Since the eruption of the global financial crisis, problems that have been addressed and measures that have been implemented focused on the apparent outcome of the economic architecture at the macroeconomic and microeconomic level, and obviously the root causes of the problem and therefore discussions of reliable or sustained solutions have been left to academic fantasies.
As we have been discussing from the onset of the crisis, such result-oriented approaches might have brought some extra time at the beginning, but as the crisis evolves into a perfect storm causing stagnated growth, rising unemployment, declining tax revenue and a loss of capacity to roll over debt cycles, results-oriented policies will lose their credibility with a narrowed realm of applicability and a high cost structure.
Unfortunately, today this scenario has been proven correct almost everywhere, particularly in Europe. To remind you, the EU countries have lost critical time in recent years discussing what to do and how to do it. As of today, forget about any long-term oriented solutions; the worst news is that the realm of medium and short-term measures is critically narrowed as well.
As the eurozone has entered into a visible recession with an average 11 percent unemployment rate, expectations for expansionary monetary policies to boost growth and implementation of bond selling either by the European Central Bank (ECB) or by the European Financial Stability Facility have increased. Having considered all these developments, last week ECB President Mario Draghi announced that “whatever is required to support the eurozone and the stagnant economy, we are without doubt going to implement it with decisiveness.”
Upon this announcement, sentiments in the EU markets took a turn for the better. When I was asked about this in the media, I argued: “According to my ongoing scenario, unfortunately this announcement looks like a sun that might weakly shine unexpectedly for an unknown period without heating even itself during winter season. Although ECB President Mario Draghi announced such a positive statement to gain some extra time, neither he nor the market players believe in it in the sense that there are no strong applicable tools anymore.”
Let's see what happened just after one week. Rather than implementing the expected policies, Draghi announced on Tuesday that the “ECB will draw up a mechanism in the coming weeks to make outright purchases to stabilize stressed eurozone borrowing costs and to stabilize interest rates.” He also argued that “the [ECB's] Governing Council will consider further non-standard monetary policy measures according to what is required to repair monetary policy transmission. In the coming weeks we will design the appropriate modalities for such policy measures.”
Obviously, as expectations were for immediate action, this kind of wishful thinking and open-ended statements created another wave of negative sentiments all over the world but particularly in the EU.
As there is no collective leadership capability that can carry out the real reforms in the global economy, it seems to me that we are moving into a new stage in the global crisis in the sense that the ever deepening crisis will create and force its own solutions with more pain and presumably less gain because it is not a managed and coordinated solution.
Our solution is institutional in nature. In order to bring confidence back to the markets, future oriented expectations of economic actors have to be turned into a positive outlook so that the economic behavior of the agents can be forecast. For that, we need a new incentive scheme at a systemic base. The first institutional message is that the global economic structure that was institutionalized around the early 1980s, that is neo-liberal globalization, is going to be reversed and replaced by a new institutional environment in which a code of conduct, a pattern of individual as well as corporate behavior could be shaped with a different payoff matrix. In my next column, the nature of institutions and institutional solutions will be elaborated upon.