Publications
EKONOMI GERIZAN
ABSTRACT
The 19th edition of our Ekonomi Gerizan series is entitled "Crisis and economic agents: an evolving global framework". When work began on this series just under a year ago, it would have been hard to imagine the catalogue of events that has since unfolded. And yet the analysis on which the choice of content for this series was based not only remains valid but has been confirmed by these events.
The title of this series aims to encapsulate the perception that we are currently facing a climate in which substantial alterations of a wide variety of economic and financial elements simultaneously concur in different territorial and institutional spheres. There was justification on the economic side for why people openly started talking of the Great Depression; on the financial side we were astounded by a complicated situation involving sovereign risks, banking systems and capital markets; and on the institutional side what was lacking was clear and firm leadership which was capable of improving every aspect of the entire situation.
In recent weeks, we have witnessed the evolution of the sovereign debt crisis. This sort of subcrisis within the crisis (if it is possible to separate certain aspects from others) began over a year ago in Greece, moving from Ireland to Portugal, back to Greece and then Italy. It has now brought Spain and other EU countries into the spotlight and has as a result, created yet more political instability. In the midst of this evolution, we have witnessed how countries, governments, markets, monetary and supervisory institutions and financial agents (among others) have reacted. Meanwhile, the man on the street has become increasingly perplexed by a seemingly never-ending spectacle in which, like a TV soap opera, something always happens at the last minute to introduce a new twist and spark another series of episodes. The main problem is that ordinary people are finding it increasingly difficult or even impossible to understand what is happening and this gives rise to a growing feeling of uncertainty and insecurity in the social fabric.
Since most crises are multivariable, they are the result of the concurrence of quite a wide series of variables and target specific sectors or countries. But this crisis is undoubtedly systemic in that it affects the entire system: real and financial economy, countries, supranational institutions and organisations, financial markets, etc.
It is generally accepted that this crisis has a financial origin. Without a doubt this was what sparked it and we can analyse the situation, its cause and effects from this perspective since the financial system was the transmission machinery which formed the crisis. But there is a preliminary question which must be answered: who provided the raw materials and financial liquidity for this machinery? Because for any matter (and the economy is no exception), an accurate diagnosis of the problem is required so that the most suitable palliative measures can be applied. The financial system is often attributed to be the cause of the crisis but given its mainly instrumental character, it appears that it is necessary to analyse other options, such as for example the evolution of raw material prices.
By way of graphic example, oil prices rose thirty-fold between 1973 and 2009 (compared with 5-year averages) and worldwide oil consumption increased by 50%. The world oil bill increased forty-fold in thirty-six years. This entails the transfer of more than twenty-five billion dollars from consumer countries to petroleum-exporting countries in this period. Only between 1999 and 2009 did this transfer total 10 billion dollars which was equivalent to 1 billion dollars a year and approximately Spain's GDP. These figures acquire an even greater dimension if we consider the possible impact of raw materials as a whole.
If we include the structural characteristics of emerging economies, which have resulted from unparalleled saving rates in recorded economic history, it is not difficult to understand how the direction of international flows in recent decades has been inverted.
There has been much talk about the drop in internal saving in developed countries as a result of debt holding back economic growth: it might well be that the steep rise in the price of raw materials and foodstuffs sparked this situation. Because if we reduce the purchasing power of developed countries while expecting them to maintain and increase the internal demand figures, it would seem that the simplest way to bridge this gap would be by increasing national, family and corporate debt. It is possible that this recipe can work for a couple of years but it is evident that this is not viable in the long term, and is a process which will take decades.
However, this is not the only problem that this crisis has created: we must also consider problems of governance, of adapting deadlines for solving the specific nature of problems, and the effects of inequality between regions of the world which are transmitted and retransmitted in terms of productive and commercial offshoring and migration.
The economic and technological development of the last two hundred years has brought us to a situation which is completely global and practically interconnected in real time, something which has never happened before in the history of humanity. One of the consequences of this is that it is nowadays practically impossible to even contemplate the possibility of autarky either in terms of a country or a region and this creates the need for unified direction, at least in certain critically important global affairs. The present crisis has in fact highlighted the fact that the current legal-political-institutional fabric is inadequate: you only need to look at the evolution of the European public debt crisis to witness the difficulty, if not the impossibility, of combining interests and objectives which should be common to the countries sharing a union treaty.
In terms of the adjustments of deadline, the European public debt crisis also serves as an example. The problems facing the directly involved European countries are mainly structural and evidently can only be resolved in the long term. Meanwhile, the effect of the solutions being applied (particularly financial ones) is basically short term. This is one of the reasons why the European sovereign risk crisis is considered to be difficult to solve: the symptoms are being treated but not the cause. The same is happening with the entire crisis: different agents in different spheres have been attempting to solve parts of the solution, and it does not appear that what is being analysed, or even adopted, are measures which take account of the systemic and structural nature of this crisis. Who remembers the famous "refoundation of capitalism" in 2008?
Finally, globalisation encourages the search for an industrial relocation which maximises the competitive advantage of reducing production costs, which eventually ends up by turning into a similar displacement of wealth to that previously mentioned for raw materials. Migration is the other side of the coin of this process: humans move from their places of origin to the physical locations of the manufacturing processes and take on the jobs rejected by locals.
We are therefore basically facing a situation of systemic crisis whereby a complete overhaul of the principles and institutions on which the economic development of the last two centuries was based is required: a change of paradigm is needed. We cannot go on believing or practising that economic development is the same as economic growth based on consumerism and environmental plundering. Nor can we go on believing or practising that the accumulation of wealth is in itself good, even less so when it is based on inequality and lack of human solidarity. But in order to really come out of this crisis we need to clearly diagnose its true causes and channel its circumstantial aspects, and clear and constant leadership is required which can work with long-term vision and action to undertake the structural reforms deemed necessary.
The first chapter of this edition of Ekonomi Gerizan, entitled "Global imbalances: diagnoses and solutions", presents a series of reflections which explore different perspectives on certain elements of the situation which are characterised precisely because of their global nature.
The book opens with the article "Global imbalances: perspectives after the crisis" in which Luis Serven highlights how four years after the global crisis began the world economy is still submerged in difficulties: there is no sign of a consolidation of recovery and with the ever-increasing financial disruptions came an increase in the fiscal problems of a large group of industrial economies, especially in the Eurozone. It is hardly surprising that the coexistence of enormous and opposing current account balances in some of the world economies continues to be cause for concern. According to the author, the evolution of the imbalances in the post-crisis world climate has not yet received widespread attention despite the interest raised by the subject. The article therefore analyses whether global imbalances are likely to disappear after the crisis and, if not, explores the role played by economic policy. The article pays special attention to the mechanisms through which the external imbalance of an individual country can represent a problem in a wider sphere since in this context it would seem improbable that economic policy decisions on an individual level can be suitable in this wider sphere.
The important economic role which the new emerging economies have acquired in recent decades is the basis for the article by Pablo Bustelo entitled "The new emerging economies and political power in the global economy" which discusses a projection of its foreseeable evolution. In this article, the author explains how the shift in the world economic axis which has already begun will mean that the 21st century will be Asia's century. This growing and unstoppably predominant role must be reflected in an equivalent increase in its political power, which nowadays is part reflected in forums such as the G20, the trilateral IBSA forum (India, Brazil, South Africa) and the BRICS (Brazil, Russia, India, China and South Africa). In the main financial organisations, such as the International Monetary Fund (IMF) or the World Bank, however, the reluctance of developed countries to yield power does not leave enough margin and provides emerging and developing economies with a counterproductive anachronism in global governance and this could result in unwanted impairments in this area.
The financial system has undoubtedly played an important role in development, first at the outbreak and later during the evolution of the crisis. The article "Global imbalances, asset bubbles and the financial system" by Óscar Arce and Lucio Sanjuán begins with an analysis of the accumulation of global macrofinancial imbalances which gave rise to various speculative bubbles, with the greatest exponent being the housing bubble which eventually appeared in certain developed economies. The authors examine the main features of the disordered accumulation of these imbalances and their consequences and also vulnerabilities in the global credit risk transfer system which suffered from important failings in credit risk control and management mechanisms at an aggregated level. They end by summarising the main initiatives undertaken to strengthen the global financial system which could be summed up as the return to simplicity, transparency and standardisation of the more complex financial products and the new Basel III regulations for safer banking, which aim to improve how banks deal with shocks, particularly in those institutions of systemic dimensions.
The evolution of the global situation of both the real and the financial economy has been strongly determined by the evolution of the raw material trade and of the ensuing financial markets. Pedro Antonio Merino concentrates on the role of raw materials in this crisis in his article "The price of raw materials: from economic foundations to financial markets". The author explains how the evolution of raw material prices, which again reached all-time high average values in 2011, has provoked not only a debate about the possibility of these prices obeying fundamental economic variables but also a new interaction between real and financial factors: the evolution of the volume of underlying contracts related to raw materials shows their growing role as an investment asset. There is also a more immediate fact: investment in these products provides protection against the weakness of the American dollar. This article attempts to identify those factors which affect raw material prices and identify the crucial determinants. In the short term, it is necessary to analyse the conditions of supply and demand, and also the shock-absorbing effect of the inventories in the classical analysis which aims to explain the price. In the long term, raw material cycles may be explained by expectations about the evolution of the supply-demand balance, which will be crucial for determining whether we are in a completely different cycle from that of recent decades. The acceleration of economic growth and the increase in per capita income in emerging countries on the side of demand, or structural changes in production costs, such as the increase in fuel prices on the side of supply, are essential elements for revealing the dynamics of raw materials in the long term.
Jaime Caruana, in his article "Political response to the current economic challenges", maintains that the persistence and complexity of the crisis indicate that its roots are deep and its implications are far-reaching which is why making progress in terms of recovery and normalisation would require facing up to challenges in the economic, intellectual and institutional field. In order to attain balanced and sustainable economic growth, it is necessary to implement the four main economic policies (fiscal, monetary, structural and prudential) within a wide and integrated framework which enables economic authorities to act from a long-term perspective. According to the author, it is necessary to highlight the vital role of the private sector to reach a new balance in which the financial system is more resistant and capable of absorbing disturbances rather than to enlarge it. This would require better risk management and good governance, together with structures of suitable incentives for private financial institutions, and also a new focus for risk-taking which recognised the existence of uncertainty and limitations of our knowledge and the complexity of systemic risk.
The last article in this first chapter by Manuel Conthe reflects the author's view of the European Union and the relevance of its institutional role in the development of the present crisis. In his article "The euro: from monetary union to political integration", the author highlights that the crisis has revealed cracks or gaps in the monetary union project which was formed in Maastricht, which lead to people beginning to talk publicly in Autumn 2011 about a potential breakdown or partial withdrawal from the monetary union by certain member countries, a possibility which contrasts with the idea of "irreversibility" of the monetary union which inspired the treaty negotiators.
There is a generalised awareness among European governments of the pressing need to undertake necessary reforms, both in order to resolve the crisis and imbalances accumulated by various countries and also to introduce the changes needed in the functioning of the monetary union, which would prevent the same thing happening in the future. All seems to indicate that the perspective of the need to reform the old treaty in such a way as to require a stronger political financial and fiscal integration between countries sharing the same currency will ultimately triumph.
According to the author, despite the political difficulties which member state ratification would involve, the proposal for treaty modification is logical: experience has demonstrated that the Maastricht treaty has serious shortcomings which must be corrected. A country's support for the new treaty will be the tangible proof of its true desire for political integration with its partners which is required to guarantee the feasibility of long-term monetary union.
The second chapter of this edition of Ekonomi Gerizan is entitled "Various aspects of the impact of the global crisis on the Spanish economy" and analyses the crisis by focusing on Spain, since, although it is no different from any other country, the special characteristics of the Spanish macroeconomic and institutional fabric have meant that the crisis has acquired a specific overtone for Spain.
This second chapter begins with the article "Current account imbalances in the Eurozone and adjustment of the Spanish economy". Its author Javier Andrés explains how the financial crisis has coincided with and aggravated the adjustments to the Spanish economy, adjustments which were necessary to correct the evident imbalances accumulated during the years of rigorous growth. The international reorganisation of value added generation, with a progressive polarisation in a country's external positions, leaves countries like Spain in a difficult position. The substantial financing which has been available, and which has enabled high expenditure on consumption and investment, was based not only on a comparative advantage in terms of unitary costs but also on the capacity to generate financial assets associated with the residential construction sector. Loss of competitiveness, the international debt crisis and the complexity of financial markets have deeply eroded the capacity of the Spanish economy to extract external saving. As a result, a process of renovation is required if it is to recover a sustained medium-term growth path. This renovation, however, cannot be hurried or designed at a national level. The Spanish economy will require a series of quick, far-reaching and, undoubtedly, socially costly adjustments to be made so that the high level of unemployment and economic deceleration do not leave it among the losing countries of globalisation.
The following article, "Leverage of resident sectors and growth: some considerations" written by Tano Santos, explores various aspects of the current crisis with the common component of leveraging of many sectors of developed economies. In certain countries such as the US, Spain or Ireland it is the private sector which is heavily indebted; in others, such as Greece or Portugal, it is the public sector. The fundamental question is why are certain countries more susceptible to the credit bubble than others? What makes certain countries more predisposed towards indebtedness?
What characterises a leverage crisis is the total halt of credit flow (except towards the public sector) - not so much on the side of supply but rather on that of demand. Families and companies, which are heavily indebted and with devalued real-estate and financial assets, adopt a strategy of provisioning and saving in order to repair their balances. The reason for this is that in a leverage crisis such as the present one, the linking of balances, families, financial intermediaries and international creditors hampers debt renegotiation leaving the slow process of deleveraging as the only alternative. This linking of balance in turn introduces uncertainty about the consequences of bankruptcy, which leads the public sector to avoid these unpredictable consequences by rescuing the affected sectors. In a climate where many sectors are involved in this deleveraging process by accumulating their own resources, rebalancing only occurs on a low production level. This is why this type of recession is called the "balance-sheet recession". This type of recession is different from others where the supply component is greater than the demand component, as in the case of crises associated with oil shocks which require very different policies.
The following article in this chapter, written by Juan Antonio Maroto entitled "Analysis of the situation and effects of indebtedness of non-financial companies before and after the crisis", analyses the growth model followed by Spanish companies until the emergence of the current financial international crisis, which benefitted from a long period of low interest rates and credit facilities. The author highlights that the radical change in these financial conditions since 2007 and the shift of the crisis to the real economy have affected corporate liquidity, solvency and economic activity. These have changed substantially and are comparatively analysed by examining the corporate dimension, the economic sectors of operation and the autonomous communities where the companies are located.
After analysing the situation of non-financial companies in Spain, the article by Juan Francisco Jimeno examines the situation of families under the title "The financial situation and wealth of home economics". The author states how during the period 2000-2007 there was strong credit growth which mostly materialised in the accumulation of real-estate assets, but the current financial crisis has caused a sharp drop in house and financial asset prices and this has caused a considerable drop in family wealth. Similarly, during the 2000-2011 period there were notable changes in the level and composition of family finances.
This article uses the Spanish Survey on Household Finances (EFF) produced by the Bank of Spain in order to associate the income, assets, debts and expenditure of each family for the three years of 2002, 2005 and 2008. These surveys gather information about the distribution of wealth and debts in different types of homes and this provides detailed information about the financial situation and assets of Spanish homes enabling economic policy decisions to be empirically taken in order to reduce the negative consequences of the financial crisis and to design macroeconomic policies which support consumption and internal demand during this process and therefore allow economic activity to recover sooner and more intensely.
The third and final chapter of this new edition of Ekonomi Gerizan focuses on the aspects of this crisis linked with the financial side and is entitled "Financial system: monetary policies, currencies and institutions". This final chapter opens with the article about monetary policy, "European monetary policy in times of crisis", by María Encío who reviews the functions of a central bank and the actions undertaken by the European Central Bank during the crisis. The author analyses and assesses the effectiveness of the implemented measures and reflects on the future responsibilities of a hybrid-type institution which must therefore marry its mission of central bank and European public authority. The author believes that if in normal times it is possible for the different institutions to follow simple norms of behaviour and establish clear boundaries on a national, international and European level, in times of crisis the situation is more complex. On one side, it is necessary to avoid doing other people's work, eliminating their incentives to implement measures which they should adopt, thereby generating moral risk. On the other side, it is not possible to become entrenched by principles and norms designed for a theoretical situation which does not correspond to reality, and to renounce adopting measures to avoid much worse situations. In this regard, before considering whether the European Central Bank has behaved in an excessively activist way, for example in the public debt market, or completely the opposite, it must be demonstrated that these actions have not enabled the institution to achieve its objective. The author expresses her belief that no indicator shows that any of the interventions carried out has compromised the European Central Bank's capacity to maintain price stability in the Eurozone in the years to come.
The next two articles explore different aspects of the state of the international monetary system (IMS). The article by Miguel Otero-Iglesias examines the situation and possible evolution of the IMS architecture under the title "From dollar unipolarity to a multipolar exchange system: consequences for world economic stability". The Triffin dilemma highlighted the Bretton Woods system, but was apparently dodged by converting the US dollar into the anchor for a fiduciary rather than metallist system. However, this dilemma has not disappeared: the obligation to provide liquidity to guarantee the smooth running of the world economy has resulted in a current account deficit which could erode the credit credibility of the issuing country. In fact, China, the greatest US creditor, has already started to question the credit credibility of the greatest economic and military power in the world, and the Chinese authorities have on numerous occasions condemned the centrality of the dollar in the system and called for a debate among leading world powers about IMS reform. In his article, the author analyses the consequences of changing from the current IMS to an IMS with three international currencies competing with each other. He concludes that in the medium and long term it is possible for the dollar, the euro and the Chinese yuan to compete with each other in the same way as other global currencies, something which is possible today in a highly interdependent global economy or in a more regionalised economy which is fragmented into different economic and monetary blocks: for the more optimistic, a tripolar IMS would be advantageous because it would share benefits and responsibilities between the US, Eurozone and Chinese monetary authorities.
The second article focusing on the IMS is written by Federico Steinberg. In his article "How to avoid a currency war", the author analyses the different angles of the currency war and possible solutions. He compares the current situation with that of the 1930s and explains the relation between competitive devaluation and protectionism, before analysing the international economic setting and proposes a new diagnosis for the Great Depression (2008-2010), in which he underlines that the risk of economic deceleration and stagnation in advanced countries will intensify foreign exchange conflicts. He also explains why the internal political determinants are those that determine the actions of the main countries in relation to exchange rates and evaluates why the viability of the different coordination proposals, including those aimed at modifying China's position. Finally, he holds that the structural problem underlying the foreign exchange conflict is the hegemonic role of the dollar in the IMS, which is increasingly less compatible with a multipolar world.
The third chapter ends with a further two articles which focus this time on the world of financial institutions. In his article "Crisis implications and challenges of European retail banking", Ángel Bergés Lobera highlights that the severest international financial crisis since the Great Depression has called the traditional intermediation model into question more than ever before, a model which forms the basis for retail banking trade. An international structural comparison of banking systems in the main international economic blocks provides a global reference framework which enable the vulnerabilities of the various economic blocks to be identified against an abnormal functioning of the banking channel in financial systems, which serves as the basis for analysing the impact that the financial crisis has had on the main blocks' banking systems, and also the different recapitalisation capacity that these have revealed. This recapitalisation has taken, in many cases, the form of public sector contributions in a context of malfunctioning financing mechanisms in the markets. It is precisely the enormous size of national support measures for banking systems which is now threatening to undermine the financial stability of nations and raising doubts about their solvency. This deterioration in sovereign solvency undermines banks, rendering it difficult or more costly for them to gain financing and their risk prime makes it difficult or very costly for them to gain access to financing. This new climate will affect the structure of retail banking trade, both in terms of financial rebalancing and also the generation capability of profitable trade in a context of growing capital needs, to which suitable profitability must undoubtedly be offered.
The chapter and the book ends with an article written by Vicente Salas under the title "Which type of bank corporate governance best avoids financial crises? General reflections and lessons of Spanish savings banks". The author proposes that good corporate governance is usually associated with suitable protection of the interests of shareholders who are company owners yet removed from its administration. When corporate governance is assessed only from the perspective of shareholders' interests, it is done so on the assumption that the interests of the remaining groups linked to the company are suitably protected with contracts and there are no important external effects for society as a whole. The author highlights that such conditions are not generally fulfilled by banks and therefore good corporate governance of financial institutions is very different from that of other trading companies. It is therefore important to recognise the singularities of corporate financial institution governance in order to understand the causes of the financial crisis better and to design banking regulatory and supervisory frameworks to prevent them. Experience of Spanish savings banks reform completes the reflection of the relevance of corporate financial institution governance in financial crises.
In this 19th edition of the Ekonomi Gerizan series our aim has been to provide at least an insight into the complex and delicate moment that we are currently experiencing: the current crisis combines interim and structural aspects which means that its evolution and resolution are even more important than those of other crises resulting mainly from specific imbalances in very defined aspects of the entire system. There are many challenges which must be resolved positively but we are confident that a clearer global awareness, both on the part of those with some degree of decisive capacity and of those who are the patient subjects of such decisions, will bring us to a new starting point on which the bases are established for a new phase of more supportive and sustainable human welfare than that which we have known so far.
Correspondingly, our aim has been for the articles selected, and the papers previously presented at the Summer School Seminar organised by the University of the Basque Country in San Sebastián, to inform and reflect on the questions created by this crisis which has already lasted for four years.
