Download Varieties of capitalism and financial crisis responses: the European

Varieties of capitalism and
responses to the financial crisis:
the European Social model versus
the US model
JEAN MONNET CHAIR
Pasquale Tridico
University Roma Tre
Outline
 Financial crisis 2007 and real effect with
economic crisis 2008-10: Great Recession (3.2%), Unemployment (10%) and losses (5
trillion $)
 Resurgence of Keynesian policy and demise
of Washington Consensus
 Responses in EU and in US (comparative
analysis and varieties of capitalism)
 Conclusion and policy suggestions
Domino Effect of the Subprime Crisis (has hit the
US economy and other economies)
Commodity price
Housing price
Mortgages
CDO Volumes
BUBBLES AND BURSTS
Mortgage Delinquencies
Failed banks in US
Assets $bn
Number failed banks
ratio assets/banks
6
350
Bank Failures
5
300
4
250
200
3
150
2
100
1
50
0
0
2007
2008
2009
2010
ratio assets/banks
Assets in $bn and number of banks
400
The sequence of the financial crisis
 Background: household debt and bubble in the housing






sector, low interest rates coupled with global imbalances
and saving glut
Fall of 2007: US housing sector crisis and collapse of the
sub-prime market.
Default correlations on mortgages spread to the world
through the complex system of securitization.
MBS downgraded by CRA (some months before were
giving artificially high ratings); nobody wanted them now.
Lost value, poor returns (toxic assets)
Credit markets seized up, expectations worsened,
interbank lending crunched, banks failed, Interest rates
went up with more trouble for mortgage owners and
increased default correlations. Bubbles burst!
Solvency problems and liquidity problems
Central banks liquidity injections.
The end of a dream?
Characteris
tics
Models
Competi
tion
Economic
Regulation
Main
Economic
Actors
Rel. betwn
public &
private
Int.national Taxation
Eco
Relation
Finance
Anglosaxon
model
(USA, UK,
Irland)
Promoting
free
competition
Deregulatn,
withdrawal
of the State
from the
Economy
Firms,
Corpora
tions,
Markets,
Residual
public
sector:
Marketoriented
Global
competition
Low taxes,
no or little
progressive
rate
Deregulatn.
Liberalizatn
Finance for
Consumptn
Investments
Corporative
model
(Germany)
Balancing
Cooperation
and
Competition
Stricter
regulation
Tripartite
structures
(business
clubs, Trade
unions,
govrnment)
Publicprivate
partnerships
Protection
of strategic
sectors in an
open
economy
High
taxation to
finance
Welfare
State
State
Control,
regulated
competition
National
Accumulati
on and
Regulation
Strategy
Private and
Public
sectors
Publicprivate
partnerships
under State
guide
Protectio
nism
High Taxes
and
Collective
Recourses
State
controlled
liberalisa
tion and
competition
Knowledge
and
innovation
as economic
guide for
regulation
Public and
Private
Firms and
Ethic
Corpora
tions
Publicprivate
partnership
in order to
realize
Social
Cohesion
National
Actors,
moderate
free
competition,
open
economy
High wages,
career
perspective,
High and
progressive
tax rate
Developed
finance for
Investments
; extensive
credit for
small firms;
limited
finance and
credit for
consumptio
n; financial
regulation,
transparenc
y, protection
of saving;
higher taxes
on financial
corporation;
European
Dirigiste
model
(France)
Social
Social
Democratic
model
(Scandinavi
an
countries)
Model
Avg. Growth of GDP per capita in EU and US, 1961-2009
1961-80
1981-91
1992-2009
5
FORDISM (1946-1970) AND POST-FORDISM (1980-TODAY)
4,5
4
3,5
3
2,5
2
1,5
1
0,5
0
Germany
France
Spain
Italy
EU15
USA
Post fordism Market Financialization 1988-2006
180
160
Market Finacialization: 1988-2006 (% of GDP)
140
1988 2006
120
100
80
60
40
20
l an
ds
No
rw
ay
Po
rtu
ga
l
Sp
Un
a in
i te
dK
i ng
do
Un
m
i te
dS
tat
es
Ne
the
r
Ja
pa
n
Ita
ly
Ire
lan
d
Ca
na
da
De
nm
ar
k
Fr
an
ce
Ge
rm
an
y
Gr
ee
ce
Au
s tr
ali
a
0
Correlation between Labur Flexibility and Capital Financialization
Flexibility and finacialization, selected countries
EPL trend 1990-2000
financialization 2000s
150
100
50
-50
-100
Source: World Bank 2010, online database
er
ag
e
av
ed
en
Sw
n
Sp
ai
ga
l
Po
rtu
w
ay
N
et
he
r
or
la
n
ds
pa
n
Ja
Ita
ly
ec
e
re
G
N
G
er
m
an
y
an
d
Fi
nl
ar
k
en
m
D
Be
lg
iu
m
0
The root of the crisis since the end of
1970
 Profit soar
 Wages stagnated
 Inequality increased
 Consumption kept up thanks to
financialization
 private debt (financial innovation)
 public debt (bonds China-US)
40
Post fordism: Market Financialization and Inequality
United States
Portugal
Gini Mid 2000s
30
35
Ireland
Italy
Spain
United Kingdom
Greece
Australia
Japan
Canada
France
Germania
Netherland
Norway
25
Sweden
Denmark
60
80
100
120
Financialization 2006
140
160
Post fordism: Market Financialization and Lab Flexibility
3
Portugal
Italy
2
Netherland
Ireland
Japan
Australia
Canada
0
1
Greece
Sweden
Norway
Germania
Denmark
Spain
France
60
80
100
120
2006fncz
140
United Kingdom
United State
160
Wage dispersion, selected countries
Source: Euromemorandum 2010
Wage shares on GDP, selected countries
Source: Euromemorandum 2010
Family debt and inequality in US
• 1980 : 80% of GDP (debt)
• 2007: 140% of GDP (debt)
• 1980: 5% share of the top of the
distribution had 20% of income
• 2007: 5% share of the top of the
distribution had 35% of income
Indebitamento delle famiglie e disuguaglianze di reddito
(US, 1984-2008)
Fonte: IMF, 2010
Disuguaglianze di reddito e dei livelli di consumo (US 1980-2006)
Real Wage, Non-supervisor Workers (In 2007 $)
US weekly real wage 1947-2007
avg weekly earnings
$700,00
$600,00
$500,00
$400,00
$300,00
$200,00
$100,00
19
47
19
49
19
51
19
53
19
55
19
57
19
59
19
61
19
63
19
65
19
67
19
69
19
71
19
73
19
75
19
77
19
79
19
81
19
83
19
85
19
87
19
89
19
91
19
93
19
95
19
97
19
99
20
01
20
03
20
05
20
07
$0,00
Source: US Department of Labor, Bureau of Labor statistics
US Economy, Non-agricultural Sector (In 2007 $)
US productivity (1992=100) and hourly wage 1973-2007
Avg hourly earnings
Productivity
160,00
Source: US Department of Labor, Bureau of Labor statistics
140,00
120,00
100,00
80,00
60,00
40,00
20,00
19
73
19
74
19
75
19
76
19
77
19
78
19
79
19
80
19
81
19
82
19
83
19
84
19
85
19
86
19
87
19
88
19
89
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
0,00
Compensation financial sector and other sectors
Avg compensation financial sector
Avg Compensation other sectors
Source: Financial Crisis Inquiry Commission (2011)
Rapporto tra i compensi dei manager e i
salari medi dei lavoratori dipendenti
Fonte: ILO 2010
Interactions and bubbles within the Finance-led Growth Model
LABOR
↓ w/p
Instable wages
Precarious job
↑Finance for consumption
↑ Credits, loans, mortgages
(credit) BUBBLE
(Prices in the commodity
market increase too)
CONSUMPTION
FINANCE
Financialization
↑ Demand for finance
↑ Price shares
(financial) BUBBLE
↑ Movement of Portfolio
↑ Financial investments
(speculative) BUBBLE
↓ Productive investments
INVESTMENTS
Financial crisis responses
 Competitive Market Economy (CME)
- US, UK, Ireland, Australia, Netherlands, Canada.
 European Social model (ESM)
- Eurozone17 (except Ireland) rather than EU27
At the G20 meeting in London in 2009, # models, #
strategies: the Franco-Allemande
(Sarkozy&Merkel) called for state regulation and
financial restrictions. The Anglo-Saxon axe
(Brown&Obama) aimed mostly to reach a
consensus to provide monetary liquidity for the
financial system.
Central Banks strong reactions:
quantitative easing and zero interest rate
 Posner (2009) estimates that the total amount
of the spending of the Fed during the period
2007-2010 for the financial crisis was of $5.2
trillion. It is unclear however, how much and
where exactly the Fed money went at the
beginning of the crisis in the desperate
attempt to save banks and financial
institutions (Westbrook, 2010).
 Similarly in Europe: ECB and Bank of
England
Fed quantitative easing
Reserve money 2008-10
Fed and ECB interest rates 2006-2010
6
5
4
Fed
ECB
3
2
1
0
2006
2007
2008
2009
2010
Fiscal stimulus in US and EU 2007-10
Germany
UK
Netherlands Italy
France Spain
Tot
EU
US
Bn.
euro
82
31
8.5
9
26
40
200
(apx)
775
Arra
USbn$
+ 700
USbn$
Tarpa
%
GDP
3.3
2.2
1.4
0.6
1.3
3.7
1.5%
(apx)
2.7%
+
2.3%
Government rescuing banks
US and EU
US (bailing out, saving plans or
govmt shares for firms and
financial institutions)
700 US $ bln TARPA
EU
Apprx 100 US $ bln
AIG
Fannie Mae
Freddie Mac
Merril Lynch
Goldman Sachs
Morgan Stanley
Washington Mutual
Bank of America
Maiden Lane
Citigroup
Govmt shares
ING (Netherlands)
BNP Paribas (France)
Unicredit (Italy)
Swedebank (Sweden)
Alpha (Greece)
Lloyds and RBS (UK)
Commerzbank (Germany)
Nationalisation
Fortis (Belgium)
Anglo Irish (Ireland)
Northern Rock (UK)
Hypo Real Estate (Germany)
Financial Regulation in US and EU
 US regulation (the “Frank-Dodd Act”)
 new supervisory architecture system, major role of Fed in
oversight large firms and involvement of the Treasury. A
Council of Regulators is set up to coordinate supervision with
Fed.
 EU regulation and responses
 Contrary to the weaker reaction of ECB the EU regulation
response was stronger. The De Larosière Report (2009) was
absorbed by EU directives and regulations, declaration of
support of the EU Commission (2009), the European Council
(2009). However, the EU regulation is weakened by the
fragmentation among the EU member states and their
different national “operative” regulations in the financial
markets.
US regulation: macro and micro “soft”
oversight
Micro
prudency
Consumer Financial Protection Agency.
The Fed monitors commercial banks
and large firms.
The SEC monitors the securities.
The CFTC futures
Macro
prudency
Financial Services Oversight Council to
monitor WS. Council of Regulators
on systemic risks run by Treasury
(with Fed)
A stronger EU regulation
US financial regualtion
EU/Eurozone financial regulation
CRA
No significant changes.
Strict surveillance of methodologies and ratings.
Registration and certification requirements.
Derivative
s and OTC
markets
Tighter regulation with the institution of a
central counterpart authorized to issue
derivatives. SEC and CFTC monitor
Tighter regulation with the institution of a central
counterpart authorized to issue derivatives. The
ESMA monitors
Basel
agreement
for Banks’
capital
Mostly Basel II. Capital requirement for
Banks increased to 8% (Basel III) only
for large top 20 firms (Basel II for the
rest, 2% of capital). Banks must hold 5%
of securities in credit risk products.
Similarly for UK
Basel III. Capital requirement for Banks increased
to 8% and higher standard required as in Basel III
(limit to leverage ratio at 3%, liquidity ratio
improved to meet short term obligation). Banks
must hold 5%-10% (Eurozone 10%) of securities in
credit risk products.
Micro
prudency
Consumer Financial Protection Agency.
The Fed monitors commercial banks. The
SEC monitors the securities. The CFTC
futures
European System of Financial Supervisors (ESFS)
with 3 functional authorities and supervision
powers for banks, insurance and securities: EBA
EIOP, ESMA
Macro
prudency
Financial Services Oversight Council to
monitor WS. Fed over large firms.
Council of Regulators on systemic risks
European Systemic Risk Board (ESRB) within
ECB: Macro prudential supervision
Hedge
Funds (all
kinds)
Supervision by SEC and CFTC. More
transparency required.
Strongly restricted: authorization, transparency,
liquidity leverage, supervision, information,
strategies, auditing, interest conflicts.
Securities
and CDS
Supervision by SEC. More transparency
required.
Stricter supervision & transparency. Disclosure
positions, and short selling option bans (Eurozone)
Tax financ
Bank levy (US, Uk and Canada)
FTT (Eurozone)
Main divergences US-Eurozone
 The most important disagreement concerns a financial
transaction tax (FTT)
 the FTT would serve to finance the huge costs of this
crisis (German and France)
 UK, US Congress and Canada strongly object it and the
G20 Pittsburg meeting already rejected it. Bank lobbies
are strongly against the FTT too.
 The Obama administration would see as a good
compromise a sort of Bank Levy which would have a
more modest impact on tax collection
 Other issues: hedge funds, Basel
agreements, capital requirements, CRAs,
etc
US and EU vulnerability
 Beyond these differences, and despite the attempt to
reform the financial sector, finance and economy still
remain vulnerable, both in EU and US. This is due to
a combination of 4 indicators in badly dangerous
position:




1) government deficits,
2) unemployment,
3) Current Account deficit (CA)
4) slow recovery.
 Out of these 4 variables the Synthetic Vulnerability
Index (SVI) was calculated
 For 2011: US -4.5 worse than Eurozone -3.72
US economy: Synthetic Vulnerability Index
2006
2007
2008
2009
2010
2011
15
10
5
0
-2,625
-2,625
-3,9525
-5
-4,5
-4,8
-5,8
-10
-15
govmt balance
unemployment
Synthetic Vulnerability Index
CA
GDP growth
Eurozone economy: Synthetic Vulnerability Index
2006
2007
2008
2009
2010
2011
15
10
5
0
-1,675
-1,3
-2,5
-5
-3,725
-3,975
-5,15
-10
-15
govmt balance
unemployment
Synthetic Vulnerability Index
CA
GDP growth
US-EU27 trade in merchandise (values in millions $)
$400,000.00
$300,000.00
$200,000.00
$100,000.00
$0.00
2005
2006
2007
2008
($100,000.00)
($200,000.00)
US Import from Eu27
US Export to Eu27
Balance
2009
EU27 CA surplus/deficit with main partners, 2008 (millions of Euros)
100
50
0
-50
-100
-150
-200
Series1
United States Switzerland
68.3
12.6
India
Canada
Brazil
Japan
Russia
China
2.6
2.5
-6.5
-32
-61.3
-157.6
Labour market: again US more
vulnerable than Eurozone
 Despite a lower recession in US in
comparison with Eurozone (-2.6% against 4.2%) in US unemployment went from 4.6%
to 9.8% (+5.2) and employment rate fell from
72% to 64.5% (-7.5) in 2010.
 In the Eurozone the unemployment rate looks
much better: it went from 8.6% to 9.6% (+1.2)
and employment fell from 66.2% to 65.7% (0.5%).
GDP growth before and after 2009 recession
2008
2009
2010
2011
8
6,8
6,4
6
4,6
4,3
4
2,6 2,4
2,5
2,5
1,5
2
1,5
1
0
-0,6
-2
-2,6
-3,2
-4
-4,1
-6
World Output
Advanced
Economies
United States
Euro Area
Emerging and
Developing Economies
Employment (left) and unemployment (right) rates in US 2006-2010
74
12.0
72
72
9.8
10.0
70
8.0
68
6.0
66
4.6
64.5
4.0
64
2.0
62
60
0.0
2006
2007
2009
US Employ.
2008
US Unempl.
2010
Employment (right) and unemployment (left) rates in Eurozone 2006-10
67.5
12.0
67
66.5
9.6
8.4
10.0
8.0
66.2
66
6.0
65.7
65.5
4.0
65
2.0
64.5
0.0
2006
2007
2009
Eurozone Employ.
2008
Eurozone Unempl.
2010
L’impatto sul mercato del lavoro: paesi dell’Unione europea
Andamento del tasso di disoccupazione (2000-2010)
Marika
Carboni
Fonte:
(2010) e Istat (2010)
Tesi di Laurea
Università degli Studi Roma Tre
Public expenditure for labour market
 Moreover, given the relatively lower percentage
of US public expenditure for unemployment
policies (passive and active measures) 0,49% of
GDP against 2,8% of GDP on average among
countries of the European Social Model, the
human costs of US unemployment with respect
to EU appear much bigger.
 All this confirms our argument that the Eurozone
and in particular the ESM is better able to cope
with the crisis, allowing for less social costs and
better social performance than US.
d
ite
ES
M
US
A
1
Av
g
m
ea
S.
Ko
r
gd
o
pa
n
Ja
lia
nd
ala
Ze
Ki
n
Ne
w
Au
str
a
ad
a
Ca
n
Ita
ly
d
lan
Ire
Au
str
ia
in
Sp
a
ce
de
n
an
y
Fr
an
Sw
e
rm
Ge
nd
Fi
nla
active
Un
ium
th
er
la
nd
Ne
Be
lg
nm
ar
k
De
Passive and Active Unemployment measures (% of GDP), OECD 2007-08
4,5
4
passive
3,5
3
2,8
2,5
2
1,5
0,49
0,5
0
US and EU closer comparison
World share of GDP
Eurozone 2009
US 2009
14.8% (EU27: 21%)
20.2%
Global market share in terms of exports (world 15% (EU27: 20%)
%)
(EU
13%
Population
328 mln:
498mln)
27: 317mln
Inequality - Gini coefficient
0.29%
41%
GDP per capita $ ppp
33,452
46,653
Life expectancy at birth
81
79
Poverty (50% of median income) 2006
10%
17.1%
Combined gross enrolment ratio in education
(primary, secondary & tertiary levels, % of pop)
Secondary enrolment ratio (% of
secondary school-age population)
Primary enrolment ratio (% of primary
school-age population)
Expected years of schooling (children)
95%
91%
97%
16
92%
88%
91%
15
ed
en
d
ds
al
an
Sw
Ze
la
n
Ki
ng
do
Un
m
ite
d
St
at
es
A
Av
vg
g
ES
An
M
gl
os
ax
co
.
ite
d
Un
w
Ne
pa
n
Ita
ly
Ja
th
er
Ne
lia
Au
st
ria
Be
lg
iu
m
Ca
na
da
De
nm
ar
k
Fi
nl
an
d
Fr
an
ce
G
er
m
an
y
Ire
la
nd
ra
Au
st
Social Expenditure, % of GDP (OECD selected countries 2007)
30
25
20
15
10
5
0
2006
US
Eu
17
2007
US
Eu
17
2008
US
Eu
17
2009
US
Eu
17
2010
2011
US
Eu
17
US
Eu
17
1
1.5
1.5
9.8
9.6
9.7
9.8
2
1.5
An. Gdp 2.6
Growth
3.0
2.1
2.8
0.3
0.6
-2.6 -4.1 2.5
Unemplo
yment
4,6
8.3
4,6
7.5
5,8
7.5
10
Inflation
3.2
2.2
2.8
2.1
3.8 3.3
2.7
1.7
GBudget -2,5 -1.3 -2,8
-%gdp
-0.6
-5,4 -2.0 -7,9 -6.3 -9,2 -6.6 -7,3
-6.1
G Debt - 61
%gdp
68.3 62
66
71
88.
CA
(% -6
GDP)
-0.1 -5,2
0.1
-4,9 -1.1 -2,9 -0.8 -3,3 -0.6 -3,4
ECB/Fed
int rates
2.25
3.5
Ex rate 1
€ over $
4.2
1.25$
5.2
1.34$
69.
2
4
1.59$
9.4
0
83
0.3
78
1
2.5
1.40$
93
84.
0.2
98
1
1.19$
1.34$
-0.5
Within EU: Public debt
in 2009, as %of GDP
roz
B e on e
lg
Bu ium
lg
Cz aria
e
De ch R
nm
Ge ark
rm
E s any
ton
Ir e ia
l
Gr and
ee
c
Sp e
Fr ain
an
ce
I
Cy taly
pr u
La s
Lit tvia
hu
a
Lu nia
xe
Hu mb
ng
a
Ma ry
Ne lta
t he
Au rla
s
Po tria
Po land
r
Ro tuga
ma l
Slo nia
v
Slo enia
va
Fin kia
S w l and
ed
en
No UK
rw
ay
US
Eu
Unemployment rate 2010 EU members and US
20
15
10
5
0
Policy suggestions
 From Keynes and from the fordism: where finance has a secondary






role and it is a tool which guarantees productive investments.
Wage is the main nexus which guarantees consumption (not credit)
the ESM: a slightly better position than US (see SVI) because the
system is anchored to the wage nexus, and finance is not the main
institutional form, although in the past 20 years also in…Europe.
The ESM is able to combine, better than US, efficiency (GDP growth)
and social performance (inequality, poverty, mass education and life
expectancy).
After the IIWW ESM grew faster than US and reached better social
performances. Only in the last two decades US had slightly faster
GDP growth, with further worsening of social indicators.
However, this growth in US was led by finance which caused the big
crash and the Great recession of 2007-2009.
On this light, the US model led by finance raises many doubts and
should be radically reformed. I suggested this has to be done on the
lines of the ESM.
Avg. Growth of GDP per capita in EU and US, 1961-2009
1961-80
1981-91
1992-2009
5
FORDISM (1946-1970) AND POST-FORDISM (1980-TODAY)
4,5
4
3,5
3
2,5
2
1,5
1
0,5
0
Germany
France
Spain
Italy
EU15
USA
Varieties of capitalism within the enlarged Competitive
European Union (17 Eurozone members, with *) Economies
model)
European
Social model:
Austria*
Belgium*
Finland*
France*
German*
Netherlands*
Slovenia*
Denmark
Sweden
Luxemburg*
Hungary
Czech Rep
Greece*
Italy*
Portugal*
Spain*
Hybrid model
(mixed between
ESM and LME)
Cyprus*
Malta*
Latvia
Lithuania
Poland
Romania
Bulgaria
Estonia*
Slovakia*
Competitive
Market
Economies
(CME)
UK
Ireland*
Market
(Anglo-Saxon
US, UK, Ireland, Canada, New
Zealand, Australia
Conclusion
 In the same vein of Kindleberger (2005) we can conclude




that if there are manias governing finance, which are not
rational, then governments should intervene and regulate.
Monetary policies should not accommodate manias. A
financial transaction tax will limit manias.
Finance, regulated under supervision of the state, should
serves investments and not consumption.
Governments need to do more not only regulation: to
guarantee an appropriate level of consumption which
should be sustained by an appropriate level of wage in
order to maintain an appropriate level of aggregate
demand (AD). AD is supported by an appropriate level of
public investment (in particular health and education).
On the contrary, the last austerity policies, both in Europe
and in US, go just in the opposite direction.