The financial and economic crisis that erupted in 2008 will, in retrospect, be regarded as a transformative moment, because it raised fundamental questions about the future shape of our economic systems. These questions are not so much about the end of capitalism — as some perceive or even desire — but rather about the different ways in which capitalism is understood in different countries.
What we are witnessing today is a reversal of the debates of the 1980s.
Back then, former US president Ronald Reagan used to joke: “The nine most terrifying words in the English language are: I’m from the government and I’m here to help!”
Now that governments have spent trillions of dollars, euros, yen and pounds on stabilizing financial markets and the economy in general, those words seem far less terrifying.
In fact, faith in the market has been dented, while trust in government and regulation is increasing. After decades of consensus that the state should set the rules and otherwise leave the private sector alone, the state is now widely seen as a beneficial force that should play an active role in the economy.
This is happening despite the lack of a clear indication of the superiority of the state. On the contrary, the US government’s heavy intervention in the US housing market is probably the most pertinent example of the state’s shortcomings, one that no doubt contributed significantly to the crisis.
I sense a growing willingness to forgo the benefits of innovation — not least financial innovation — in exchange for a slower pace of change, which is assumed to be more controllable. This shift will not only impede future growth, but could bring other dangers as well.
The first danger is that the state overextends itself. The fiscal balances of the G20 economies will deteriorate dramatically as a result of the crisis. Deficits will improve somewhat as economies recover and support measures are withdrawn. But not all of the measures are temporary or economically reasonable. Most governments have used their stimulus packages to serve vested interests as well. The accumulated debt will constitute a lasting burden on public finances.
Moreover, we must remember that budgets were already strained before the crisis, and that governments’ balances do not reflect all aspects of reality. In Germany, for example, overall debt jumps from the current 65 percent of GDP to 250 percent when pension liabilities are included.
Interest payments account for an ever-larger share of budgets — and will continue to grow when interest rates start to rise again. In the absence of strong political commitment and credible plans for gradual fiscal consolidation, there is a distinct risk that at some point sovereign yields will rise markedly — with negative implications for the economy and politics.
WHO TO SAVE
The second danger is that governments will continue to see it as their duty to decide which firms to save and which to let fail. A line must be drawn between a time of crisis, when emergency measures are needed to avert economic collapse, and normal circumstances, in which the full force of market mechanisms applies.
The instinct of governments, however, may be to revert to the idea of protecting national champions or reasserting national sovereignty in some sectors. But instinct is not necessarily a sound basis for decision-making. And in times of globalization, distinguishing between “national” and “foreign” is neither appropriate nor feasible.
In order to preserve the state’s ability to act while avoiding competitive distortions between and within industries, we should establish criteria to guide future decisions in this area. As a matter of principle, companies that were in trouble prior to a severe economic crisis should not be eligible for state assistance of the type that the world recently witnessed. Moreover, aid must be limited, lest firms become addicted to it.
Governments should also be aware of the long-term costs: Large-scale state interference in market processes will produce its own set of corporate winners and losers. Structural change may be delayed, depriving us of the opportunities offered by the crisis to build more competitive and dynamic industries — and accelerating the relative global decline of mature economies.
Indeed, the third danger is that greater state intervention in the economy entails a shift away from globalization, paving the way for various forms of national protectionism. We can see this in the financial industry, where increased state ownership has led to a distinct danger of re-nationalization and re-fragmentation of financial markets.
Many financial institutions that received government funds have concentrated on their respective home markets and scaled back their activities abroad. Similarly, there is a risk that new regulation may, either deliberately or as an unintended side effect, lead to re-nationalization of markets.
It is understandable that governments seek solace in the presumed safety of national markets. But the shelter that national markets provide is illusory: The only way to increase the resilience of financial markets and to ensure that recurrence of this kind of crisis becomes less likely is to build a regulatory framework that is commensurate with integrated markets.
We need global (or at least European) rules, and we need strong institutional structures to enforce these rules — a requirement that is not necessarily limited to the financial markets.
We must resist the temptation to believe that a meddling, paternalistic state is the way of the future. Not only business, but also society as a whole, would lose out if we moved in that direction.
Or, as has been said by many: “A government big enough to give you everything you want is strong enough to take everything you have.”
Josef Ackermann is chairman of the board and group executive committee of Deutsche Bank and chairman of the board of the Institute for International Finance.Copyright: Project Syndicate
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