Events are coming and there is little time to remember. But it's still a birthday. Fifteen years ago, on 9 August 2007, the Great Crisis began. Something we had never seen and took us by surprise.
Until shortly before then, with rare exceptions, the dominant view among economists, politicians and authorities was that the world was experiencing the so-called Great Moderation, a kind of new Eldorado with permanent high growth as well as low inflation and unemployment. We were told that this happy phase – traditionally thought of as a tradeoff between inflation and unemployment – was the result of two changes in the set-up. First, markets had been made more functional: by reducing their inefficiencies with interventions which for decades had broadened the sphere of free market forces and the pursuit of profit (and restricted that of the State and of forms of initiative with social objectives); extending the size of the market globally, previously limited by national borders. Second, economic policies had become non-interventionist and, in particular, monetary policy had become more credible, which now focused only on consumer inflation (eg inflation targeting). Someone objected that large trade imbalances were growing (especially between the USA and East Asia) and that, also due to those imbalances and to deregulation and financial innovation, the level of debt (sometimes public, more often private) was seriously increasing , building dangerous fragility. But he was told not to worry: the markets were able to look after themselves and they had to be left to work. Incidentally, in this view, with its creeping stagnation, Italy was unable to participate in the banquet of the Great Moderation only due to its own delays in applying the free market mantra.
It is therefore a profound shock to learn that the new systemic financial crisis of August 2007 does not come from an imperfect periphery but from the luminous center of world finance on Wall Street. And, through toxic bonds and other financial gimmicks, American over-borrowing had permeated much of the advanced financial systems. Like in a Truman show, one realizes that behind the fake paper-mâché background with the fake blue sky there is a real sky but full of dark clouds. The central banks of advanced countries immediately stop looking only at inflation by intervening to circumscribe instability with powerful and unorthodox injections of liquidity. But the spiral of instability has inexorably set in motion and the growing crunches explode in September 2008 in the bankruptcy of the second largest investment bank, Lehman Brothers. It turns out the American Pandora's box. The financial markets seem to be drawn into a black hole and, in hindsight, the US authorities immediately regret having accepted that failure, scrambling to bail out all the other failing financial institutions. Even the likes of Goldman Sachs are forced to ask for public support. The same is happening in Europe where, it should be remembered, Italy is one of the few countries to avoid bailout interventions because our banks are the least contaminated by that first wave of instability. And, since those interventions aggravate the public debt of the countries affected by the banking crisis, the lack of aggravation is good for our public accounts.
The shock wave of financial meltdown coming from the center tends to produce a blockage in the circuits of the global economy generating a recession that is feared to lead to a long and deep depression, as in the 30s. Conscious of this, the world's leaders are quickly updating the governance of the planet, moving from the now obsolete G8 to the more representative G20. At the meeting in London in April 2009, two lines of emergency intervention were lucidly stated. On the one hand, all governments are committed to adopting active policies to support the recovery. Therefore, putting the non-interventionist creed of the Great Moderation on the shelf, monetary policies (everywhere) and fiscal policies (where possible) become very expansionary. On the other hand, there is a commitment to a severe re-regulation that closes the season of cheerful finance (and of 'light touch' regulation) to restore financial stability.
The effect of expansionary policies is being felt. In the second half of 2009 and in 2010, an asymmetric recovery manifests itself: more sustained in emerging countries, less strong in advanced ones, many of which are grappling with a painful process of deleveraging (debt reduction). Instead, progress in the re-regulation of finance is largely impalpable, also due to the veto power of big financial interests that is once again manifesting itself. Thus, instead of restoring the conditions for financial stability, one gets the impression that the main financial institutions are returning to a sort of 'business as usual', as if nothing had happened.
And then even the recovery weakened in 2011 and even more so in 2012. This time, the decisive blow comes from the sovereign debt crisis in the Eurozone. On closer inspection, it is difficult to explain in economic terms how this crisis could have exploded in an area which, as has been mentioned several times, has overall a public debt/GDP ratio lower than the USA - and much lower than Japan - and above all, a substantial balance in the external accounts. It all stems from the public debt crisis in Greece which then infects Ireland, Portugal and Spain and, finally, Italy (since July 2011). Thus the lid is removed from the European Pandora's box.
The least costly way to resolve the Greek crisis was for the Eurozone, backed by its good overall macroeconomic fundamentals, to undertake to provide all the necessary guarantees and support. Instead, for reasons that historians will explain, under the hegemony of the German-French directorate it is claimed that investors will be called upon to bear the losses. It's like adding fuel to the fire. The Greek crisis gets worse and worse and the contagion extends to all the countries identified as Euro-weak. On various occasions, attempts are made to stem the crisis but, no matter how hard one tries, each institutional solution identified is like Penelope's canvas: every step forward is followed by one (if not two) steps back. In the meantime, the main financial institutions, having returned to 'business as usual', are happy to have found in Europe a fat prairie in which to graze easily. The absurd result is that, while other major economies struggle with expansionary policies, the paradigm of fiscal discipline and tidy public finances produces huge recessionary bouts in the Eurozone, which then ripple on a global scale. Moreover, left at the mercy of speculation by the perception that solidarity on the part of strong Euro countries may not exist, fiscal rigor does not seem to solve the problem of weak Euro countries but drags them deeper into a dangerous spiral of economic tensions and social.
EDid we leave Eldorado and land in a circle of Dante's Inferno? One thing is certain: this crisis too will end. However, if European rulers fail to regain mutual trust, the cost for the old continent will be momentous. It would be paradoxical to have to tell our grandchildren that the solid and balanced vessel of the Eurozone was shattered because inexperienced drivers were unable to avoid the impact with the Anglo-American vessel, made unbalanced by the domination of financial capitalism which produces instability, and with the fleet of the emerging, apparently robust but too often guided by state capitalism and unable to guarantee economic freedoms and individual rights.
