Analytique, complet, indépendant
Analytique, complet, indépendant
Copyright © 2008 Europolitics. Tous droits réservés.
How long will the crisis last?
Tsvetan Vasilev (*) | mercredi 06 juin 2012
The global economy has reached a turning point and the question ‘Where to now?’ is on the agenda of the world’s political leaders. If ten years ago someone had raised the question of the cyclicality of the capitalist economy, the majority of the public would have thought him mad. At any rate, because it seems we have decided that capitalism had overcome its inherent feature to follow certain stages of development, which inevitably go through a crisis. Capitalism is supposed to follow a thirteen-year cycle of development, which in practice has been replaced by one which lasted over thirty years as a result of a number of ‘successful’ interventions. Since 2008 the consequences have been apparent.
Following the U.S. economic crisis of the 1990s, which gave rise to the need to find new sources and areas of financing, the Clinton Administration successively passed three laws to encourage investments in housing and in mortgage-backed securities, the main one being the 1995 amendment of the Community Reinvestment Act. As a result, in a purely centralized manner the government shifted the focus of banks towards priority financing of the U.S. population’s acquisition of new dwellings.
The ‘promotional’ policy of the U.S. government, stimulating indiscriminately the giving out of unsecured and poorly secured loans, laid the foundations for the development of the notorious nowadays Fannie Mae and Freddie Mac. They held the bulk of the vast amount of mortgages (including the so called subprime mortgages) which triggered the collapse of the U.S. financial system in 2008. High-risk mortgage loans number about 27 million, the outstanding debt alone amounting to over USD 4 trillion.
Historically, studies have shown that there were crises which lasted 20-30 years, which puts an emphasis on the chief question at the moment: ‘How long will the crisis last? Does it have a bottom? Have we seen this bottom yet or it continues to elude us?’ In my opinion, we have not hit bottom yet and it is not even clear when we are going to, because the level of indebtedness – of citizens, on the one hand, and of governments, on the other – is so high that we cannot see that driving force which can stimulate consumption. It is obvious that simply no one would continue to finance living on credit and beyond one’s means.
The weak recovery in 2010-2011, reflected in improving economic indicators, was rather a result of the large amounts of money injected into the economy through interventions by the Federal Reserve and the European Central Bank. This begs the question whether it is possible for the capitalist economy to sustain its development based only on purely monetary methods or we should seek more insistently the role of the state. The current stage of development of the capitalist cycle certainly calls for greater involvement of the state, not only through pouring money into the economy, but mainly through strengthening its entrepreneurial function.
If I have trust in something that could lead the global economy out of the current crisis in the short term, it is in the development, albeit somewhat decelerated, of the Developing Asia and of the so called BRICS countries. It is a fact that from 2000 to 2010 the G7 countries’ share in world GDP dropped from 49% to 39%, while that of the BRICS increased from 17% to 26%. The levels of most of the macroeconomic indicators of the BRICS also prove their advantage over advanced economies.
If we consider the depth of the crisis in the global economy we will be only referring to ‘half the trouble’ in comparison to what we witness in the EU. The crisis has been brought into the European system – European banks held exposures to U.S. securities of approximately USD 4 trillion, including to subprime mortgages. Of these exposures as much as USD 740 billion have already been written off. This unfavorable fact affects all the possibilities for the European financial system to mitigate the effects of the crisis.
Besides the classic reasons that triggered the crisis in Europe, in my opinion, certain factors arising from the characteristics of the European system itself also contributed. The EU has shown that to a large extent it still remains just a sum of different economies in terms of level of development, which by no means work as a system. The highly developed countries – mainly the Northern countries and those of the Rhineland group – are much more advanced than the Southern ones and the new Member States.
The major reason for these discrepancies is that the EU enlargement created conditions for an almost monopolistic dominance of large German and French companies, which effortlessly gained unlimited access to the markets of a number of countries. A huge part of South European economies constantly register negative trade balances, primarily as a result of their trade with Germany and the Netherlands. In general, there is nothing wrong with that; however, these trade deficits had been financed mainly by government debt until banks holding these debts were incapable of taking on new obligations and the bubble could no longer keep expanding.
The problem is that to a large extent the European community is closed in on itself. It has not managed to gain competitive advantages over third countries. It is no coincidence that over 60% of Member States’ trade, including Germany’s, takes place within the EU. In addition, a huge number of the EU countries are over-indebted. The government gross debt as a percentage of GDP of a considerable part of them (such as Greece and Italy) exceeds 100%, while that of others is between 60% and 90%.
I do not believe that the large disproportions and the huge debts, accumulated mainly in the PIIGS countries, can be resolved in any other way than leaving the Eurozone. Personally, I do not think that the sovereign debt crisis has been solved. The first stage of the Greek debt crisis was a technical solution which has given no idea of how things will unfold from now on. The Greek economy has fallen into a depression which will hardly allow the country to service its debt, though it has been greatly reduced.
The crisis in Europe, besides being aggravated by problems of a systemic nature, is connected with certain political decisions in the EU which by no means are working in favor of finding a solution to the consequences of the crisis. Personally, I sincerely doubt that it is possible to introduce federalism in Europe at this point, not because it is wrong, but because now is hardly the right time, especially given the great disappointment and the strong centrifugal forces which have taken hold of some European countries. Therefore, it is more likely that certain processes will bring change into the very structure of the EU, rather than create a confederation of some kind.
Europe has reached a decisive point for choosing its direction of development.
(*) Président du Conseil de Surveillance, Corporate Commercial Bank, Sofia“The EU remains just a sum of different economies”