The financial crisis affecting banks and Governments is no more than a symptom of a deeper problem. That problem is a loss in relative competitiveness of both Europe and North America vis a vis  the emerging economies of China, India, Brazil and others over the past  twenty years. The loss of competitiveness was accompanied by an unwillingness to face up to long term problems like the  eventual  cost of ageing societies, and the ephemeral nature of some of the innovations of the so called  “new economy”.

The   boom- driven expansion of credit was like an anaesthetic that concealed an underlying loss in competitiveness from us   until 2008. Now that the anaesthetic has been withdrawn, after such a long time, the pain is acute. The human cost is all too real.

The answer to this for all European  countries  is, I believe, to work to increase what economists would call the total factor productivity of our economy, the productivity of the way in which we use all our resources, public and private,  capital and labour, tangible and intangible. We need a new  way of thinking , an enhanced  orientation towards  finding ways to earn a living  from meeting  the needs of the  rest of the world .

Read the rest of this entry »

The massive, unprecedent fiscal and monetary stimulus undertaken by almost all governments and central banks in the last two years has prevented the 2008-2009 recession from turning into a second Great Depression. Policymakers and economists did not forecast the crisis, but they have been able so far to take it under control. So we should at least rejoice; the great depression of the 1930’s was not anticipated as well, but it was because of subsequent mistakes by authorities that it became so great!

This said, the current picture is not bright at all. GDP in many countries is well below its previous levels, and some of the likely causes of the crisis are still there, waiting for a long-term appropriate remedy.

A main concern for the next future consists in the ‘exit strategy dilemma’: on one side, early exit from public spending and monetary easing would slowdown the recovery and threaten deflation and long-term unemployment. On the other side, keeping a high deficit spending and an accommodating monetary policy would trigger concerns about fiscal sustainability and expected inflation, with the consequent increases in long-term rates and therefore in lending rates on personal and corporate loans, thus leading to a crowding out of consumption and investment from the private sector. Read the rest of this entry »