Anomalies in the International Economy (II)

The fact that the banking industry, in spite of the reforms adopted in the EU and the U.S., is keeping controversial practices in place is a severe issue. Another one is that the interventions aimed at rescuing certain large segments of this industry seem to have strengthened the control over public policies, especially in “too big to fail” (i.e. too big to be allowed to fail) and “too big to save” (i.e. too big for the state’s ability to provide help) situations. One such instance is Ireland, whose economy was ruined by the over-expansion of domestic banking groups (the help provided in order to save Ireland from bankruptcy being in actuality a support given to the Irish state so that it could take over the losses in the banking system).

The large-scale incorporation of liabilities held by private entities into the public debt deepened the moral hazard and blurred the dividing line between the public and the private spheres. One of the fundamental rules of a market economy is that the ones who take chances must reap the rewards, but must also pay in case of failure. Saving private entities, particularly in the financial industry, was a decision based on reasons related to systemic risks. Unless the structure and behavior of the industry register certain changes, which must also consist of big groups splitting up, and unless retail operations are separated from investment banking and limited in their speculative operations, the vices of the current system will be perpetuated.

The crisis has shown that states tend to resort to unorthodox measures when faced with major difficulties, irrespective of their development and institution-building levels. One of the things that the “Washington Consensus” frowned upon was central banks printing money in order to finance budget deficits, which was a common practice in Latin America during the last decades, as well as in post-communist countries. During the past few years, we have seen the Fed in the U.S., the Bank of England and, although more subtly, the European Central Bank resort to the money printer. I do not think there was an alternative to central banks taking over part of the tax burdens in order to prevent the banking system from collapsing, but we need to record the fact as it happened. At the end of the day, the explosive increase of public debt was, in some cases, impossible to avoid.

The growth of some emerging economies is reflected in data concerning educational systems, as well as research and technological development expenses. A recent OCDE study has shown that a great number of Asian states surpass European countries and the U.S. in the field of child education. These dynamics are corroborated by publications in scientific and applied research journals. It is little wonder then that a national commission on growth and development was formed in the U.S., chaired by Michael Spence, a recipient of the Nobel Prize in Economic Sciences. The Europe 2020 strategy, which resurrects the Lisbon Agenda, expresses the intense preoccupation toward changes in competitive advantages within the global arena. Unfortunately for the Europeans, divergent tendencies are growing in the EU, and some economies may get caught up in vicious circles. We may even witness a “Japanization” — i.e. a long-term stagnation caused by the excessive increase of public debt and the weakness of monetary policy (the U.S. has not escaped this danger, either).