Varieties of capitalism and
responses to the financial crisis:
the European Social model versus
the US model
JEAN MONNET CHAIR
Pasquale Tridico
University Roma Tre
Outline
Financial crisis 2007 and real effect with
economic crisis 2008-10: Great Recession (-
3.2%), Unemployment (10%) and losses (5
trillion $)
Resurgence of Keynesian policy and demise
of Washington Consensus
Responses in EU and in US (comparative
analysis and varieties of capitalism)
Conclusion and policy suggestions
Domino Effect of the Subprime Crisis (has hit the
US economy and other economies)
Commodity price
Housing price
Mortgages
CDO Volumes
BUBBLES AND BURSTS
Failed banks in US
0
50
100
150
200
250
300
350
400
2007 2008 2009 2010
Ass
ets
in $
bn a
nd n
umbe
r of
ban
ks
0
1
2
3
4
5
6
ratio
ass
ets/
bank
s
Assets $bn Number failed banks ratio assets/banks
Mortgage Delinquencies
Bank Failures
The sequence of the financial crisis
Background: household debt and bubble in the housing sector, low interest rates coupled with global imbalances and saving glut
Fall of 2007: US housing sector crisis and collapse of the sub-prime market.
Default correlations on mortgages spread to the world through the complex system of securitization.
MBS downgraded by CRA (some months before were giving artificially high ratings); nobody wanted them now. Lost value, poor returns (toxic assets)
Credit markets seized up, expectations worsened, interbank lending crunched, banks failed, Interest rates went up with more trouble for mortgage owners and increased default correlations. Bubbles burst!
Solvency problems and liquidity problems
Central banks liquidity injections.
The end of a dream?
Characteris
tics
Models
Competi
tion
Economic
Regulation
Main
Economic
Actors
Rel. betwn
public &
private
Int.national
Eco
Relation
Taxation Finance
Anglo-
saxon
model
(USA, UK,
Irland)
Promoting
free
competition
Deregulatn,
withdrawal
of the State
from the
Economy
Firms,
Corpora
tions,
Markets,
Residual
public
sector:
Market-
oriented
Global
competition
Low taxes,
no or little
progressive
rate
Deregulatn.
Liberalizatn
Finance for
Consumptn
Investments
Corporative
model
(Germany)
European
Balancing
Cooperation
and
Competition
Stricter
regulation
Tripartite
structures
(business
clubs, Trade
unions,
govrnment)
Public-
private
partnerships
Protection
of strategic
sectors in an
open
economy
High
taxation to
finance
Welfare
State
Developed
finance for
Investments
; extensive
credit for
small firms;
limited
finance and
credit for
consumptio
n; financial
regulation,
transparenc
y, protection
of saving;
higher taxes
on financial
corporation;
Dirigiste
model
(France)
Social
State
Control,
regulated
competition
National
Accumulati
on and
Regulation
Strategy
Private and
Public
sectors
Public-
private
partnerships
under State
guide
Protectio
nism
High Taxes
and
Collective
Recourses
Social
Democratic
model
(Scandinavi
an
countries)
Model
State
controlled
liberalisa
tion and
competition
Knowledge
and
innovation
as economic
guide for
regulation
Public and
Private
Firms and
Ethic
Corpora
tions
Public-
private
partnership
in order to
realize
Social
Cohesion
National
Actors,
moderate
free
competition,
open
economy
High wages,
career
perspective,
High and
progressive
tax rate
Avg. Growth of GDP per capita in EU and US, 1961-2009
0
0,5
1
1,5
2
2,5
3
3,5
4
4,5
5
Germany France Spain Italy EU15 USA
1961-80 1981-91 1992-2009
FORDISM (1946-1970) AND POST-FORDISM (1980-TODAY)
Post fordism Market Financialization 1988-2006
Market Finacialization: 1988-2006 (% of GDP)
0
20
40
60
80
100
120
140
160
180
Aus
tralia
Can
ada
Den
mark
Franc
e
German
y
Greece
Irelan
dIta
ly
Japa
n
Nethe
rlan
ds
Norway
Portuga
l
Spa
in
United Kingd
om
United States
1988 2006
Correlation between Labur Flexibility and Capital Financialization
Flexibility and finacialization, selected countries
-100
-50
0
50
100
150
Belgi
um
Den
mar
k
Finla
nd
Ger
man
y
Gre
ece
Italy
Japa
n
Net
herla
nds
Nor
way
Portu
gal
Spain
Swed
en
aver
age
EPL trend 1990-2000 financialization 2000s
Source: World Bank 2010, online database
The root of the crisis since the end of
1970
Profit soar
Wages stagnated
Inequality increased
Consumption kept up thanks to
financialization
private debt (financial innovation)
public debt (bonds China-US)
Post fordism: Market Financialization and Inequality
Australia
Canada
Denmark
France
Germania
Greece
Ireland
Italy
Japan
Netherland
Norway
Portugal
Spain
Sweden
United Kingdom
United States
25
30
35
40
G
ini M
id 2
00
0s
60 80 100 120 140 160 Financialization 2006
Australia
Canada
Denmark
France
GermaniaGreece
IrelandItaly Japan
NetherlandNorway
Portugal Spain
Sweden
United KingdomUnited States0
12
3
EP
L 2
000
s
60 80 100 120 140 1602006fncz
Post fordism: Market Financialization and Lab Flexibility
Wage dispersion, selected countries
Source: Euromemorandum 2010
Wage shares on GDP, selected countries
Source: Euromemorandum 2010
Family debt and inequality in US
• 1980 : 80% of GDP (debt)
• 2007: 140% of GDP (debt)
• 1980: 5% share of the top of the
distribution had 20% of income
• 2007: 5% share of the top of the
distribution had 35% of income
Indebitamento delle famiglie e disuguaglianze di reddito (US, 1984-2008)
Fonte: IMF, 2010
Disuguaglianze di reddito e dei livelli di consumo (US 1980-2006)
US weekly real wage 1947-2007
$0,00
$100,00
$200,00
$300,00
$400,00
$500,00
$600,00
$700,00
1947
1949
1951
1953
1955
1957
1959
1961
1963
1965
1967
1969
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
avg weekly earnings
Real Wage, Non-supervisor Workers (In 2007 $)
Source: US Department of Labor, Bureau of Labor statistics
US productivity (1992=100) and hourly wage 1973-2007
0,00
20,00
40,00
60,00
80,00
100,00
120,00
140,00
160,00
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Avg hourly earnings Productivity
US Economy, Non-agricultural Sector (In 2007 $)
Source: US Department of Labor, Bureau of Labor statistics
Compensation financial sector and other sectors
Avg compensation financial sector
Avg Compensation other sectors
Source: Financial Crisis Inquiry Commission (2011)
Rapporto tra i compensi dei manager e i
salari medi dei lavoratori dipendenti
Fonte: ILO 2010
Interactions and bubbles within the Finance-led Growth Model
LABOR FINANCE
↓ w/p Financialization
Instable wages ↑ Demand for finance
Precarious job ↑ Price shares
(financial) BUBBLE
↑Finance for consumption ↑ Movement of Portfolio
↑ Credits, loans, mortgages ↑ Financial investments
(credit) BUBBLE (speculative) BUBBLE
(Prices in the commodity ↓ Productive investments
market increase too)
CONSUMPTION INVESTMENTS
Financial crisis responses
Competitive Market Economy (CME)
- US, UK, Ireland, Australia, Netherlands, Canada.
European Social model (ESM)
- Eurozone17 (except Ireland) rather than EU27
At the G20 meeting in London in 2009, # models, #
strategies: the Franco-Allemande
(Sarkozy&Merkel) called for state regulation and
financial restrictions. The Anglo-Saxon axe
(Brown&Obama) aimed mostly to reach a
consensus to provide monetary liquidity for the
financial system.
Central Banks strong reactions:
quantitative easing and zero interest rate
Posner (2009) estimates that the total amount
of the spending of the Fed during the period
2007-2010 for the financial crisis was of $5.2
trillion. It is unclear however, how much and
where exactly the Fed money went at the
beginning of the crisis in the desperate
attempt to save banks and financial
institutions (Westbrook, 2010).
Similarly in Europe: ECB and Bank of
England
Fed quantitative easing
Reserve money 2008-10
0
1
2
3
4
5
6
2006 2007 2008 2009 2010
Fed
ECB
Fed and ECB interest rates 2006-2010
Fiscal stimulus in US and EU 2007-10
Germany UK Netherlands Italy France Spain Tot
EU
US
Bn.
euro
82 31 8.5 9 26 40 200
(apx)
775
Arra
USbn$
+ 700
USbn$
Tarpa
%
GDP
3.3 2.2 1.4 0.6 1.3 3.7 1.5%
(apx)
2.7%
+
2.3%
Government rescuing banks
US and EU
US (bailing out, saving plans or
govmt shares for firms and
financial institutions)
700 US $ bln TARPA
EU
Apprx 100 US $ bln
AIG
Fannie Mae
Freddie Mac
Merril Lynch
Goldman Sachs
Morgan Stanley
Washington Mutual
Bank of America
Maiden Lane
Citigroup
Govmt shares
ING (Netherlands)
BNP Paribas (France)
Unicredit (Italy)
Swedebank (Sweden)
Alpha (Greece)
Lloyds and RBS (UK)
Commerzbank (Germany)
Nationalisation
Fortis (Belgium)
Anglo Irish (Ireland)
Northern Rock (UK)
Hypo Real Estate (Germany)
Financial Regulation in US and EU
US regulation (the “Frank-Dodd Act”)
new supervisory architecture system, major role of Fed in
oversight large firms and involvement of the Treasury. A
Council of Regulators is set up to coordinate supervision with
Fed.
EU regulation and responses
Contrary to the weaker reaction of ECB the EU regulation
response was stronger. The De Larosière Report (2009) was
absorbed by EU directives and regulations, declaration of
support of the EU Commission (2009), the European Council
(2009). However, the EU regulation is weakened by the
fragmentation among the EU member states and their
different national “operative” regulations in the financial
markets.
US regulation: macro and micro “soft”
oversight
Micro
prudency
Consumer Financial Protection Agency.
The Fed monitors commercial banks
and large firms.
The SEC monitors the securities.
The CFTC futures
Macro
prudency
Financial Services Oversight Council to
monitor WS. Council of Regulators
on systemic risks run by Treasury
(with Fed)
A stronger EU regulation
US financial regualtion EU/Eurozone financial regulation
CRA No significant changes. Strict surveillance of methodologies and ratings.
Registration and certification requirements.
Derivative
s and OTC
markets
Tighter regulation with the institution of a
central counterpart authorized to issue
derivatives. SEC and CFTC monitor
Tighter regulation with the institution of a central
counterpart authorized to issue derivatives. The
ESMA monitors
Basel
agreement
for Banks’
capital
Mostly Basel II. Capital requirement for
Banks increased to 8% (Basel III) only
for large top 20 firms (Basel II for the
rest, 2% of capital). Banks must hold 5%
of securities in credit risk products.
Similarly for UK
Basel III. Capital requirement for Banks increased
to 8% and higher standard required as in Basel III
(limit to leverage ratio at 3%, liquidity ratio
improved to meet short term obligation). Banks
must hold 5%-10% (Eurozone 10%) of securities in
credit risk products.
Micro
prudency
Consumer Financial Protection Agency.
The Fed monitors commercial banks. The
SEC monitors the securities. The CFTC
futures
European System of Financial Supervisors (ESFS)
with 3 functional authorities and supervision
powers for banks, insurance and securities: EBA
EIOP, ESMA
Macro
prudency
Financial Services Oversight Council to
monitor WS. Fed over large firms.
Council of Regulators on systemic risks
European Systemic Risk Board (ESRB) within
ECB: Macro prudential supervision
Hedge
Funds (all
kinds)
Supervision by SEC and CFTC. More
transparency required.
Strongly restricted: authorization, transparency,
liquidity leverage, supervision, information,
strategies, auditing, interest conflicts.
Securities
and CDS
Supervision by SEC. More transparency
required.
Stricter supervision & transparency. Disclosure
positions, and short selling option bans (Eurozone)
Tax financ Bank levy (US, Uk and Canada) FTT (Eurozone)
Main divergences US-Eurozone
The most important disagreement concerns a financial transaction tax (FTT)
the FTT would serve to finance the huge costs of this crisis (German and France)
UK, US Congress and Canada strongly object it and the G20 Pittsburg meeting already rejected it. Bank lobbies are strongly against the FTT too.
The Obama administration would see as a good compromise a sort of Bank Levy which would have a more modest impact on tax collection
Other issues: hedge funds, Basel agreements, capital requirements, CRAs, etc
US and EU vulnerability
Beyond these differences, and despite the attempt to reform the financial sector, finance and economy still remain vulnerable, both in EU and US. This is due to a combination of 4 indicators in badly dangerous position:
1) government deficits,
2) unemployment,
3) Current Account deficit (CA)
4) slow recovery.
Out of these 4 variables the Synthetic Vulnerability Index (SVI) was calculated
For 2011: US -4.5 worse than Eurozone -3.72
US economy: Synthetic Vulnerability Index
-2,625 -2,625
-5,8-4,8 -4,5
-3,9525
-15
-10
-5
0
5
10
15
2006 2007 2008 2009 2010 2011
govmt balance unemployment Synthetic Vulnerability Index CA GDP growth
Eurozone economy: Synthetic Vulnerability Index
-1,675 -1,3-2,5
-5,15-3,975 -3,725
-15
-10
-5
0
5
10
15
2006 2007 2008 2009 2010 2011
govmt balance unemployment Synthetic Vulnerability Index CA GDP growth
US-EU27 trade in merchandise (values in millions $)
($200,000.00)
($100,000.00)
$0.00
$100,000.00
$200,000.00
$300,000.00
$400,000.00
2005 2006 2007 2008 2009
US Import from Eu27 US Export to Eu27 Balance
EU27 CA surplus/deficit with main partners, 2008 (millions of Euros)
-200
-150
-100
-50
0
50
100
Series1 68.3 12.6 2.6 2.5 -6.5 -32 -61.3 -157.6
United States Switzerland India Canada Brazil Japan Russia China
Labour market: again US more
vulnerable than Eurozone
Despite a lower recession in US in
comparison with Eurozone (-2.6% against -
4.2%) in US unemployment went from 4.6%
to 9.8% (+5.2) and employment rate fell from
72% to 64.5% (-7.5) in 2010.
In the Eurozone the unemployment rate looks
much better: it went from 8.6% to 9.6% (+1.2)
and employment fell from 66.2% to 65.7% (-
0.5%).
GDP growth before and after 2009 recession
-0,6
-3,2
-2,6
-4,1
2,5
4,6
2,6 2,5
1
6,8
4,3
2,4
1,5 1,5
6,4
-6
-4
-2
0
2
4
6
8
World Output Advanced
Economies
United States Euro Area Emerging and
Developing Economies
2008 2009 2010 2011
Employment (left) and unemployment (right) rates in US 2006-2010
72
64.54.6
9.8
60
62
64
66
68
70
72
74
2006 2007 2009 2008 2010
0.0
2.0
4.0
6.0
8.0
10.0
12.0
US Employ. US Unempl.
Employment (right) and unemployment (left) rates in Eurozone 2006-10
66.2
65.7
8.4
9.6
64.5
65
65.5
66
66.5
67
67.5
2006 2007 2009 2008 2010
0.0
2.0
4.0
6.0
8.0
10.0
12.0
Eurozone Employ. Eurozone Unempl.
Marika Carboni Tesi di Laurea Università degli Studi Roma Tre
L’impatto sul mercato del lavoro: paesi dell’Unione europea
Andamento del tasso di disoccupazione (2000-2010)
Fonte: (2010) e Istat (2010)
Public expenditure for labour market
Moreover, given the relatively lower percentage
of US public expenditure for unemployment
policies (passive and active measures) 0,49% of
GDP against 2,8% of GDP on average among
countries of the European Social Model, the
human costs of US unemployment with respect
to EU appear much bigger.
All this confirms our argument that the Eurozone
and in particular the ESM is better able to cope
with the crisis, allowing for less social costs and
better social performance than US.
Passive and Active Unemployment measures (% of GDP), OECD 2007-08
0
0,5
1
1,5
2
2,5
3
3,5
4
4,5
Den
mar
k
Belgium
Nethe
rland
Finland
Ger
man
y
Swed
en
Fra
nce
Spa
in
Aus
tria
Irelan
dIta
ly
Can
ada
Aus
tralia
New
Zea
land
Japa
n
United Kingd
om
S. K
orea
USA
Avg
ESM
active passive
0,49
2,8
US and EU closer comparison Eurozone 2009 US 2009
World share of GDP 14.8% (EU27: 21%) 20.2%
Global market share in terms of exports (world
%)
15% (EU27: 20%) 13%
Population 328 mln: (EU 27:
498mln)
317mln
Inequality - Gini coefficient 0.29% 41%
GDP per capita $ ppp 33,452 46,653
Life expectancy at birth 81 79
Poverty (50% of median income) 2006 10% 17.1%
Combined gross enrolment ratio in education
(primary, secondary & tertiary levels, % of pop)
Secondary enrolment ratio (% of
secondary school-age population)
Primary enrolment ratio (% of primary
school-age population)
Expected years of schooling (children)
95%
91%
97%
16
92%
88%
91%
15
Social Expenditure, % of GDP (OECD selected countries 2007)
0
5
10
15
20
25
30
Aus
tralia
Aus
tria
Belgium
Can
ada
Den
mar
k
Finlan
d
Fran
ce
Ger
man
y
Ireland
Italy
Japa
n
Net
herla
nds
New
Zea
land
Swed
en
Unite
d Kingd
om
Unite
d Sta
tes
Avg
ESM
Avg
Ang
losa
x co
.
2006 2007 2008 2009 2010 2011
US Eu
17
US Eu
17
US Eu
17
US Eu
17
US Eu
17
US Eu
17
An. Gdp
Growth
2.6 3.0 2.1 2.8 0.3 0.6 -2.6 -4.1 2.5 1 1.5 1.5
Unemplo
yment
4,6 8.3 4,6 7.5 5,8 7.5 10 9.4 9.8 9.6 9.7 9.8
Inflation 3.2 2.2 2.8 2.1 3.8 3.3 0 0.3 2 1.5 2.7 1.7
GBudget
-%gdp
-2,5 -1.3 -2,8 -0.6 -5,4 -2.0 -7,9 -6.3 -9,2 -6.6 -7,3 -6.1
G Debt -
%gdp
61 68.3 62 66 71 69. 83 78 93 84. 98 88.
CA (%
GDP)
-6 -0.1 -5,2 0.1 -4,9 -1.1 -2,9 -0.8 -3,3 -0.6 -3,4 -0.5
ECB/Fed
int rates
4.2 2.25 5.2 3.5 2 4 1 2.5 0.2 1
Ex rate 1
€ over $
1.25$ 1.34$ 1.59$ 1.40$ 1.19$ 1.34$
Within EU: Public debt
in 2009, as %of GDP
Unemployment rate 2010 EU members and US
0
5
10
15
20
25
Eurozo
ne
Belgium
Bulgaria
Czech
R
Den
mark
Germ
any
Estonia
Ireland
Greece
Spain
France
Italy
Cyprus
Latvia
Lith
uania
Luxe
mb
Hun
gary
Malta
Netherla
Austria
Poland
Portugal
Rom
ania
Slove
nia
Slova
kia
Finland
Sweden
UK
Norway
US
Policy suggestions
From Keynes and from the fordism: where finance has a secondary role and it is a tool which guarantees productive investments.
Wage is the main nexus which guarantees consumption (not credit)
the ESM: a slightly better position than US (see SVI) because the system is anchored to the wage nexus, and finance is not the main institutional form, although in the past 20 years also in…Europe.
The ESM is able to combine, better than US, efficiency (GDP growth) and social performance (inequality, poverty, mass education and life expectancy).
After the IIWW ESM grew faster than US and reached better social performances. Only in the last two decades US had slightly faster GDP growth, with further worsening of social indicators.
However, this growth in US was led by finance which caused the big crash and the Great recession of 2007-2009.
On this light, the US model led by finance raises many doubts and should be radically reformed. I suggested this has to be done on the lines of the ESM.
Avg. Growth of GDP per capita in EU and US, 1961-2009
0
0,5
1
1,5
2
2,5
3
3,5
4
4,5
5
Germany France Spain Italy EU15 USA
1961-80 1981-91 1992-2009
FORDISM (1946-1970) AND POST-FORDISM (1980-TODAY)
Varieties of capitalism within the enlarged
European Union (17 Eurozone members, with *)
Competitive Market
Economies (Anglo-Saxon
model)
European
Social model:
Austria*
Belgium*
Finland*
France*
German*
Netherlands*
Slovenia*
Denmark
Sweden
Luxemburg*
Hungary
Czech Rep
Greece*
Italy*
Portugal*
Spain*
Hybrid model
(mixed between
ESM and LME)
Cyprus*
Malta*
Latvia
Lithuania
Poland
Romania
Bulgaria
Estonia*
Slovakia*
Competitive
Market
Economies
(CME)
UK
Ireland*
US, UK, Ireland, Canada, New
Zealand, Australia
Conclusion
In the same vein of Kindleberger (2005) we can conclude that if there are manias governing finance, which are not rational, then governments should intervene and regulate.
Monetary policies should not accommodate manias. A financial transaction tax will limit manias.
Finance, regulated under supervision of the state, should serves investments and not consumption.
Governments need to do more not only regulation: to guarantee an appropriate level of consumption which should be sustained by an appropriate level of wage in order to maintain an appropriate level of aggregate demand (AD). AD is supported by an appropriate level of public investment (in particular health and education).
On the contrary, the last austerity policies, both in Europe and in US, go just in the opposite direction.
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