Blog post

The crisis multiplier

Publishing date
15 February 2009

Jean Pisani-Ferry believes that for governments it is critical to agree on a set of fail-safe measures which distinguish between what action is temporarily permitted and what action is to be avoided at all costs. Agreeing a code of conduct of this kind could be one of the objectives of the April G20 in London.

The exact numbers remain up in the air but the trend gives cause for concern. Global trade is contracting at a rate of knots, is spreading the crisis from country to country and is everywhere magnifying the impact of the fall‐off in domestic demand. The mechanism which before transmitted increasing growth rates has now been thrown into reverse. The shock is especially abrupt for heavily export‐reliant economies such as Korea and Germany, and they are duly seeing a very considerable drop in growth. This is the context in which we must judge the debate over protectionism which has occurred since Congress launched moves to introduce a ‘Buy American’ clause. Trade policies are not in the dock – they have not had much influence on recent trade developments. But a wave of import restrictions would certainly add another layer of crisis and trigger an even bigger slow‐down in production.

Big‐country leaders are alive to this danger. They are aware that the protectionism of the ‘30s was devastating. So an out‐and‐out trade war is unlikely. However, we do observe an increasing number of initiatives which, combined, are slowly fragmenting the international economic sphere. Three examples follow. The first has to do with stimulus programmes. Several governments are slanting their plans towards sectors with low import content such as infrastructure and construction, or towards supply‐side measures designed to improve the competitive position of their industry. Nothing too evil there, except that the shock delivered by this crisis is first and foremost a demand‐side shock. The most direct response would be to shore up demand and not to favour a particular sector. The national bias of stimulus programmes is leading to skewing, with the risk that demand is being created in sectors where it is holding up satisfactorily. The second example has to do with support for financial institutions. It is widespread practice that governments, in recapitalising banks, are asking in return for commitments to lend to business and households. Nothing odd about that, except that the companies and households in question are those located in the country doing the recapitalising. Very logically, a bank such as ING, which has made such commitments to the Dutch government but worries about its balance sheet, risks having to cut lending to its Belgian customers.
The third example concerns state subsidies to business. The French car industry package has been linked to a commitment to preserve jobs, even though production has dropped 40% on a year ago. How can a manufacturer keep people on when demand crumples – even with short‐time work ‐ unless he brings jobs home from other production sites? The Czechs and the Slovaks spotted this, and protected immediately.
But why do governments risk making the problems worse? At least as much as through willful ignorance or bad faith, it is doubtless because they are answerable to their own citizens for use of taxpayers’ money. Where politics is national, taxpayers are justified in expecting that their taxes be used for alleviating their problems rather than those of their neighbours. Things would be different if democracy were supranational. But as long as this is not the case (and there is no imminent prospect), there is an objective contradiction between the principles of democratic politics and collective efficiency in the crisis.
Three years ago Manfred Wennemer, CEO of German tyre maker Continental, explained his decision to cut jobs in Hannover by invoking his duty to all his workers world wide. Whether this reasoning was genuine or cynical, it represented the thinking of many private companies at that time. No boss of a business in receipt of state aid would dare say anything of the sort today. For whatever motive, government help is serving to renationalise the behaviour of multinationals.
The critical thing under the current circumstances is for governments to agree on a set of fail‐safe measures which distinguish between what action is temporarily permitted and what action is to be avoided at all costs. Agreeing a code of conduct of this kind could be one of the objectives of the April G20 in London.

This comment was published in Le Monde.

About the authors

  • Jean Pisani-Ferry

    Jean Pisani-Ferry is a Senior Fellow at Bruegel, the European think tank, and a Non-Resident Senior Fellow at the Peterson Institute (Washington DC). He is also a professor of economics with Sciences Po (Paris).

    He sits on the supervisory board of the French Caisse des Dépôts and serves as non-executive chair of I4CE, the French institute for climate economics.

    Pisani-Ferry served from 2013 to 2016 as Commissioner-General of France Stratégie, the ideas lab of the French government. In 2017, he contributed to Emmanuel Macron’s presidential bid as the Director of programme and ideas of his campaign. He was from 2005 to 2013 the Founding Director of Bruegel, the Brussels-based economic think tank that he had contributed to create. Beforehand, he was Executive President of the French PM’s Council of Economic Analysis (2001-2002), Senior Economic Adviser to the French Minister of Finance (1997-2000), and Director of CEPII, the French institute for international economics (1992-1997).

    Pisani-Ferry has taught at University Paris-Dauphine, École Polytechnique, École Centrale and the Free University of Brussels. His publications include numerous books and articles on economic policy and European policy issues. He has also been an active contributor to public debates with regular columns in Le Monde and for Project Syndicate.

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