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The GFC: Views from London

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23 September 2009 10:32

I’m just back from a visit to the UK – my first in about four years. As well as a chance to catch up with family, my visit gave me a useful opportunity to speak to a range of people in London – academics, journalists, economists, think tankers and policymakers – about the shape of the post-GFC world as viewed by those living in one of the two financial capitals of its pre-GFC incarnation. (There was also a fair bit of interest in why Australia had enjoyed such a good crisis — I found myself joking that, from an Australian perspective, the real international crisis had been the last Ashes series). 

While my meetings produced a wide range of views and positions, here are a few of the propositions about the world economy that caught my attention:

  • Europe matters less than it (perhaps) should: Possibly the best summation of Europe's role in the global economy came in one of my first meetings, with the proposition, 'Europe matters on average, but not at the margin'. So while the European economy is clearly massive – last year the Euro area was the world's second largest economy – and European banks and companies are a major international force, the real action in terms of what will drive the future of the global economy will increasingly be found elsewhere. When I ran this view past most of my subsequent interlocutors, there was very little dissent, although there was a wider range of views on why this was so (demographics v. institutional failings being one particularly stark dividing line), and hence what could change the diagnosis.
  • The euro had a pretty good crisis and is here to stay: there was a fair degree of consensus that fears about a break-up of the Euro-area during the height of the GFC had been wildly overdone, a view that was shared even by those more sceptical about the merits of the single currency. The euro had now marked its tenth anniversary, survived yet another test, and performed an important role in sustaining the single market by removing the problems that would have been created by a series of currency adjustments, went the arguments. Forecasts of a breakup were way off the mark. 
  • The future of the Gs is still up for grabs: with Pittsburgh looming, there was quite a bit of attention being paid to the role of the G-20 in the international economic architecture. Once again, there was a fairly broad agreement that the G-20 had performed pretty well to date (albeit against the very low benchmark set by previous international gatherings) and that the G-7 was no longer a credible mechanism for managing the world economy. However, there was no consensus that the G-20 would be a long-term winner from the crisis, with a surprising number willing to make the case that it was too big or lacking the 'right' membership in some way, and with a G-7- (for example a G-14) still a contender.
  • China is the next 'too good to be true' story: arguably one big lesson of the GFC was that when something looks too good to be true (see for example the Great Moderation and the End of Risk), it will eventually turn out that it isn't true after all.  One of my interlocutors argued that a quick review of the world economy at the moment would throw up China as the next candidate for a 'too good to be true story', and a degree of pessimism about long-term Chinese economic prospects was a theme across a majority of meetings when East Asia was discussed. Going on my (admittedly unrepresentative) sample, analysts in London seemed on average to be more sceptical about China's prospects than their Australian counterparts. That said, pretty much everyone agreed that China had the 'best' crisis of any major economy, especially in terms of the effect on its relative international standing.
  • It's an oligarchs' world: several people argued that one of the most insightful things written about the GFC to date was the essay by Simon Johnson on the US financial oligarchy, noting that as the GFC bottomed out, the likelihood of radical financial reform was receding almost as rapidly as it did after the Asian financial crisis. Put this together with the view that the big winner from the GFC in the international prestige stakes has been Beijing, and you get the proposition advanced by a couple of my contacts that the future of the global economy will be dictated by two sets of oligarchs.
  • Economics hasn't come out of the GFC that badly: in contrast to the arguments that the crisis has been extremely bad for the economics profession, a number of discussions (warning: severe sample bias at work on this one!) pressed the view that in fact the lesson for economics from the GFC was a positive one. Contrary to early fears, there had been no re-run of the Great Depression, no retread of Smoot-Hawley (although the US action against Chinese tyres did sound some warning bells) and no fragmentation of the world economy. Policy had learned enough from economic history to avoid repeating it after all, and this was a significant achievement to be set against the failure to forecast the crisis.

Photo by Flickr user Tawcan, used under a Creative Commons license.

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