At the recent IMF meeting a doomsday mood characterized most statements. MD Lagarde expressed strong worries at the renewed slowdown of global growth in the advanced countries, and urged renewed action. No conesensus was found, however, how to deal with the crisis.
However, the facts are less worrying, if we disentangle the growth performance from the renewed threat of a breakdown of the financial system. The growth forecast has been maintained for the world with 4.5% for both 2011 and 2012, with low growth for the US (2.8%, resp. 2.9%) and only 1.6%, resp. 1.8% for the Eurozone. While these call for policy action, these numbers are not really a disaster – only if we ignore some of the underlying reasons. In the fact of ageing and sometimes shrinking workforces and in light of the effects of economic growth on climate change, mature economies need to develop plans how they can maintain their standards of living without growth or with less growth than in the past, how they can adapt their lifestyles to higher average age, smaller populations and less damage to the global climate. These are very important structural issues which require urgent action – but they are not immediate threats. So let us leave them aside, for the time being. The immediate problems are hard enough.
The worries expressed during the Washington meetings refer mainly to how the financial system deals with the aftermath of the 2008 ff. Crisis. We need to distinguish two strands: that of the private sector debt and that of government financing (the ”sovereign” sector). Reasons causing the private sector crisis were the low or negative savings rates in the Anglo-Saxon countries as a result of falling real incomes for persons earning around and below average, and the onslaught of banks and advertising agencies about purported consumer needs, the concomitant sub-prime mortgage financing and the government-promoted development of ever more, opaque and complex financing instruments. Serious solutions to this part of the crisis must not attempt to revive these pernicious trends – which obviously were built on sand; but rather to restructure the economies towards more self-financing (savings) behaviour, towards more investment and less consumption-driven economies, in order to build the material and immaterial infrastructure for older and more ecological and solidarity-driven, fairer, societies. For the financial sector this implies the need to “de-leverage”, to shrink it – with all the concomitant costs. In national accounting terms: the contribution of financial services to GDP (there is a discussion going on on they how are they actually measured) will need to shrink, maybe even in absolute terms.
For government financing whose debts – as a result of the crisis – have become untenable (estimates say that the contribution of the stimulus and banks-saving packages in Europe added between 15 and 20 percentage points), in addition to already high debt ratios carried over as pre-crisis profligate behaviour, the following choices exist for Europe, especially the Eurozone. Either we take this financing away from (private) financial markets and their daily “panics and worries” and hand it over to Central Banks or other public agencies (EFSF, and the like) whose (hopefully) more rational assessments of individual economies’ strengths and problems will avoid the present daily fluctuations and the excessive swings in interest rate premia, or – if we want to leave it in the hands of the “markets”, restrict trading in these bonds and thus avoid the daily volatility. An intermediate way would be that of “Eurobonds”, where all or strong Euro countries guarantee all Euro country bonds, thus generating more liquidity and less risk for small, exposed countries. If this is seen as inviting “irresponsible” behaviour by some countries, government debt could be split into a Eurobond part (up to 60% debt ratio) and a national part (above 60%), or similar schemes.
All present efforts by the international community seem to want to leave the financial sector as is, apart from some new regulatory steps under way designed to discourage excessive risk-taking. But heads of state and finance ministers and central bank governors and international financial institutions shy away from confronting the de-stabilizing financial markets, fearful of all kinds of “contagion risks”. They sit vis-a-vis financial market actors like the proverbial rabbit in front of the snake – instead of drawing the relevant lesson from the crisis, namely that the financial sector has caused it, aided and abetted by all-too-willing and swooning politicians. Thus, contrary to their proclamations, we do not need to solve a crisis of confidence, but one of structure and utility.
This is not about retribution, but rather about learning the correct lessons for the future: just like Chernobyl and Fukushima (among others) have opened our eyes to the dangers of the nuclear industry and have led to moratoria on building new nuclear plants (Chernobyl) and plans to phase out existing plants (Fukushima), we must learn our lessons from “financial weapons of mass destruction” (Warren Buffet) and defuse them by forcing the financial sector back into its useful corset, i.e. to finance the real economy, to mitigate some risks, to transform savings into investment.
Concretely, this means the above-mentioned re-direction of government finance; the strict separation of commercial banking (for the real sector) from investment banking and the restriction of government guarantees for savings to the former; the restructuring of government budgets towards building the foundations of future society and away from financing the burdens of past activities; the closing of highly risky or redundant financial activities; the shutting down of intransparent capital flows to tax havens within countries and outside; the building of adequate financial resources to help countries in trouble (a la IMF); the re-orientation of EU, Eurozone and national economic policies towards growth and away from single-minded budget consolidation (without abandoning efforts to reduce the debt ratios), and the creation of more solidaristic, eco-friendly economic systems which allow a much larger part of our populations to participate in the fruits of productivity increases.
The recent IMF meeting and the G-20 statement by finance ministers have shown once more that politicians still waver which way to go. They once more affirm their willingness “to do everything necessary to deal with the problems”, without saying in concreto what they are willing to do. They once more shy away from tackling the overpowering (but overly timid) financial markets head-on. They mistakenly urge Central Banks towards more “quantitative easing”, instead of developing instruments to directly finance the real economy. At best, they will generate some temporary goodwill from the financial markets, bought with a lot of taxpayer money, at worst they will have thrown more good money after bad and started a second Great Depression. The confidence gap which needs to be filled is not between politics and the financial markets, but between politics and the citizenry.