The most recent world economic growth cycle (1993 - 2007), marked by its length and exuberance, can be considered to be the final result of the last wave of globalisation following the Second World War (Breton Woods Agreements) and has been the catalyst and driving force for the development of information and communication technologies during the last two decades of the 20th century.
There have been significant economic changes: a considerable increase in world trade, the greater international role played by the economies of China, India and Brazil, the off-shoring of the production of goods and services, to name but a few.
There have also been important transformations in the sphere of finances and these include the real-time interconnection of local financial markets, free flow of capital around the world and the development and use of financial engineering instruments (e.g. options, futures, derivatives, securitizations, structured products, hedge funds, etc.).
During this same period, a series of supranational institutions were also established (United Nations Organisation, World Bank, International Monetary Fund, European Union, World Trade Organisation, etc.) and these can be considered to be a clear yet non-explicit reflection of the size and direction of the situation as a whole.
This series of transformations have had an unavoidable impact on individuals, society, culture and state organizations, an impact which has in turn been driven and transformed by the growing generalised influx of information and communication technologies.
The foundations for the final stage of this economic growth cycle which was witnessed in the first decade of this current century, however, were founded on quicksand. Excessive liquidity in the international financial system originating from different sources resulted in the international banking system experiencing strong credit expansion in a climate of low interest rates. Standard banking system guidelines would have limited this expansion if the appearance and spectacular development of what became known as the shadow banking system had not been tolerated, a deregulated system based on financial innovation operations which enabled credit risk operations to be extended under the protection of regulatory arbitration. This situation, in conjunction with important commercial and budgetary deficits in certain countries and unbalanced growth in others and strong price pressure in the main raw materials markets, was not sustainable over time. We now know that those voices which were few and faint at the time and which expressed concern about the instability of the entire situation were right, and that it would only be a matter of time before some circumstance would act as the spark.
In the second half of 2007, this circumstance occurred: the North American subprime mortgage crisis, which had been heralded by the slowing down of operations and a slump in the price of real-estate assets in the US several months beforehand. This change in situation revealed the weaknesses, ineffectiveness, inefficiencies and inconsistencies of the system as a whole. Over a period of only a matter of months, not only did this have devastating effects on the international financial system but it also quickly affected financial markets and real economies, the growth rates of which swiftly slowed down to enter into an almost immediate recession.
Both supervisory monetary institutions and the governments of developed countries were aware of the seriousness of the situation, and so they ceaselessly and limitlessly adopted measures in order to avoid a generalised confidence crisis and collapse of the entire system.
It has now been two years since the crisis began and the worst is supposedly over. At this moment in time (December 2009), certain developed countries have started to show slight signs of economic recovery and the growth of emerging economies seems to have been re-established. It is obvious, however, that the problems are far from over.
The enormous intervention by governments by means of demand-activating policies and by monetary authorities by means of liquidity injections to the financial system and extraordinarily low interest rates have an expiry date or, to be more precise, a quantitative limit if other types of problems are to be avoided.
Excessive credit expansion has resulted in important productive sectors being oversized, certain stocks of assets being excessive, and an unemployment which could well become structural if it goes past the point of no return.
The indebtedness of certain countries has reached dangerously unreasonable levels and this will in turn be borne by their citizens in the budget with a subsequent deterioration in their standard of living.
Although the multilateral and multi-institutional handling of the crisis has been successful, questions have arisen not only about the global financial system but also about the current economic model and the global governance system.
There is also much concern about the effect that this will have on societies both in terms of politics and culture not only because of the impact of the crisis itself but also additional problems caused by the assimilation of strong currents of emigration towards developed countries which occurred during the period of strong economic growth.
The scenario and series of circumstances that we have just described have opened the debate about the possibility of changing the economic and social model, something which some consider to be essential. Our intention behind the summer seminar and the publication of this book is to provide information and reflections to help our readers explore the debate in greater depth.
The edition opens with a first chapter entitled “Global perspectives of the crisis”. The aim of the first article is to provide a series of wide-ranging views in an attempt to explore the crisis beyond the perspective of a certain sector or sphere of activity. In his article entitled “An analysis of the recent Great Recession”, Diego Rodríguez Palenzuela presents and discusses the main causes and characteristics of the most recent Eurozone recession. Even though the profiles of recession and recovery associated with recent recessions are distinct and individual, certain empirical similarities can also be detected, which is what happened with the behaviour of the macroeconomic aggregates in the Eurozone on this last occasion. In the specific case we are concerned with, the strong contraction of international trade (a factor which accentuated the seriousness of recent events) has been a particular feature, while the significant drops in private consumption and investment followed the trends marked in previous crises. The author suggests that everything seems to indicate that the Eurozone economic recovery which began in the second half of 2009 will continue, although at a slower rate and with a higher level of uncertainty than before.
In the next article in the chapter entitled “The global imbalances before and after the world crisis”, its author Luis Serven suggests that the coexistence of large current account deficits and surpluses in the world economy has generated important controversy in international economics: there is no common consensus about its importance in the gestation of the current crisis, nor about whether it represents a threat for future development and stability of the world economy. This is not the first time that this type of global imbalance has occurred but the last episode was characterised by its greater magnitude and duration and because of the fact that the external imbalances of advanced countries were mainly financed by emerging countries. This last point highlights the possibility that we are now facing something similar: global imbalances with different causes. After evaluating the different opinions recently voiced about the impact of these imbalances on the world crisis, the author reflects on how it may possibly evolve in the future, concluding that it is not possible to rule out a reduction in the US foreign deficit which would in turn lead to a considerable depreciation of its currency.
María del Carmen Gallastegui offers a novel perspective in her article “The economic crisis and the environmental crisis: analogies and lessons” by suggesting that both the current economic crisis and the environmental crisis are global phenomena and are to a certain extent interrelated. Both crises share some interesting similarities: the adoption of excessive risk was responsible for their creation, the presence of asymmetric information, and the lack of understandable and credible accounting, among others. The author maintains that by analysing the way in which these circumstances have been tackled in order to solve environmental problems interesting lessons can be learned for solving the economic crisis.
The second chapter of this 17th edition of the Ekonomi Gerizan editorial series, entitled “View of the crisis from the perspective of developing countries” aims to analyse the situation in countries which (as in the case of China) are destined to become the main driving forces of the world economy in the decades to come, or which (as in the case of developing countries) suffer the impact of economic cycle changes in a different and probably more serious way.
In his article “China and three crises”, Alfredo Pastor analyses the specific features of the case of the Chinese economy. In recent decades, China has taken on a greater role on the international economic stage and is likely to be a deciding factor for the evolution of the world economy in the decades to come according to how it solves the challenges posed by its development and how it integrates into the economic scenario as a whole. The Chinese economy should be analysed not only within the parameters of the current global economic and financial crisis but must be understood and analysed within the framework of the persistent and considerable commercial and financial imbalances which exist on an international level and the threat of a constant rise in the price of raw materials and natural resources.
The role and impact of the crisis on Latin America is completely different from the previous case. In their article “The impact of the crisis on Latin America”, the authors José Luis Machinea and Guido Zack analyse the impact of the crisis on South American countries. They remark that the effect on developing economies has been smaller than on developed countries, despite the fact that the volatility of growth in recent decades has generally been greatest in the developing world. After explaining why the impact on Latin American countries has been lesser than in previous crises and identifying the risks of recovery which are taking place, they conclude that even supposing that none of these risks were to occur, they expect the world to grow in the mid/long term at a lower rate than in the recent past, but probably with fewer jolts. They also estimate that the region's future will mainly depend on the evolution of the world economy in the coming years, which will be marked by the role of trade, by the more dynamic regions, by the off-shoring of production and by the role of technological change.
The article “What might the crisis imply for developing countries?” written by Iliana Olivié presents a wider perspective. In a world economy with a high level of globalization, the impact of the developed world crisis on developing countries soon became apparent. And the debate about the validity and suitability of development models for emerging and developing countries is a result of questioning the economic growth model of developed countries. After evaluating some of the economic and social consequences of the world financial and economic crisis for developing countries, the author explores the development paradigms from the analysis of the causes of the financial crisis, a debate which is closely linked with the one about the state's role in the economy and with the debate about the main development paradigms.
The financial system's role in the gestation and triggering of the crisis was extremely important and we have therefore decided to focus entirely on this in the third chapter which is entitled “The financial nature of a global crisis”. The chapter begins with “Some reflections about the reform of financial regulation and supervision” by José Pérez. According to the author, the nature and seriousness of the current financial crisis has resulted in an in-depth review of financial regulation and supervision on both sides of the Atlantic and this is why there is currently common consensus about the need for significant changes to prudential regulations, investor protection, market infrastructures, supervisory institutions, and crisis management and resolution mechanisms and processes both for preventing their recurrence and for minimizing their costs. In the case of the European Union, these needs for change are underlined by the challenges which European fragmentation poses for financial stability and the efficiency of a single financial services market. The content of the article attempts to answer what the author considers to be the great questions about reform such as why these legislative and institutional changes are being proposed for financial supervision in the EU, what justification there is for these and what they comprise of and what the most important implications of these are.
The following article is written by the President of the National Securities Market Commission (CNMV), Julio Segura, and entitled “The orientation of financial supervision in response to system failings”. In this article, the author first explores the errors in the market, legislation and macroeconomic policy design, and the financial theory hypotheses which proved to be incorrect despite the initial high levels of confidence, all of which throw light on the activity of a market supervisor in a crisis such as the current one. The author then goes on to comment on some of the actions of the CNMV which have been guided by the previous analysis: on an international level, an active role in necessary legislative reforms for areas such as hedge funds, OTC markets, rating agencies, directors' pay, financial information and financial markets; and on a national level, actions to guarantee adequate valuation of financial assets and to improve market operations.
In his article “The financial crisis and solutions: the outlook from both sides of the Atlantic”, Santiago Carbó analyses the main factors behind the financial crisis which broke in August 2007 and the mechanisms proposed to solve these problems both on a national and international level. Paying special attention to the initiatives in the United States and Europe, and also to the Spanish case, he distinguishes between initiatives to solve short-term problems and long-term actions and proposals to reform international finances. The analysis suggests the existence not only of unilateral actions on a national level to tackle long-term problems but also of important differences in financial reform initiatives in Europe and the US. The special nature of the Spanish case is illustrated both in terms of the supervision mechanisms arbitrated within the prudential supervision scheme before the crisis (i.e. the statistical provisions) and of the resolution of the asset impairment problem and banking restructuring by means of an organized process consisting of various scenarios or courses of action.
The following article contains the closing conference of the Summer Seminar organized by the FCAVN which serves as the backbone for this book and which was given by the Governor of the Bank of Spain, Mr. Miguel Ángel Fernández Ordóñez. This closing conference explored the situation of the reasonably healthy Spanish banking system which must confront a series of important challenges relating to the pressure on margins, to financing, to capital, to efficiency and to the quality of assets, which must be resolved in order to continue to satisfactorily fulfil its economic function of providing financing for the entire system. Faced with a foreseeably much less expansive economic scenario in the future, financial institutions must act in order to maintain their profit and loss account amid a resizing and restructuring of the sector as a whole. In this respect, processes to restrict costs and improve efficiency and productivity will be of prime importance, as will the exploitation of the advantages of economies of scale.
The fourth and final chapter of this edition entitled “Reflections about the management of the crisis” analyses different tools for managing the crisis. “Anti-crisis economic policies examined” is the title of the article by Juergen Donges who states that the non-conventional measures implemented by central banks and governments to reduce systemic risk in financial markets (and also ultra-expansive fiscal economic recovery measures) have resulted in a vertiginous increase in public deficit despite their positive short-term effects. The inevitable consolidation of budgets (impeccably imposed by the "inter-temporal budget constraint) means that governments must have expansive fiscal policy "exit" strategies in place for when economic activity starts to recover as must the central banks in their sphere of monetary policy in order to prevent a particularly cheap currency from producing an upturn in inflation or generating new speculative bubbles in the financial and real-estate markets. Economic reactivation policies, which are inherently short term, must also be supplemented as soon as possible with in-depth supply-side policies for the medium/long term. The crisis has not diminished any of the major challenges which economies have faced for some time now.
In his article “Global economic governance and IMF and WTO reforms”, Federico Steinberg considers that the global financial crisis has raised the question of the need for a reform of global economic governance institutions in order to improve their effectiveness and legitimacy. Although globalisation would require the reform of practically every multilateral organisation, the crisis demands that we start with the Breton Woods institutions (and with the IMF and the WTO in particular) in order to avoid an increase in protectionism. The main challenge consists in allowing the emerging economies to be heard and in designing new guidelines for trade and international finances which will enable future crises to be avoided. The current situation, in which international cooperation is becoming more necessary than ever, opens a great opportunity for progress to be made in this reform. But whether the international community can take advantage of this is by no means guaranteed.
This edition of Ekonomi Gerizan closes with the article “The economic and dynamic crisis of real-estate adjustment in Spain” by José García Montalvo who presents an overview of the situation and perspectives of the real-estate sector in Spain. Rather than offering an exhaustive study of all aspects of the Spanish property market, the article focuses on certain critical aspects to provide a synthetic view of the sector. The article analyses the current situation and the factors which determine the rate at which the real-estate sector adjusts to the new post-bubble balance.
With this seventeenth edition of Ekonomi Gerizan our aim has been to focus on a subject which, on this occasion, is not only relevant but also tremendously current and even pressing. It has always been our intention to publish thought-provoking reflections and to cover subjects which we consider to be of great interest. With this aim, the content of this book and all previous editions of the Ekonomi Gerizan series are freely available on the Federation of Basque Savings Banks’ website (www.fcavn.es). It is our readers who will have the final word and it will be for them to decide whether or not we have achieved our objective.
Before ending, we would like to thank everyone who we have worked with over the last year and who has made this publication possible. Despite some having an extremely busy work schedule as a result of this very crisis, they have managed to find the time to offer us their valuable knowledge.