360° Analysis

Wirtschaftskrise ohne Ende ?


January 20, 2012 23:34 EDT

Swiss journalist Dagma Wacker interviews Aymo Brunetti about his analysis of the Euro-zone crisis and about his book: Wirtschaftskrise ohne Ende?on the subject. The translated interview follows this short excerpt from the book.


Since the outbreak of the global economic crisis, economic questions are in the focus of public discourse. The sequence of shocks due to the economic bubble of the US real estate market, the panic in the global economy and the indebtedness in the Euro-zone, led to a constant presence of the economic crisis in the headlines. It is not exaggerated to speak of an economic once-in-a-hundred-years event.

The objective of this book is to explain this event in short and with accuracy – the book shows how the long-term multifaceted crisis came into being, how governments and central banks reacted to it, and which challenges still lie ahead. Therefore a few simple concepts will be used and the links between the different events, which led to the crisis, will be highlighted. On the one hand the book is aimed at readers interested in economics and who want to get a short overview of the different contexts. On the other hand it can serve as an introduction for those, who have not dealt intensively with economic issues yet or who feel that they have lost track of the events of the past few years.

During my work as a lecturer and as a politico-economic practitioner, I have never experienced such a big interest in economic issues as in the context of this crisis. At the same time, I could not find a short text among the many publications out there that I could have recommended as an overview to colleagues or students. Therefore I developed material step by step, for presentations and lectures, which eventually led to this book. To get things straight: there is no lack of excellent and interesting publications on different aspects of the crisis (see references). What is missing, from my point of view, is a short introduction that distils the essence and depicts the most important connections of the crisis; in that regard I hope I can make a contribution.

Foreword for the 2nd edition

The second edition of this book is published right in the middle of heavy discussions about an impending banking crisis in Europe. The developments, since the first edition was published in June 2011, indicate that the global crisis is, four years after the start of the troubles, not over yet. This new culmination illustrates again, that it is rewarding to deal with the backgrounds of the crisis as a whole and therefore with the reasons for all the problems. Since the developments, which led to the current troubles are definitely not new. In fact, they can all be traced back to one basic problem: the excessive indebtedness and the too risky behavior of the big, strong, and interconnected banks.

The fact that this book is aimed at the central role the banks played during all phases of the crisis, has proven to be appropriate as an explanation for the recent troubles as well. Because the book emphasizes the basic mechanics, without wanting to recreate every single development, there was almost no need for an adaptation of the text. Only those chapters were updated that deal with the crisis in the Euro-zone.

The Interview

“Wirtschaftskrise ohne Ende ?” or “Economic crisis without end? " is the book in which Aymo Brunetti, Head of the Directorate of Economic Policy at SECO, impressively and clearly sets out the causes of the financial crisis and their potential impact. An investor even said: “One should have given this book to top bankers to read. Then they would not have acted as riskily and we would not be in this situation.”

In the final chapter Brunetti warns that the crisis is far from over. On the contrary, the risks are still greater than the collateral. Time has shown this to be a prophecy that has proven to be true.

Dagma Wacker: What was your motivation and your goal for writing this book?
Aymo Brunetti: I could not find a short, commendable book that described the contexts of the financial crisis. I was often confronted with questions about the background of the crisis. Questions namely faced by people who usually have little to do with economics.

DW: Towards the end you describe the glass as ‘half empty ', but the situation has intensified dramatically ever since. How do you see it now?
AB: My current assessment as compared with the conclusions of the book has not fundamentally changed: there remain more risks than bright spots. Some of the risks referred to have occurred, so that the situation has worsened even more.

DW: In your opinion, what has induced this recent high volatility and the downturn?
AB: The debt problems which remain unresolved, especially in the Euro-States, which have their own fiscal policy but not their own monetary policy. This is combined with still undercapitalized and short term financed European banks. All this could be the source for further banking crises.

DW: In your book you above all blame the banks and their willingness to take risks for the crisis. Do you also blame them for the intensification?
AB: Ultimately, yes. Whereas blame sounds a little bit too preachy to me. The banks had for a long time strong incentives to take large risks. If banks were not invested as heavily in government bonds nowadays, one could tidily restructure the debt of the GIPS countries. However because due to the present state certain banks will not survive that, one tries to avoid a restructuring with expensive and ultimately scarcely targeted methods.

DW: To what extent are the entanglements caused by globalization involved in the present situation? Would the crisis be smaller or geographically limited with less globalization?
AB: A global economic crisis is in fact only possible in a globalized economy but such are the risks we take to benefit from the major advantages of the global division of labor. The benefits of globalization far outweigh the harm caused by the current crisis.

DW: Observers predict a sharp decline in the economy and world trade. What do you think?
AB: The risks for economic development have increased, no doubt. Also, experience shows that financial crises are followed by prolonged stagnations that are often characterized by the necessary reduction of debt.

DW: Beat Kappeler is anticipating a crisis length of at least ten years, you too?
AB: I would never trust myself to predict events beyond ten years from the present.

DW: And how do you see the development during these ten years?
AB: It seems plausible that the next few years are likely to be influenced by little dynamic growth in many countries.

DW: Are there any parallels between Switzerland and Japan?
AB: For Switzerland, in my opinion, the effects of the crisis are less clear. The Japanese economy has never been able to truly recover from the housing crisis in the early nineties. As a result, the state debt has risen sharply (more than 200% of the GDP). In addition, they have an unfavorable demographic structure. In comparison, Switzerland is in a better situation structurally.

DW: And the EU?
AB: Certain high-debt EU countries will indeed face severe years of stagnating or even declining economic output.

DW: Have the baby boomers been living beyond their means and are they leaving the subsequent generation a legacy of both debt and pension costs?
AB: This is so. Not only in the short term but above all with respect to the costs of their retirement arrangement.

DW: Switzerland seems to be currently doing quite well there. Will it continue like that?
AB: In fact, we do have a relatively good situation, especially also regarding the state finances. The consequence is the strong franc, which acts as a powerful brake to the development and could have high long-term cost in some sectors.

DW: Which region is expected to recover most quickly from the crisis and why?
AB: Most likely the emerging economies, especially in Asia. This will be because they have learned important lessons from the Asian crisis ten years ago and are now less vulnerable to crises.

DW: What is your view on the situation in the US?
AB: It is very serious, especially the debt situation. But also the monetary policy, which is extremely expansive. Normalization will not be easy. The United States will probably face economically difficult years after decades of overstimulation.

DW: In your book, you criticize the too rapid and too uncritical expansion of the euro. Now there are voices being raised that speak of only two alternatives: To allow certain countries to go bankrupt or the breakup of the euro? Former Chairman of the Federal Reserve Alan Greenspan has already orally laid the project Euro to rest.

AB:The alternatives are truly unpleasant. A dissolution of the euro zone in the middle of a crisis would lead to an economic disaster in my opinion. Going bankrupt in some cases, meaning the restructuring of our debts, is only possible for the countries when the banks are more stable. There probably will be a creeping fiscal integration in the medium term.

DW: Would the reintroduction of the country's currency and its devaluation be a viable alternative? In the book, you express a critical view of this, but the situation has since intensified.
AB: Precisely because the situation has worsened, undertaking devaluation would be a foolhardy policy. A withdrawal of a fiscally weak country in the middle of a financial crisis would immediately cause a collapse of the banking system. And it would not be much better for the remaining euro-zone when Germany merges.

DW: The primary idea for the establishment of the European Union was the building of common economic interests to bind the members in order to prevent expensive conflicts.
AB: This has clearly not succeeded, because the mechanisms of sanctions were missing. It proved to be politically impossible to punish a sovereign country for the violation of the Stability and Growth Pact.

DW: Now seems to be the situation where hardship binds the members. Merkel and Sarkozy call for a common economic and financial policy.
AB: As I said, I think that it is ultimately going in the direction of greater fiscal integration. However that could become quite expensive for the fiscally stronger states. One understands the reluctance from this side against the euro bonds.

DW: You also referred to the possibility of a closer union in your book. Is the development of the EU into a federation of states the only way to save the euro?
AB: In the long term it should go in that direction. But politically it is very difficult to sell.

DW: Even in Germany, the call for direct democracy and the will for an increased say (Stuttgart 21, etc) is becoming increasingly loud. The Greeks strike against austerity packages. Are such radical long-term cost-cutting measures at all politically feasible?

AB: That's a legitimate question, which I cannot competently answer as an economist. Though I am concerned about the political consequences of many years of brutal saving measures.

DW: How hard will the Swiss economy suffer under the strong franc? Where do you see the greatest impact?
AB: If it stays on the currently heavily overvalued level, this will occasion substantial costs in the export-oriented industries.

DW: In your book, it's always about the relationship of political regulation and freedom of functioning market forces. Is there an ideal formula?
AB: From the perspective of economic theory it is relatively clear: In order to support efficient solutions, the state must intervene where market failures exist. This clearly improves the control of the situation. It is relatively undisputed among economists where such market failure exists. There are for example market failures in case of the ‘Too Big to Fail’ banks. The political acceptance is anything but simple. One can see that in the environmental policy as well as the enforcement of stricter capital requirements for banks.

The views expressed in this article are the author's own and do not necessarily reflect Fair Observer’s editorial policy.


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