The Economic Crisis:

a challenge for Economics

EducationSteve Hurd, UK, EU, WorldDoris Valente, Italy, EU, World

Birgit Weber, Germany, EU, World

Stages in the Economic Crisis1. THE GOLDEN AGE? Pre-2007

World Economy expanding rapidly• Freer trade and globalisation• Growth of financial markets & instruments• Debt financed expansion• Rising real incomes• Convergence of living standards

across Europe and the World• Infrastructure investment

– boom in domestic housing and commercial building.• Universal Happiness !!??

Stages…2. 2007 SHOCK OF FINANCIAL CRISIS– Lehman Brothers – sub-prime mortgage collapse– Major Clearing Banks left with bad debts– Bank bailouts Rise in government debt – Collapse of housing markets– Banks and governments at mercy of rating

agencies

Stages…3. RESPONSE TO THE SHOCK– Banks: collapse, recapitalise or nationalised– Governments: cut spending & raise taxes

– EUROZONE problems – loss of national control of:• Exchange rate• Interest rates• Fiscal policy

Insufficient free movement of labour and capital, fiscal harmonisation and regional transfers.

Stages…3. EFFECTS OF CRISIS– Consumer and business confidence collapses– Fall in investment and economic growth– Export markets collapse– Unemployment rises– Borrowing and Debt “Increases”– Credit ratings fall– Regional and international inequality grows– Political divisions within Europe – mutual blame– Universal Sadness!!??

How do we begin to teach this?Effective teaching starts by:•Discovering what students know and believe already•Engaging with and building upon thisCurrent economic crisis is a perfect opportunity to ask students to apply and explore the limitations of the economics they are being taught. But syllabuses and assessment must allow this.

Survey of European Students

• What do students know about the crisis?• What questions are they asking?• What causes are they stating?• What evidence is there of misunderstanding

of facts and processes?• How do we need to modify our teaching and

learning approaches?

EU student perceptions of the crisisKey words (n=404) Questions (n=1013)

KEY WORDS EUBanks 96Debt 91Unemployment 78Euro 59Greece or Greece? 53Recession 44Inflation 38Taxation/tax evasion 19Poverty 16Spreads/speculation 16Interest rates 12Budget deficit 12Bankrupty 11

QUESTIONS EUWhat are the causes? 73Why so much debt? What can be done? 61What is the solution? 48How can the Greek problem be solved? 47How to solve high taxes and evasion? 43Can we reform our politicians? 31Why didn't we control the banks? 20Why not print more money? 18What is the future of the Euro? 16Where did the money go? 12

Two Groups of Students

From ITALY (n=168)Unemployment 58Banks 38Debt 36Inflation 32Taxation/tax evasion 16Spreads/speculation 16Poverty 13Bankruptcy 11Suicide 7Interest rates 6Recession 5Balance of payments deficit 5Subprime mortgages 4Devaluation 3Berlusconi 3

From GERMANY (n=93)Euro 45Greece 44Debt 32Banks 28Spain 7Unemployment 5Fiscal pact 5Italy 3

Key words exerciseGROUP A GROUP B

Students’ questions

ITALIAN Group (n=505) GERMAN Group (n=245)

What can be done about high taxes and tax evasion? 43

Can we reform our politicians? 31

What is the solution? 25Why so much debt? What can be done? 23

What are the causes? 23Why didn't we control the banks? 9How can we avoid unemployment? 6What can be done about subprime loans? 3

How can the Greek problem be solved? 45Why so much debt? What can be done? 38

What are the causes? 19

What is the future of the Euro? 8

To what extent do you agree that the following have contributed to causing the current economic crisis?

In order to solve the crisis in YOUR COUNTRY it is necessary to...

In order to solve the Crisis in the EUit is necessary to

We all have a mission!

ECONOMICCRISIS

EU Politicians

The Confused Masses

Hope

LIGHT

Economics Teachers

Contribution of Economics Education

• Knowledge of economic institutions, concepts and theories

• Skills and competencies (application/research)• Distinguishing “cause” and “effect”• Understanding trade-offs between desirable

objectives – opportunity cost• Being clear about “attitudes” and “values”

Useful concepts and theories…

Theory of Clubs/ Moral Hazard

Theory of Optimal

Currency Areas

How Economies Adjust

to Shocks

Free Markets &

Market Failure

Market Regulation/

Deregulation

Asymmetric

Information

Keynesian& New

Classical Theories

Club Theory

In this club we take care of all our members

But we do expect all our members to keep to the dress rules

But I prefer to wear denim

Basic trade-off is between desire of a club to grow and retain members while preserving the club rules..

Optimal Currency Area Conditions(After Mundell)

1. Sufficient similarity among countries to prevent asymmetric shocks.

2. A high degree of labor mobility and/or wage flexibility.

3. A centralized fiscal policy that transfers resources from countries that are doing well to those that are doing poorly.

The Values Dimension• The welfare of all human beings is equally

important! Social equity/fairness.• Need to empathise with the predicament of each

country e.g. Greece, Germany.• Recognition that the health of the European

Economies matters to the nations of Europe, and also to the rest of the world.

• With the need for global cooperation on environment and climate matters we need to avoid “beggar my neighbour” policies/ protectionism.

End

Time for questions & discussion

Supplementary slides

The Survey: Countries

680 Participants, 97 % from EU by July 2012•Italy 30 % 189 •Austria 23 % 148 •Germany 20 % 129•Ireland 12 % 76•France 6 % 35•United Kingdom 6 % 35•Bulgaria 2 % 11•Netherlands 1 % 7and others …

The Survey: Sex

• Male 43 %238

• Female 57 %321

Answered questions 559, skipped 104

The Survey: Age

Born •1994 (18/19) 31 % 164•1993 (17/18) 24 % 124•1995 (16/17) 21 % 110•1992 (15/16) 13 % 67•1996 (14/15) 11 % 58

Answered question 523, skipped 140

The Survey: Subjects

IGEA/ Mercurio 25 % 111Social (Science) Studies 20 % 88Economics 19 % 72Business 15 % 66Politics & Civics 9 % 37Science économiques et sociales 5 % 23(419 answered questions, 244 skipped)

Your view to the counter-factual statement

“The answer to the current crisis is to allow your country’s currency (e.g. the euro) to fall in value, to lower interest rates, to increase government spending and lower taxes in order to create more jobs.”