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Summary 2.6 percent lower than in 2008. Private consumption This can be attributed especially to government pol-

overall fell by 0.6 percent in 2009, whereas the private icy, which succeeded – with a massive stimulus pro-

saving rate has been steadily increasing. The gramme – in strengthening its economy without rely-

strongest negative growth contribution last year came ing on outside impulses. The programme is sched-

from investment. The domestic problems led to a uled to expire by the middle of this year and will not

sharp fall in the demand for foreign goods and ser- be fully offset thereafter by impulses from the rest of

vices over the year. The decline in exports, on the the world. From a structural perspective, economic

other hand, was clearly less pronounced. Con- policy is increasingly putting a burden on the

sequently, the US trade balance was able to improve Chinese economy by aggravating unbalanced eco-

substantially, thus contributing to a reduction in nomic developments. In recent years gross capital

global imbalances. After approximately three years, formation has accounted for 40 percent of GDP,

real-estate prices stopped falling in mid-2009. To a against only 35 percent from private consumption.

large extent, this development can be traced back to In a typical developed country, these figures are

the massive subsidies and tax reliefs granted by the around 20 percent and 65 percent, respectively. With

US government. Only when state support runs out, its clear focus on investment activity in large, often

however, will it be possible to judge whether the real- state-controlled, enterprises, the stimulus package

estate market recovery is sustainable. will raise the share of investment further. In the

medium term, many of these investments may prove

Although the recession has ended, the US economy to be misdirected and unprofitable, and may lead to

still has to remedy its structural problems. US con- overcapacities in some sectors.

sumers have been living beyond their means for too

long. To allow for a way back to sustainable growth, With the sole exception of Poland, all European Union

member countries went through a deep recession last

US consumers are in a process of curtailing their con- year. A comparison of the peak in the first quarter of

sumption. This process has already set in but needs to 2008 with the trough in the second quarter of 2009

continue during our forecasting horizon. Further- reveals that the European Union – and with it the

more, although the worse seems to be over for the euro area – contracted by 5.1 percent over a period of

banking industry, a continuation of write-offs is high- five quarters. The three Baltic States – Estonia, Latvia

ly likely and government intervention in the banking and Lithuania – were especially hard hit by the eco-

and real estate sectors will consequently remain high. nomic crisis and saw their GDP drop by approxi-

On top of that, fiscal sustainability is an issue that will mately 20 percent.

stay on the agenda for years to come. Although the decline in private consumption and

After having been hit the hardest amongst the large investment continued, the European Union started

economies in the world during winter 2008/2009, the

set in already in the sec- to recover during the second half of 2009. Of the

economic recovery in Japan

ond quarter of last year. The most important drivers western and southern European member countries,

for the mild recovery were foreign trade and private only Cyprus, Greece, Spain and the United King-

consumption. However, this will not prevent the dom were still in recession in the third quarter of last

annual growth rate for 2009 from falling to – 5.3 per- year. Similar to the US’s, the European recovery is

cent. Japan will continue its recovery in the short run, fragile. Although the prospects of firms have

but its medium term prospects are rather bleak. improved, problems within the banking sector

Exports will remain the main driver of growth this remain. This is likely to lead to a more restrictive

and next year. The Japanese export economy benefits credit supply which, together with continued under-

from its geographical proximity to Asian emerging utilisation of production factors, will prevent a

markets, which are experiencing a surge in domestic strong recovery of investment. Furthermore, wors-

demand. ening labour market conditions, small wage increas-

es and somewhat higher inflation will lead to a

Over the summer was able to recover to near- reduction in real disposable income, thereby reduc-


ly pre-crisis growth levels. To a large extent this was ing consumption growth. Finally, we also expect fis-

caused by a strong increase in investment activity ini- cal stimulus to be transitory, as in the US. Hence,

tiated by huge fiscal and monetary stimulus pro- according to our forecasts, after having sunk by

grammes of the government. The short-term eco- 4.0 percent last year, GDP growth will rise to 1.0 per-

nomic prospects for China remain quite positive. cent this year.


EEAG Report 2010 Summary

Mainly as a consequence of the drop in oil prices, exchanges. When trust is missing, financing disap-

inflation rates in the European Union fell until sum- pears and economic activity suddenly stops. This is

mer last year. The increase in prices will accelerate what happened in October 2008 and the subsequent

somewhat on the whole, but – given low capacity util- months. The data show that the percentage of people

isation rates and stable inflation expectations – remain that reported having full trust in banks, brokers,

restrained. The increase in consumer prices will be mutual funds or the stock market, which was as high

1.2 percent in the European Union in 2009 (after as 40 percent in the late 1970s and around 30 percent

0.7 percent in 2008). In the euro area, the inflation just before the crisis hit, dropped to 5 percent and has

rate will equal 0.9 percent in 2010 (after 0.3 percent not recovered since. Similarly, we find that for the first

last year). The increased indebtedness of European time since the data on trust exist, self-reported trust in

governments, caused by large fiscal stimulus pro- banks and bankers has fallen below the trust people

grammes, together with slowly rising interest rates will have in other, randomly selected, people.

raise the debt burden. Government interest expenses

are certain to rise in the years to come and crowd out This marked fall in trust was largely provoked by the

other types of government spending. This is already a revelation of the opportunistic behaviour that the

good reason for governments to prepare and commu- unfolding of the crisis brought to light, of which the

nicate exit and consolidation strategies to return to Bernard Madoff fraud is emblematic, and has con-

sound and sustainable public finances again. More tributed to casting a dark light on the whole finan-

importantly, such strategies are needed to strengthen cial industry. Indeed, we show that in states where

overall macroeconomic stability and to guarantee that the number of victims of the Madoff fraud was

any future crisis can again be relieved by appropriate higher, the level of trust towards banks, bankers,

fiscal policy measures. brokers and mutual funds has fallen more than in

states with a lower concentration of Madoff victims.

To summarise, our assessment of the macroeconomic The destruction of trust inherited from the crisis has

outlook is that while policy has been successful in pre- important implications for the future of financial

venting a new great depression and a deflationary spi- markets, including the demand for financial prod-

ral, the recovery remains fragile and future growth ucts and investors’ portfolio choices. Most likely it

prospects are clouded by structural problems. Many will result in:

of these structural problems were present before the

crisis, but some new structural problems may have • A drop in investments in risky assets. Such assets

been spawned by the crisis itself, especially in the lend themselves more easily to opportunistic

financial sector. Chapter 2 of this report discusses one behaviour than simpler securities. Thus, portfolios

of them, namely the collapse of trust. will likely be twisted markedly towards safer secu-

rities and away from stocks.

• A drop in the demand for complex financial instru-

ments with ambiguous returns. These are assets

Chapter 2: A trust-driven financial crisis that are more exposed to the risk of fraud and con-

A key ingredient in understanding the financial crisis sequently more easily placed among high-trust

is a dramatic drop in trust towards financial interme- investors. When trust dwindles the demand for

diaries, bankers and financial markets. While many these instruments declines and investors revert to

conventional factors have contributed to the emer- “familiar” instruments

gence and propagation of the financial crisis, they • Less diversified portfolios and a greater share of

alone cannot fully explain the sudden collapse in eco- domestic assets, the latter being perceived as more

nomic activity that took place after October 2008. familiar and trustworthy. On the other hand,

investors will entertain relations with multiple

We argue that starting in summer 2008 something intermediaries in order to diversify the risk of

very important was destroyed: the trust that interme- opportunistic behaviour by reducing exposure to

diaries have in each other and that investors have in each one of them. Both effects are costly: the first

the financial industry. Trust – the belief a person has because one loses the benefits of diversification,

that a counterpart in a transaction will not take the second because of the cost of setting and main-

advantage of him – while normally ignored in stan- taining multiple relations.

dard economic analysis, is crucial in many transac- • Less reliance on and delegation to intermediaries.

tions and certainly in those involving financial Our evidence shows that a fundamental ingredient

5 EEAG Report 2010

Summary in the intensity of financial delegation is the level Because these initiatives are both specifically aimed at

of investors’ trust. Since delegation is all the more protecting investors from abuses they may actually

necessary the more one invests in sophisticated contribute to rebuilding trust. But there are also rea-

securities, also through this channel there should sons to believe that by themselves these interventions

be a move towards simpler portfolios. may have limited impact.

• Finally, since an insurance contract is itself a

financial contract and as such is prone to the The alternative strategy to rebuild trust relies on the

opportunistic behaviour of the insurance compa- idea that losing investors’ trust is very costly for the

ny, the fall in trust should also affect the demand financial industry. If it is costly, intermediaries could

for insurance. be expected to have strong incentives to take actions

reputation and re-gain the trust of

to re-build their

their customers. Unfortunately there are no easy

To sum up, the fall in trust towards all segments of the recipes on how A may convince B to reconsider his

financial industry will give rise to a generalised flight opinion about the trustworthiness of A. The chapter

from financial trades, particularly those that are examines three possible mechanisms.

severely exposed to opportunistic behaviour. • A rating system that even the most (financially)

Insofar as it results in a shift towards safer assets, it illiterate investor can understand. It consists of rat-

will push up the equity premium and make equity ing intermediaries on their ability to offer trust-

financing more expensive. This may have conse- worthy services and to limit incentives to exploit

quences for fast-growing and innovative firms that conflicts of interest at the expense of the investor.

depend more heavily on this type of financing. The rating system, offered in an easily understand-

Similarly, if the increased mistrust results in a pref- able metric (e.g., a number from 0 to 10), would

erence for instruments with shorter maturity, it will allow all investors to distinguish intermediaries on

raise the cost of long-term financing, hampering the basis of their integrity, thus reducing the scope

projects with high yields but longer maturities. for opportunistic behaviour. It would de facto pro-

Because of this it is important to understand how vide intermediaries with incentives to raise their

trust in financial markets and intermediaries can be trustworthiness by transferring punishment power

rebuilt. The chapter examines two avenues: The first to the investors.

relies on enhanced regulation; the second on a reac- • A trust-based compensation scheme. A second,

tion by the industry. more direct mechanism to rebuild trust is to pro-

vide incentives to build it. If the compensation of

The regulatory approach, so far the only one that has the investor’s manager depends on the level of trust

been followed to rebuild trust, is to raise the strength investors have in their asset manager, the latter

of financial regulation. This approach has been the have strong incentives to behave in a trustworthy

subject of several of the recent G20 meetings and of manner and this, perhaps slowly, will raise the

the proposals that are being discussed at the Financial investors’ trust and their willingness to invest.

Stability Board. Many of the proposals that are under • Promoting investors’ financial education. A third

scrutiny go beyond the purpose of rebuilding trust

of strategy is to take actions that promote the finan-

and will most likely affect the perceived solvency

the intermediaries, to lower the chance of future cri- cial education of the investors – for instance by

sis. But these measures are likely to have little impact lobbying the government to have financial educa-

on trust. tion taught at (public) school, making financial

education material, certified by third parties, avail-

From the viewpoint of the regulation of investors’ able to investors, and other such measures. An

relations with financial intermediaries, the most rele- intermediary that promotes financial education

vant proposal that can help recover trust is the cre- signals its intention to be willing to deal with expe-

ation of the consumer protection agency proposed by rienced and sophisticated investors, with enough

the Obama administration. The agency would oversee nous not to fall victim of financial abuses and dis-

consumer financial products, which have been regu- torted advice. This should contribute to improving

lated in the past but whose oversight was exposed as investors’ trust.

lax. One may also mention the creation in the US of a

Financial Fraud Enforcement task force to combat Needless to say, investment in financial education

financial crimes. pays off in the very long run; however the returns to


EEAG Report 2010




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Dispensa al corso di Politica economica europea e delle istituzioni internazionali del Prof. Gian Cesare Romagnoli. Trattasi del sommario del rapporto dello European Economic Advisory Group 2010 nella traduzione italiana all'interno del quale è svolta un'analisi macroeconomica della situazione delle economie europee ed americana durante il 2010.

Corso di laurea: Corso di laurea in consulente esperto per i processi di pace, cooperazione sviluppo
A.A.: 2011-2012

I contenuti di questa pagina costituiscono rielaborazioni personali del Publisher Atreyu di informazioni apprese con la frequenza delle lezioni di Politica economica europea e delle istituzioni internazionali e studio autonomo di eventuali libri di riferimento in preparazione dell'esame finale o della tesi. Non devono intendersi come materiale ufficiale dell'università Roma Tre - Uniroma3 o del prof Romagnoli Gian Cesare.

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