Financial Crisis and Recession

In the first years of our century, two factors emerged, not sufficiently noticed: on one side, the transformation and expansion of financial systems in a deregulatory environment, the decline of traditional banking, and the advent and extensive use of new financial instruments, whose illiquidity surfaced in the incoming crisis. On the other side, in the Eurosystem, the critical factor was the asymmetric behaviour of the member countries’ policies, specifically the reluctance of the hegemonic country, Germany, to follow an expansionary fiscal policy to support the weaker members, that had to deflate, in a sort of “domestic devaluation”. The lack of a common fiscal policy was deeply felt, and the insufficiency of a single monetary policy to preserve stability became gradually evident. The first factor was shown, in the financial systems, by a dramatic disproportion between enormous private short-term indebtedness, and safe assets. Hence, failures, in both the financial and real economy, a deep recession, public bail-outs, and unemployment. In Europe, the almost existential crisis of the Eurosystem was a serious accident waiting to happen. The prompt reaction of governments and central banks avoided a disaster that might have been similar to the Depression of the 1930s.