Blog Post

What Mark Will the Crisis Leave?

Bruegel Director Jean Pisani-Ferry writes about the prospects for post-crisis growth in the world economy in a column published in both the French newspaper Le Monde and the German newspaper Handelsblatt. He explains that the decrease in the labor force and the reduction of capital stock will likely lead to a much slower recovery in […]

By: Date: September 26, 2009 Topic: Global economy and trade

Bruegel Director Jean Pisani-Ferry writes about the prospects for post-crisis growth in the world economy in a column published in both the French newspaper Le Monde and the German newspaper Handelsblatt. He explains that the decrease in the labor force and the reduction of capital stock will likely lead to a much slower recovery in mature economies in Europe and the United States. The approach from Europe and the U.S. has differed thus far, Pisani-Ferry writes, but they must both act proactively to ensure a smooth recovery.

The crisis is not yet behind us but the climate of depression which had hovered over the winter is showing signs of lifting. Financial conditions have improved markedly and, even if it is very hard to know to what extent they have been implemented, recovery plans have started to have an impact. As for international trade, which plunged and had thereby caused the crisis to spread, it is now effectively the engine of the upturn. However unbearable it may seem to those who are losing their jobs, there are grounds for optimism about immediate prospects.
It is therefore time to look a little further afield and to ask what mark the crisis will leave on the years to come. Experience does not give us cause to be sanguine. Several papers, for example one very recently by the IMF, have shown that financial crises leave deep wounds. Not only does government debt balloon, not only are production losses of recession years not recouped, but output levels drop over the long term. Once the shock of the crisis and the subsequent rebound is over, output generally settles on a growth path which is parallel to what it was previously, but one notch lower.
The reasons for the slippage are numerous. First, there is the permanent sidelining of workers deprived of their jobs – sometimes encouraged by early retirement schemes – and the structural nature of the rise in unemployment. Crises disrupt whole sectors of the economy and restructuring implies longer job searches between employment and thus on average higher unemployment. Second, there is the collapse of firms and the fact that those which have survived have cut their investments, so reducing the available capital stock. Third, there is the contraction of the financial sector and the fact that someone working in this sector finding another job may have a greater social utility but will definitely have lower productivity, at least at the outset. All in all, it is not uncommon for a serious banking crisis to trigger a permanent drop in GDP of the order of five percentage points or more.
A step down of that magnitude may have a limited impact on a fast-growing economy. For an emerging country, it may often represent no more than the loss of a few months. But for the mature economies of Europe, five points amounts to a reverse of two or three years with a corresponding drop in tax revenue, a hole in the budget, inevitable belt-tightening measures, rows over who bears how much of the burden and, last but not least, the risk of a vicious circle of stagnation. The danger for Europe is that it may suffocate tomorrow under the weight of the burden left over from the crisis. .
Of course not everyone is in the same boat. Given the size and the state of the financial-services sector in the UK, the problem is more serious there than in France where the recession has been shorter and less brutal. It may very well be especially tough in Spain where growth relied on immigration and real estate. But attitudes differ. Europeans remember vividly the errors of the past. Since the middle of the 1970s essentially every shock has resulted in a deterioration of its prospects, in general without economic policy having anticipated this. This time people are swearing that they will not be caught out again and are starting to prepare for the tough times. Americans, who have never known the same trauma, have the opposite mindset. They do not believe in a permanent rise in unemployment and expect the recovery to
return economy to the same trajectory as before. In consequence, they are not readying themselves to spend as much.
Who is right and who is wrong ? The danger for the US is to underestimate the size of their problems and for Europe to be caught up in a self-fulfilling prophecy. Neither of these two stances is helpful. The US should for once relent and draw a lesson from international experience. As for Europe, rather than wallowing in self-pity, it should use its pessimism as a lever for action. Whether it is labour markets, education, the efficiency of public spending or the reconstruction of a financial system capable of supporting economic development, there is no lack of reforms to choose from if it wants to boost the growth potential of its economies.


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read about event
 

Past Event

Past Event

Three data realms: Managing the divergence between the EU, the US and China in the digital sphere

Major economies are addressing the challenges brought by digital trade in different ways, resulting in diverging regulatory regimes. How should we view these divergences and best deal with them?

Speakers: Susan Ariel Aaronson, Henry Gao, Esa Kaunistola and Niclas Poitiers Topic: Digital economy and innovation, Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 19, 2022
Read about event More on this topic
 

Past Event

Past Event

Is China’s private sector advancing or retreating?

A look into the Chinese private sector.

Speakers: Reinhard Bütikofer, Nicolas Véron and Alicia García-Herrero Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 18, 2022
Read article
 

Blog Post

The EU needs transparent oil data and enhanced coordination

The EU lacks the coordination structure and transparent data necessary to most effectively navigate an embargo on Russian oil.

By: Agata Łoskot-Strachota, Ben McWilliams and Georg Zachmann Topic: Global economy and trade, Green economy Date: May 16, 2022
Read article
 

Blog Post

Now is not the time to confiscate Russia’s central bank reserves

The idea of confiscating the Bank of Russia’s frozen reserves is attractive to some, but at this stage in the Ukraine conflict confiscation would be counterproductive and likely illegal.

By: Joshua Kirschenbaum and Nicolas Véron Topic: Banking and capital markets, Global economy and trade Date: May 16, 2022
Read about event More on this topic
 

Upcoming Event

Jun
23
14:00

BRI 2.0: How has the pandemic influenced China’s landmark Belt and Road Initiative?

China's Belt and Road Initiative is undergoing a transformation after two years of pandemic. How is it changing and what are the consequences for Europe.

Speakers: Alessia Amighini, Eyck Freymann, Alicia García-Herrero and Zhang Xiaotong Topic: Global economy and trade Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author
 

Podcast

Podcast

The cost of China's dynamic zero-COVID policy

What does zero-COVID mean for both China and the global economy?

By: The Sound of Economics Topic: Global economy and trade Date: May 11, 2022
Read article More on this topic
 

Opinion

For Europe, an oil embargo is not the way to go

Even at this late hour, the European Union should consider taking a different path.

By: Simone Tagliapietra, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 9, 2022
Read article Download PDF More by this author
 

Book/Special report

European governanceInclusive growth

Bruegel annual report 2021

The Bruegel annual report provides a broad overview of the organisation's work in the previous year.

By: Bruegel Topic: Banking and capital markets, Digital economy and innovation, European governance, Global economy and trade, Green economy, Inclusive growth, Macroeconomic policy Date: May 6, 2022
Read article
 

External Publication

The Global Quest for Green Growth: An Economic Policy Perspective

A review on green growth and degrowth arguments.

By: Klaas Lenaerts, Simone Tagliapietra and Guntram B. Wolff Topic: Global economy and trade, Green economy Date: May 5, 2022
Read article More on this topic More by this author
 

Podcast

Podcast

Global trade Down Under

A conversation on the global trading landscape.

By: The Sound of Economics Topic: Global economy and trade Date: May 4, 2022
Read article More on this topic
 

Opinion

A tariff on imports of fossil fuel from Russia

A tariff on imports of Russian fossil fuels would allow Europe to hit Russia's energy sector without great suffering.

By: Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 2, 2022
Read article More on this topic
 

External Publication

How to weaken Russian oil and gas strength

Letter published in Science.

By: Ricardo Hausmann, Agata Łoskot-Strachota, Axel Ockenfels, Ulrich Schetter, Simone Tagliapietra, Guntram B. Wolff and Georg Zachmann Topic: Global economy and trade Date: May 2, 2022
Load more posts