Are we able to anticipate new crises?
Economic recovery is looming on the horizon. According to the latest OECD forecasts, after a fall in economic activity of 3.5% in 2020 (-6.7% in the euro zone and -8.2% in France), the world economy should return to growth of 5.8% in 2021 and 4.4% in 2022 (respectively, 4.3% and 4.4% in the euro zone and 5.8% and 4% in France). But we should not be under any illusions. The post-Covid era will be a world of crises.
If certain notions “dampen in routine use” (Jacques Lacan), the recurrent use of the notion of economic crisis since the 1970s, far from dampening, reveals a permanent reality and things are getting worse at the beginning of the 21st century. The financial crisis of 2008-2009 and the pandemic crisis in 2020-2021 easily assert that and have similarities. In both cases, a local shock, a priori of small magnitude (a fall in property prices and defaults in a narrow segment of American finance, the subprimes; an outbreak of the virus in Wuhan, China) spread on a global scale, causing the two most serious recessions the world economy has experienced since the 1930s, despite unprecedented injections of monetary liquidity by the central banks and massive recourse to budget deficits and state debt, which limited the extent of the depression. In both cases, these local shocks revealed previously latent risks. They propagated them by amplifying them because of the intensity of international mobility and interdependence: interweaving of financial systems, incessant migration of men and women, instantaneous diffusion of more or less reliable information flows, integration of production chains on an international scale, dependence on international trade and supply disruptions. In both cases, latent local risks turned into global crises.
Economic crises with variable geometry in the face of various types of shocks
There are many types of economic crises, in terms of their scale, nature and more or less lasting effects on growth: small local crises, in the form of currency or stock market crises, sectoral crises or fluctuations linked to the cyclicality of activity and affecting the output gap, i.e. the gap between growth and potential growth; or “Major crises” questioning the growth regime and affecting durably potential supply. If they lead to a sharp fall in output and employment, they are the result of multiple determinants.
These crises always combine two types of factors. Firstly, latent fragilities or risks that jeopardise the durability or sustainability of market equilibria, macroeconomic or sectoral situations, amplifying tensions, which may be contained for a time, but are subject to the exhaustion of resilience capacities and to imperfections in the self-regulation of markets. Secondly, the appearance of endogenous or exogenous shocks, i.e. events or phenomena that suddenly render previous situations unsustainable (on the foreign exchange market, within the banking system, in the balance between global supply and demand at the macroeconomic level, on the capital and commodities markets, etc.), or that brutally modify the perceptions of the future and the expectations of economic agents, causing reversals in consumption or investment levels, triggering adjustments in financial asset portfolios or a switch of international capital movements. Hence the analysis of crises in terms of shocks: supply shocks, demand shocks, financial shocks, etc. Endogenous shocks result from the procyclicality of credit, household or government over-indebtedness, and the succession of boom and burst phases in real activity or in the asset markets. Exogenous shocks are often local shocks, of an economic or political nature, or linked to natural phenomena, climatic accidents or pandemics, geopolitical tensions, or even unreasonable shifts in the business climate and confidence levels. All these factors suddenly contaminate the markets. Globalisation diversifies the origin and amplifies the effect of these shocks. And crises become systemic crises.
Hence the antiphon, today, of global risks, i.e. extreme events (accidents, pandemics, cybercrime, sovereign defaults, bank failures) likely to contaminate production systems, access to resources, technological networks or infrastructures. But global risks also respond to major socio-economic trends, which are slower in their impact but also more enduring, and which are likely to exert large-scale depressive effects on economic activity and employment in a large number of countries.
Global risks in the “world after”
In the “world after”, despite the rebound in growth, global risks, which can turn into crises in the face of shocks, have not disappeared. They obviously include various types of macroeconomic imbalances in the form of inflationary pressures, an overvalued currency, budget deficits or balance of payments that are difficult to sustain, excessive household, corporate or government debt, or mass unemployment. These macroeconomic risks were accentuated by the 2008-2009 financial crisis and, ten years later, by the Covid-19 pandemic. But global risks include other types of threats that could jeopardise a sustainable return to growth.
Falling productivity gains and ageing populations are weighing on potential growth. If the fall in the physical profitability of capital did not translate into a fall in profit rates, it is because at the same time there was a compression of wages, a deformation of the sharing of value added (less in France than elsewhere), to the detriment of employees and because, for the large internationalised firms, additional sources of rent capture had appeared, on the financial markets or thanks to the internationalisation of production chains, integrating the emerging countries. Also by carrying out tax or regulatory optimisation strategies. Furthermore, income and wealth inequalities, despite the deferral of deadlines by corporate and government debt and minimised by low interest rates (but for how long?), are ankylosing global demand and explain the sharp rise in savings rates for some, the headlong rush into over-indebtedness for others. Not to mention the bubbles in the asset and property markets. The hypothesis of a future secular stagnation, defended by Lawrence Summers and Robert Gordon, brings together these various phenomena. In addition, there is the high macroeconomic cost of energy transitions, now perceived as an imperative in the face of global warming, and the costs of adapting to the digital revolution in terms of human training and colossal public and private investments… Nor should we neglect the political and social risks of rising inequality and the legitimate feeling of being downgraded, especially among young people, which explain the rise of extremism and populism on all sides of the Atlantic. At the international level, the scale of asset stocks and macroeconomic disparities, which are reflected in trade or balance of payments imbalances, lead to huge capital transfers in a logic of short-sighted returns that can lead to a reversal of flows in a short space of time, provoking financial crises, as we saw at the time of the subprime crisis, particularly when American interest rates rose.
Macroeconomic surveillance that extends to global risks
In order to anticipate and attempt to prevent crises, it is important to ask what are the global risks weighing on the post-Covid world, and therefore what are the fundamental factors, the major trends, the main sources of tension likely to turn into large-scale crises in the face of shocks, which are by nature unpredictable, calling into question the sustainability of the recovery or causing serious macroeconomic imbalances at the global level?
This is the ambition of the very recent review by the International Monetary Fund (IMF) of its macroeconomic and financial surveillance function, either at the level of each member country (with the annual reports imposed by Article 4 of its Articles of Agreement) or at the global level (with the half-yearly World Economic Outlooks or the annual External Sector Reports). In a series of reports (2021 Comprehensive Surveillance Review: Overview Paper, IMF Policy Paper, Washington, May 2021; 2021 Comprehensive Surveillance Review: Background Paper on the Surveillance Priority Ensuring Economic Sustainability, IMF Policy Paper, Washington, May 2021) approved by the IMF Board, the Washington-based institution draws lessons from the recent past and makes the case for a profoundly renewed surveillance of the global economy and member countries in light of the risks and deep uncertainties about the sustainability of macroeconomic and financial situations in the face of the new landscape of the world economy. Without neglecting the importance of macroeconomic or financial imbalances, it is a question of integrating the global risks and deep uncertainties that threaten high, sustainable and inclusive economic growth. This includes the threats to employment posed by digital technologies, the imperatives of climate change, the effects of the slowdown in productivity gains, the consequences of the rise in income and wealth inequalities on the dynamics and composition of aggregate demand, and the burden of ageing populations on public budgets and social accounts. Not forgetting the challenges of the recomposition of power between the big players on the world stage, on the geopolitical level, with the confrontation between the United States and China, and from the angle of control of the digital revolution and the applications of artificial intelligence under the aegis of the world’s technological oligopolies. All these phenomena underlie and explain a large part of the macroeconomic imbalances and tensions expressed on the markets or translated into currency or trade wars, and leading, in the presence of this or that shock, to crises. In addition, there is of course the need to anticipate and reduce all the spillover mechanisms associated with international integration, both at the level of production chains and international trade and at the level of global finance.
While monetary and financial imbalances, macroeconomic tensions, over-indebtedness and over-reactions on the asset markets are the immediate source of crises in the presence of shocks, they appear as by-products of these global risks, of these heavy trends, from which practically no national economy escapes and which, at the same time, reduce the margins for manoeuvre of policymakers, fragment societies and social cohesion and jeopardise economic growth. If these major trends are not reversed in the post-Covid era, their macro-criticality, in the words of the IMF, can only lead to new systemic crises, not only in the global economy but also in individual societies.
An abyss of uncertainty
The current recovery, however welcome, must not obscure the abyss of uncertainty that hangs over the world economy and the fact that these global risks are at the mercy of new local shocks, whether political, technological, climatic or financial, which will inevitably lead to new systemic crises if we do not succeed in initiating a new great transformation, to use Karl Polanyi’s beautiful expression, which cannot be reduced to the simple plugging of market imperfections. Anticipating crises, in order to better prevent them, makes it imperative to respond to global risks. For they could have two types of negative externalities on the solidity of the economic recovery that is taking shape today: through their depressive effects on potential growth and the long-term dynamics of economies, despite technological advances; and through their consequences, both on the critical connections of the vast network that the world economy has become, without any real global governance, and on the macroeconomic and macro-financial imbalances that lead to crises, on the scale of national economies.
Since there is much reference today to Joseph Schumpeter and the virtuous dynamic that would be induced by the process of creative destruction supported by a new economy of innovation, let us recall the question that he asked himself in 1942 in Capitalism, Socialism and Democracy: “Can capitalism survive? No, I don’t think it can”.
In order to know whether we are capable of anticipating new crises, several types of questions arise
That is the purpose of this session of Les Rencontres Économiques d’Aix-en-Provence, devoted this year to the uncertainties weighing on the recovery, is to take stock of the sources of turbulence and crises in the “world after”. Without claiming to be exhaustive, this covers several types of questions:
- What types of economic crises are most likely to reoccur in the short and medium term in the “world after”? Financial crises, sovereign debt crises, crises in production systems and the real economy, social crises, political or geopolitical crises, crises in industrial countries, crises among emerging economies?
- What are the global risks, i.e. the fundamental factors that are economic in nature, but also technological and societal, the historical trends, the main sources of tension, that are likely to turn into shocks that call into question growth and the sustainability of the recovery and that could trigger new economic crises?
- What are the urgent public policy issues, on the part of states or in terms of collective action at the international level, that could improve the resilience of national economies and the global economy, even if it means reducing economic efficiency, in order to reduce the probability and/or scale of new global crises? And, more specifically, what are the risks of new systemic crises that a normalisation of fiscal and monetary policies, resulting in a significant rise in interest rates, could cause for financial stability and ultimately for growth?