AFTER THE GLOBAL CRISIS – I, por Domenico Mario Nuti

World Public Forum “Dialogue of Civilizations”, 9-th Annual Meeting, 6-10

October 2011, Rhodes. Panel “Post-crisis future of global economy”


Domenico Mario NUTI
Sapienza University of Rome[1]


Conjectures about the post-crisis future of the global economy are path-dependent,

i.e. they necessarily depend on the course of events envisaged for getting out

of the crisis.


The current global crisis was the consequence of financial de-regulation

and the general dominance of hyper-liberal policies in the United States,

in the UK and in the global economy. It started around August 2007 as a

US banking crisis arising from toxic sub-prime assets in banks’ balance sheets;

it turned into a credit crisis that depressed enterprise investment;

it spread globally through the decline of foreign trade and the slowdown

and often reversal of capital flows, including Foreign Direct Investment;

and then – with the large scale cost of rescuing financial institutions by

government budgets, the rising cost of labour unemployment and the decline

in governments revenue – it grew into a fiscal crisis and, ultimately,

a widespread crisis of sovereign debt, particularly in the Euro-zone.

Initially – from about November 2008 – the impact of the crisis and

cross-country contagion were softened by simultaneous, internationally

co-ordinated, monetary expansion and fiscal stimulus, but monetary

expansion failed to re-launch economic growth while concern about

fiscal sustainability soon led to a simultaneous premature exit from fiscal

stimulus in most countries. Current prospects – apart from those of

BRICS (China, Russia, India, Brasil, South Africa, now accounting for

18% of world GDP and the bulk of its growth) – are of widespread

stagnation and double-dip, indeed of a second and even more serious



The macroeconomic policies followed appeared to have a keynesian flavour,

stimulating aggregate demand via tax cuts, monetary expansion and low

interest rates. But keynesian remedies would have required public

investment instead, whereas tax cuts temporarily fuelled private consumption,

and the effectiveness of low interest rates – which mostly were not passed

on to borrowers and simply involved higher profits for financial

intermediaries – was limited by liquidity preference.

The rescue of financial institutions involved a massive transfer of wealth

from taxpayers to bank creditors, including depositors and shareholders.

This solution was clearly inferior to any of the alternatives, whether

support for bank debtors, or partial nationalization of supported financial

institutions, or outright loss-taking by imprudent lenders. Income

inequality, whose depressive effect on effective demand had been

reduced by credit expansion – one of the contributory factors of the

crisis – increased further as a result of labour unemployment and

continued payment of managerial super-bonuses awarded mostly to

those responsible for the financial debacle not by markets but

by a semi-feudal process of self-serving decisions by a managerial caste.

The current generalized advocacy of strict fiscal discipline, demanded

by international financial institutions and often enshrined in

national constitutions as a balanced budget obligation, is

particularly anti-keynesian, and is bound to be counter-productive

in the middle of a recession.

First, a balanced budget is neither sufficient nor necessary to the

sustainability of government debt, because a primary surplus

(net of interest payments) may or may not be necessary to debt

sustainability – depending on whether the economy grows at a rate

slower or faster than the average interest paid on government debt.

Second, the keynesian lesson has been forgotten or ignored,

that the balance of government expenditures minus revenues,

plus the balance of private investment minus savings, plus the

external balance of exports minus imports, must necessarily add

up to zero as a matter not of theory but of accounting consistency.

Therefore the budget balance cannot be a policy instrument,

but only a target that may or may not be achievable

depending heavily also on the behavior of national economic

agents and of global trade partners (including the elimination or

large reduction of Germany’s trade surplus vis-à-vis the rest of

Europe, and China’s gigantic trade surplus). Generalized efforts

by all governments to balance their budgets simultaneously might

actually result in a perverse combination of budgetary (and trade)

imbalances as well as a lower level of employment and income

worldwide than would be the case without such efforts.



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