Two variants of financial crisis continue to wreak havoc on Western economies, fuelling joblessness and poverty: the one that we read about regularly in newspapers, involving governments around the world; and a less visible one at the level of small and medium-size businesses and households. Until both are addressed properly, the West will remain burdened by sluggish growth, persistently high unemployment, and excessive income and wealth inequality.
The sovereign-debt crisis is well known. In order to avert a likely depression, governments around the world engaged in fiscal and monetary stimulus in the midst of the global financial crisis. They succeeded in offsetting nasty economic dislocations caused by private-sector deleveraging, but at the cost of encumbering their fiscal balances and their central banks’ balance sheets.
While sovereign credit quality has deteriorated virtually across the board, and will most probably continue to do so, the implications for individual countries vary. Some Western countries—such as Greece—had fragile government accounts from the outset and tipped quickly into persistent crisis mode. There they remain, still failing to provide citizens with a light at the end of what already has been a long tunnel.
Other countries had been fiscally responsible, but were overwhelmed by the liabilities that they had assumed from others (for example, Ireland’s irresponsible banks sank their budget). Still others, including the United States, faced no immediate threat but failed to make progress on longer-term issues. A few, like Germany, had built deep economic and financial resilience through years of fiscal discipline and structural reforms.
It is not surprising that policy approaches have also varied. Indeed, they have shared only one, albeit crucial (and disappointing) feature: the inability to rely on rapid growth as the “safest” way to deleverage an over-indebted economy.
Greece essentially defaulted on some obligations. Ireland opted for austerity and reforms, as has the United Kingdom. The US is gradually transferring resources from creditors to debtors through financial repression. And Germany is slowly acquiescing to a prudent relative expansion in domestic demand.
So much for the sovereign-debt crisis, which, given its national, regional, and global impact, has been particularly well covered. After all, sovereigns are called that because they have the power to impose taxes, regulations, and, at the extreme, confiscation.
But the other credit crisis is equally consequential, and receives much less attention, even as it erodes societies’ integrity, productive capabilities, and ability to maintain living standards (particularly for the least fortunate). I know of very few