The financial crisis that started in 2008 has thrown Europe into the most severe post-war economic recession and emphasized the fundamental weaknesses of national economies, some countries undergoing significant “corrections”. The first wave of corrections (2008 – 2010) generated a decrease in the national productivity (GDP) of up to 10% in the Baltic Countries, Romania, Hungary, Ukraine, etc. The second wave (2010 – 2013) triggered an explosion of public debt in Portugal, Italy, Greece, Spain (the PIGS group), as well as the crisis of the oversized banking systems with foreign deposits and loans in Cyprus, following Iceland and Ireland.
Before the crisis, the countries were evaluated at the standard level of performance of the economic block they are part of (in the case of those mentioned above, the EU). Their identification with the economic block could reduce/conceal individual vulnerabilities. Under the weight of the crisis, the financial markets began to differentiate the countries’ individual performance in the form of a wide range of financing costs between 1% and 10% (even more between Greece and Germany). Therefore, in terms of financing costs, there appeared new regrouping criteria classifying countries into “Northern/Southern countries” or “peripheral countries” (see PIGS above). What differentiates these countries?
Historically, the European countries have developed based on economic traditions, social and cultural values and on their own institutions, which vary from one country to another, but fall within relatively similar economic policies, generated by the main development theories, from Adam Smith (1776) to Keynes and the Bretton Woods institutions (1944). The assessment of the national economies is made today under the “Washington Consensus” (the IMF philosophy), focused on macroeconomic stability (internal and external balance), liberalization of the markets and privatization.
The main components of the macroeconomic stability are the balance between public income and expenses (the budget deficit recommended in the EU is of up to 3%) and the balance of the external sector, between the input and output of goods and services (the conventionally recommended current account deficit of 3-5%), which reflect the functionality of the economy. Maintaining such balances in the long run, together with acceptable levels of price increases (2-3% inflation) and employment rates (5-6% unemployment), will provide the economy with a sustainable, long-lasting growth basis.
Some countries are in deeper trouble than others not for failure to make diligent efforts or for lack of creativity, but because they did not follow the financial discipline promoted by the “Washington Consensus” providing sustainability to economies. By a serious deviation from the standard policies, a series of economies became unsustainable, with major deficits and public debts of more than 200% of GDP (Greece, Italy), with external imbalances and exaggerated monetary economies (Cyprus, for example, has financial assets 8 times higher than its real economy), with public expenditures (social welfare programs) much exceeding their possibilities. The “South” or the “periphery” may work as hard as the “North” or the “Center”, but according to the financial markets, their work is less efficient (and apparently they need a decade to correct the imbalances).
Before the crisis, the public budgets of several countries reached deficits of 8% – 12% (Ireland, Romania, Italy, Spain, etc.), and the current account deficits amounted to 15% – 20% (Romania, Hungary, the Baltic Countries). And the effects became visible as soon as the crisis commenced: productivity went down and the unemployment rate went up. Restoring such imbalances to acceptable levels after being hit by a worldwide financial crisis requires “austerity measures”. As we are well aware, public debate with regard to whether or not such measures should be applied is very controversial and it triggered political crises (in Greece, Italy) bringing some countries to a stalemate.
Some feel that the level of the deficits and of public debt has nothing to do with being poor or rich. For example, Romania has constantly had relatively low deficits and public debts, but not for being a rich country. There are rich countries that have huge public debts and high budget deficits (see France and Germany a few years back and USA today). I think that not many countries can afford to ignore the Washington Consensus and if they do, they do it at their own expense. If you have a strong economy, with national production and a high taxable amount, then you have sufficient budget income to cover public expenditure, including social welfare programs. If your economy is less developed and/or weaker, then your income is less than your public expenses and therefore you register high budget deficits, which you have to cover from public debt (limited, within the EU, to 60% of GDP).
In other words, if you don’t need the help of the IMF, you can do whatever you want. If you do need help, you apply the lesson learnt in school. If you are a country that needs to attract foreign investments and foreign capital, the balance of external payments translates into an export competitive and attractive economy. A high deficit of the balance of payments requires the assistance of the IMF and “orthodox” correction and restructuring economic policies in order to restore the sustainability. The aim is to increase the competitiveness of the real economy.
Sustainable development, based on fiscal balances and financial stability, seemed to be a natural component of western economies. There were corrections now end then, depending on the economic cycles and, rarely, some developed countries even benefitted from IMF assistance programs for major restructuring operations (in England, it was performed by Margaret Thatcher with a courage and determination hardly seen in the political environment). But in general, the western world has been quite relaxed thinking that the lesson only had to be taught to the developing, emerging countries. Romania had to learn this lesson in the transition period from a centralized economy to a market economy. Today, having a functional market economy, all it has to do is apply the lesson.
It seems however that it is now time for the entire Europe to (re)learn the Washington consensus. I am optimistic that this will occur and that the European Union will be more resilient before a financial crisis.