The storm after the calm

Paris—Could the financial crisis of 2007-2008 happen again? Since the crisis erupted, there has been no shortage of opportunities—in the form of inadequate conclusions and decisions by officials—to nurture one’s anxiety about that prospect.

Over the course of the three G-20 summits held since the crisis, world leaders have agreed to tighten financial regulation slightly, but only for banks, while leaving other market players free of restrictions and scrutiny. As was true before the crisis, no one is monitoring the almost limitless “virtual” market for derivatives, where money moves freely without official rules or contact with the real economy.

And large players have plenty of cash with which to speculate, especially given the US Federal Reserve’s decision to inundate the world with a sea of liquidity. The result has not been investment in productive assets that boost employment in the US, as the Fed intended, but rather a run-up in global commodity prices and a growing bubble in the housing markets of the major emerging economies.

Simply put, there are no brakes that could stop the global economy from blundering into another financial crisis. Tax havens remain numerous, and their regulation anarchic. The skimpy enforcement measures undertaken by bank regulators since the crisis are nowhere near appropriate to what is at stake. Governments have refused to reinstate the absolute wall of separation between commercial and investment banks, leaving taxpayers on the hook to pay deposit-insurance claims when the bubble-prone financial sector blows up.

Indeed, it is now clear that governments prevented a full-scale collapse of the financial system in 2008 by transforming toxic private debt into public debt. It worked then, but it cannot work now, in large part because it contributed to the new, looming crisis in financial markets brought on by countries’ soaring public-debt burdens.

We cannot blame today’s emerging crisis solely on our current and recent governments’ actions. For more than 20 years, the world’s major capitalist economies have been led to borrow heavily and unabashedly, in large by a new rule, adopted worldwide beginning in the 1970s and 1980s, that tied monetary policy to targets for price growth. This dangerous idea—proposed in France by Jacques Rueff in 1958, adopted throughout Europe over the following two decades and extended to the European Central Bank—was intended to limit the tendency of capitalist economies to aggravate inflation as soon as they hit full employment.

But the rule ultimately had the terrifying result of obliging countries to borrow from private banks at market prices to guarantee their treasuries’ integrity. This created powerful barriers to public investment, as government spending was siphoned into massive profits for banks and their shareholders. With the possible exception of the four Scandinavian countries, no society with a market economy found, or even sought, the equilibrium between state and market necessary to maintain a sufficient level of public services.

But even institutionalized monetary austerity has not stopped national public-debt levels from reaching 50-100 percent of GDP in Europe (higher in Greece and Italy) and surpassing 100 percent in the United States. Clearly, the official response to the 2008 crisis was perverse and detrimental at all levels.

Moreover, the 17 European countries that currently use the euro cannot devalue their currency unilaterally. The euro is an important collective step forward, but to insure its credibility as a truly common currency, it should be treated as the embodiment of a true and whole-hearted solidarity. The German government still does not admit that—as if France before the euro would have offered up Seine-Saint-Denis or Corsica to pay off its foreign debts to keep the franc.

Greece, a eurozone member, is now in just such an untenable situation. If Greece defaults, an enormous amount of speculation will be possible. Indeed, financial markets are unlikely to differentiate between Greek debt and that of other heavily indebted economies, including Portugal, Ireland, Spain, and even Italy, the most recent eurozone member to come under speculative attack.

This could well create a financial tsunami worth trillions of dollars, which explains the energy with which the European Central Bank and its president, Jean-Claude Trichet, have tried to head off the worst. Great Britain, Belgium and even France find themselves at a debt level that does not leave much hope that they will escape unscathed.

Meanwhile, the United States cannot meet its next debt payment unless Congress and the president reach an agreement to raise the national debt ceiling. The consequences of a US default have rightly been described with growing alarm as the risk increases.

It is still possible to repair all of this. But the necessary financial measures can no longer be implemented while respecting states’ traditional and full sovereignty. The US must renounce the imperialism of the dollar, and Germany must abandon its dream of a “deutscheuro,” managed as if the other 16 euro members were historical and cultural extensions of the German nation. The approaching storm, and the measures that must be taken to address it, will bring enormous change. Project Syndicate

Michel Rocard is a former prime minister of France and a former leader of the Socialist Party.