Spurring growth will be a huge task

In 1990 Sweden suffered a severe financial crisis provoked by the bursting of a housing bubble, which was sorted out to some extent by creating a “bad bank” for each entity in difficulty. The government took swift action to rescue troubled banks, whose losses came to 12 percent of GDP. After the financial crisis came a recession that saw real growth (adjusted for inflation) fall by four percent. It would be another four years before the Swedish economy returned to pre-crisis GDP.

History teaches that prosperity cannot be had without a financial system that works normally (generating credit to households and businesses), and that the mere fact of stabilising the financial system is no guarantee of prosperity. What is needed is a rescue plan for the real economy to boost production and create jobs that is at least as intense in its goals as the bailout.

This has been forgotten in Europe over the past two years, with results obvious to everyone: the risk premiums of countries in trouble have not dropped, nor have those states cut their deficits as expected. Almost all of them have increased the public debt and have seen rises in unemployment, in the impoverishment of the middle classes, and in business mortality.

The G-8 Summit at Camp Davis is now trying to stave off total collapse and generate support for banks and for citizens too. Is the intellectual climate of our times truly changing, shifting from austerity to growth? That's what the final communiqué of the meeting says. It is time to escape the Minsky moment (named after the economist of the same name) in which debtors cannot pay, creditors do not want to pay, and everyone is trying to write off the debt at the same time.

Two camps

The G-8 statement also recognises, in general terms, the distinct point of the cycle in which the different geographical areas of the planet are in: “We commit to take all necessary steps to strengthen and reinvigorate our economies and combat financial stresses, recognising that the right measures are not the same for each of us.” This applies to the U.S. and Europe, and even within the European Union, where Germany’s situation, for example, is quite unlike Spain’s.

The position of the G-8 must from now on be assumed both by each of the regions (the EU summit on growth will be held tomorrow, May 23) and by all of them jointly, including the emerging economies, at the G-20 coming up in June. The summit will be the seventh G-20 meeting since the beginning of the Great Recession. At the first three, in Washington, London, and Pittsburgh, the same common economic sentiment was defended: cheap money policies, fiscal stimulus and aid to banks to prevent a repeat of the general financial collapse of the early years of the Great Depression of the 1930s.

The political action, however, had nothing like the strength it needed to prevent the constant and intense rise in unemployment, fall in production and sudden slowdown in demand. At the G-20 meetings in Toronto, Seoul and Cannes the world, far from recognising the failure to respond and the lack of stimulus policies, split into two camps: those who understand that the absence of growth remains the key problem, and those who appeal to fiscal stabilisation policies and austerity for a return to macroeconomic equilibrium. The results are in. Proofs, not prejudices.

The G-20 will soon meet again, this time in Mexico. The question is whether the leaders will pursue the same Rooseveltian principle of determination (after Franklin Delano Roosevelt, American president who saved the world from the Great Depression) for the real economy that they have adopted for the banking system: the rounds of recapitalisation that are needed in order to save it. That principle is: if at first you do not succeed, just try again.

From Germany

Angela Merkel against the world

"Europe remains the hot spot of the world economy. From the perspective of its most important partners, the solution can only come from Germany – and Merkel’s austerity is seen as a major error,” writes the Süddeutsche Zeitung. "Conflicts over austerity and growth remained unchanged after the Camp David summit: on one side stands Germany, and on the other the rest of the world," adds the liberal daily.

Merkel's policy may be popular in Germany, but outside the country – and this is most important – Germany is isolated. Germany and France must find a new political balance to be able to continue working as the motor of Europe’s crisis policy. It is not about coming up with a gigantic reflationary plan. But Berlin must make a growth policy in Europe possible. This is the message from Camp David.