The Crisis Is Not Over

The problems that generated [the crisis] have not yet been resolved, and Germany and Italy will have a harder time than expected to getting out of it.

The injections of optimism that President Obama delivers daily in his speeches to the country have been spreading hope that the crisis is over.

The stock market, having grown by 39 percent from the lowest point in March, seems to confirm it. Even the news that in the month of May unemployment rose to 9.4 percent was taken as a positive sign. Only 345,000 jobs were lost as opposed to 500,000 in previous months, a sign – it is said- that we are near the bottom and that recovery is around the corner. But are we really at the end of the tunnel?

Paraphrasing Badoglia, we could answer that the crisis is finished but the crisis continues.

The most serious phase of the financial crisis is finished. Thanks to massive (and expensive) state interventions in the credit sector, the financial system has been stabilized. Depositors no longer fear the fall of major banks and the market of inter-bank credit returned to levels before the bankruptcy of Lehman. Even the rising of the interest rates on government securities is seen as a positive sign.

Gone is the fear of a total financial collapse, and awareness is emerging that we are not in the Great Depression and that the economic system will recover.

The crisis seems also finished in the primary developing countries. China, having intervened to revive its public spending, is expected to grow 6.5 percent this year, while India is expected to grow 4.5 percent.

But then why does the crisis continue? Because in the meantime, none of the problems that caused the crisis have been resolved. The problems in the financial sector remain. In spite of the increases in capital, the American banking system remains under-capitalized and therefore hesitant to grant loans to consumers and companies that are essential to make the economy start up again. The fall in housing prices has not stopped nor have foreclosures.

And the process of securitization that provided the majority of credit before the crisis has absolutely not come back, in spite of the strong state subsidies.

In this context, it is difficult to imagine a stable economic recovery. Imbalances in the real world that contributed a lot to the crisis still remain to be resolved. Before the crisis, Americans were consuming too much: 100 percent of their income versus 90 percent of other developed nations. This excess of consumption, financed by loans in real estate, represented an important source of demand for other countries (including Italy).

This component does not seem to have returned. In fact, it will not return at all. The United States must save more. They have already begun to do it and there is no reason why this tendency should reverse. This means that other countries need to find new outlets for their products, a feasible task but one that requires time.

The increase in public spending in China is not enough to sustain the demand in America. And if America does not laugh, Europe cries. Maybe the initial impact of the crisis wasn’t quite as strong on the Old Continent; in part because the crisis was born in the United States, where there have been primary banking failures, and partially because Europe has a labor market that is more rigid, where layoffs do not occur right away.

But the fall of international commerce has hit countries like Germany and Italy, which are large exporters. While for the United States the International Monetary Fund foresees a flat GDP for 2010 after a fall of 2.8 percent in 2009, for Germany a fall of 1 percent is estimated in 210 after a 5.6 percent reduction in 2009. For Italy, a reduction in the GDP of .4 percent in 2010 after a 4.4 percent loss in 2009 is expected.

By outsourcing their industrial production to other countries the United States managed to export their crisis to the rest of the world.

Unfortunately in Italy this crisis overlapped with a structural weakness that has by now lasted more than 15 years. The economic progress of emerging countries has reduced our competitive advantage in products of low added value, while the deficiencies in our school system have made it difficult to compete in the high technology (and added value) sectors.

The international crisis can only accentuate our weakness. The risk of a Great Depression has disappeared but our crisis continues.