     In many developed countries, a large number of policy challenges with respect to the future welfare of their citizens still needs to be tackled: prevention and mitigation of climate change effects, the viability of pension systems in the face of ageing and the devastation the large fall in stock prices has wreaked on many capital-based pension funds; the restructuring of health systems; the large needs to bring education systems into the 21st century, the improvement in the deteriorating or non-existent infrastructure in many countries.


This is a Herculean agenda, much more than the feel-good policies of the past years can handle. The stability of the global economic system is at stake. The task is even more complicated, because the present crisis has shown in frightening clarity, that the “olden ways” are unsustainable. More joint or concerted action for the global problems, especially in the building of a new global economic and financial architecture would be desirable. No individual politician can handle that: we know that the times of Hercules as singly cleaning out Augias’ stable, are over. We don’t want, however, to have numerous Sisyphoses scrambling up and down the mountains during the hard tasks ahead. What the world needs is considered, evidence-based, concerted policy-making by serious political women and men who have the welfare of their citizens at their hearts and not that of influential lobbies. It will also take politicians who will tell their citizens some inconvenient truths and that a renewal of our socio-economic system will require sacrifices. It will take politicians who are able to take their citizens along this stony, uphill path.


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