Post Crisis and Prospects
The EU similarly is suffering from protracted post-crisis adjustment distress, with one important twist. The adjustment burden has fallen asymmetrically on the PIIGS (Portugal,Ireland, Italy, Greece and Spain), threatening the viability of the Euro, and even EU survival. Labor and other factor costs escalated rapidly during the bubble years following the signing of the Maastricht Treaty(1992), accelerating after 1999 due to foreign capital inflows encouraged by the adoption of a common currency in the Eurozone. These speculative increases weren't matched by productivity gains vis-a-vis other member states, particularly Germany, making it extraordinarily difficult for PIIGS to cope with diminished post crisis aggregate effective demand. They cannot rely on the ECB (European Central Bank) to work efficiently as a lender of last recourse to floundering commercial banks. Their only residual instrument is fiscal policy, but decades of excess public spending have placed tight constraints on further debt accumulation forcing them to shoulder the quadruple burdens of high debt service, depression, mass unemployment and vanishing social services. PIIGS cannot depend on yet-to-be-developed EU financial institutions for government facilitated debt restructuring. EU government financial credits could have mitigated the sovereign debt problem. High unemployment likewise could have been ameliorated by stronger EU labor mobility, but none of these options were viable. The PIIGS consequently are compelled to resolve the disequilibrium roundabout restoring competitiveness through a painful process of factor cost reduction and productivity enhancement that is slow and risky. They could choose to default on their sovereign debt forcing creditors to share the burden, but might well find themselves ensnared in a vicious contractionary spiral without a fiscal antidote.47
Some American states like California and Illinois face similar difficulties, but the depressive effects of reduced government spending are alleviated by superior labor
mobility and a more uniform distribution of factor costs and productivity across the
nation. Most importantly, America has well functioning federal fiscal institutions which can redistribute income across states. The United States has hardly gotten off scot free, but the greater flexibility of its governance system has forestalled the threat of disunion.
A great deal of water has flowed under the bridge in the past two decades. There were three distinct types of financial crisis: 1) a domestic money and credit implosion, where foreign investment and hot money played no significant role (Japan); 2) an insolvency and foreign reserves meltdown triggered by foreign hot money flight from frothy economies with fixed exchange rate regimes (developing Asian); where domestic speculative excesses were partly linked with foreign direct investment, and 3) a worldwide debacle rooted in reckless aggregate demand management and financial deregulation by a "partnership" of politicians, administrators, businesspersons and activists in significant part for personal gain that started in America, but spread almost instantaneously across the globe, mostly through international financial networks (except Asia where export shocks were primary). The last is the most dangerous, and most likely soon to recur because high rolling losers were compensated out of public funds,48 self-interested aggregate demand managers are unrepentant, and publics are dazed by fast talk. The least likely near term recidivists are developing nations like those in Asia which through bitter experience adopted flexible foreign exchange regimes and now maintain adequate foreign currency reserves, but over the longer term remain vulnerable to invasive moral hazard and social turmoil. Countries like China fall in the middle. On one hand, they are insulated against capital flight by stringent state controls, but on the other they are at high risk for destructive rent-seeking and turbulent domestic asset speculation. International financial laissez-faire which accompanied the second wave of globalization after the fall of the Bretton Woods system obviously has played an important part in two of the three financial crises surveyed, but is neither the only, nor the decisive aspect of the speculative equation as some have claimed.49 The greatest menace lies elsewhere with various "public-private partnerships" using all means fair and mostly foul to create favorable speculative financial conditions for their personal enrichment, which when combined with under regulated white hot money flows, Chinese dollar reserve hoarding and stealth protectionism in the best scenario will seriously degrade global economic performance, and in the worst culminate a Black Swan catastrophe.
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