EUROPEAN COMMISSION DIRECTORATE GENERAL ECONOMIC AND FINANCIAL AFFAIRS Major crises: historical comparisons to the Great Depression and the classical Gold Standard Ronald Albers* and Lars Jonung** *European Commission, DG ECFIN ** Lund University Presentation for 6th Eurostat Colloquium on “Modern Tools for Business Cycle Analysis: the lessons from global economic crisis” Disclaimer: The material and views presented here are the sole responsibility of the author and do not in any way represent an official position of the European Commission or of Lund University
Based on European Economy special report on the crisis (updated version to be published) http://ec.europa.eu/economy_finance/thematic_articles/article15893_en.htm 2
Structure of the presentation � The current crisis from an historical perspective – Tracking major crises – Extending comparisons with the Great Depression to the classical Gold Standard (1907) – Awareness of the differences: you never step into the same river twice � Policy responses – What are the key differences with earlier episodes? – What lessons been learnt and are they the right ones? – What options and pitfalls for policy in the period ahead? 3
Root causes of the crisis Macroeconomic roots Microeconomic roots • Complacency of policy makers (belief • Originate and distribute model in Great Moderation) • Complex and opaque financial • Abundant global liquidity diverted to products real estate (global imbalances) • Conflicts of interest of rating agencies • Rapid credit growth, high leveraging • Incentives for short-run risk taking • Incentives to move assets off balance sheet • Maturity mismatches • Weaknesses in supervision and regulation • Moral hazard Powerful domino effects and feedback loops when bubbles pop 4
Depth and global span of the crisis unprecedented after WWII • Trough in the contraction GDP of GDP (4.5%) well below 6 the average of 113 % year on year growth episodes of financial 4 distress between 1980 and 2 2008, as compiled by IMF 0 (2008) t-12 t-8 t-4 t = 0 t+4 t+8 t+12 -2 • Slower rebound of 113 historical crises (median) EA (current crisis) -4 consumption growth in the UK (current crisis) US (current crisis) current crisis. -6 Note: y-o-y grow th rates during tw elve quarters before and after the • Housing and business beginning (0) of a finanical stress episode. Dotted lines refer to forecasts. Sources: IMF, OECD, European Commission. investment also more affected in the current crisis. 5
Historical perspectives • Great Depression the common benchmark • It served also as a great lesson for policy intervention in the current crisis – Financial meltdown avoided – Monetary policy eased aggressively – Substantial fiscal stimulus – No large scale protectionism • What perspectives can even longer-term comparisons yield? 6
Transmission channels • Trade • Capital flows • Financial sector linkages and financial innovation • Monetary and fiscal policy • Exchange rate adjustments • Risk premia and portfolio shifts • Price adjustments and tariffs • Institutional framework and other ‘(in)visible (de)stabilisers • Speed and quality of information transfer 7
Empirical basis • Especially when comparing with the pre- WWI era, quality of the data cannot easily bear the weight of the analysis • Disparate sources hinder comparability • Chronology of episodes of financial stress relatively well documented (Reinhart and Rogoff, Bordo) • But link with real economy and financial sector impact sometimes difficult to make 8
Comparing the downturn in economic activity Graph I.2 .1: G DP levels during three globa l crise s 125 2007-2014 120 1907-1913 115 192 9-19 39 110 105 100 95 1907=100 90 1929=100 85 2007=100 80 1 2 3 4 5 6 7 8 9 10 11 Source: Smits, W oltjer and Ma (2009), Maddison (2007), W orld Economic Outlook Database, Interim forecast of September 2009 and own calculations. 9
comparisons with the 1930s 10
Output rebounds much faster in current episode Graph I.2.3: World industrial output during the Great Depression and the current crisis April 2008 - December 2009 100 95 June 1929=100 April 2008=100 90 85 80 June 1929 - August 1933 75 70 65 60 1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 Months into the crisis Source: League of Nations Monthly Bulletin of Statistics from Eichengreen and O'Rourke (2009) and ECFIN database. 11
Trade patterns Fall in world trade less, but much faster in 2008-2009 than in the 1930s Graph I.2.4: The decline in world trade during the Graph I.2.5: The decline in world trade during the crisis of 1929-1933 crisis of 2008-2009 Jun (1929 = 100) Apr (2008 = 100) 110 110 May Jul Mar May 100 100 90 90 Apr Aug Feb Jun 80 80 70 70 Mar 60 Sep Jan 60 Jul Dec Aug Feb Oct Nov Sep Jan Nov Dec Oct Notes: Light blue from Jun-1929 to Jul-1932 (minimum Jun-1929); dark blue from Aug-1932. Source: Notes: Light blue from April 2008 to Mar 2009 (minimum Feb-2009); dark blue from Apr-2009. Source: League of Nations Monthly Bulletin of Statistics from Eichengreen and O'Rourke (2009). CPB, Commission services calculations. 12
Protectionist backlash in the 1930s World average of own tariffs for 35 countries, 1865- 1996, un-weighted average, per cent of GDP 30 World War II World War I 25 20 15 10 5 0 1865 1885 1905 1925 1945 1965 1985 Source: Clemens and Williamson (2001). Comment: As a rule average tariff rates are calculated as the total revenue from import duties divided by the value of total imports in the same year. See the data appendix to Clemens and Williamson (2001). 13
Monetary contraction avoided 14
Fiscal policy adjustments of different order of magnitude 15
Labour market adjustment less strong in current episode Graph I.2.6: Unemployment rates during the Great Depression and the present crisis in the US and Europe 40 35 % 30 25 20 1929-1939* 15 10 USA 2008-2011 USA - forecast Europe** 5 Euro area - forecast 0 1 2 3 4 5 6 7 8 9 10 11 Years into the crisis Note: * 1929-1939 unemployment rates in industry. ** BEL, DEU, DNK, FRA, GBR, NLD, SWE. Source: Mitchell (1992), Garside (2007) and AMECO. 16
Crisis of 1907 emerges as the closest comparable episode in the classical Gold Standard era in some respects - but not all 17
Stylised cyclical chronology Real GDP growth (%); source: A Maddison database 10 8 6 4 2 0 1871 1876 1881 1886 1891 1896 1901 1906 1911 1916 1921 1926 1931 1936 -2 -4 -6 -8 advanced Western economies Latin America 18
Relatively stable monetary ratios to GDP Ratios to GDP (%) 1880-1913 source: Flandreau and Zumer 20 16 12 8 4 0 1880: 1883: 1886: 1889: 1892: 1895: 1898: 1901: 1904: 1907: 1910: 1913: M1 reserves government revenue 19
Fiscal deficits contained, public debts less so, but declining Fiscal ratios to GDP (%) 1880-1913 source: Flandreau and Zumer 0.6 90 80 0.4 70 0.2 60 0.0 50 1880: 1883: 1886: 1889: 1892: 1895: 1898: 1901: 1904: 1907: 1910: 1913: -0.2 40 -0.4 30 -0.6 20 -0.8 10 -1.0 0 public deficit public debt (rhs) 20
Share prices Dow Jones Industrial share price index preceding peak year (t0) = 100 240 200 160 120 80 40 0 t 1 2 3 4 5 6 peak 1907 peak 1929 peak 1980 peak 2000 peak 2008 21
Linking back to the current policy challenges 22
Rise in size of government increased fiscal multipliers Advanced economies - government expenditure ratio to GDP (%) source: Tanzi & Schuknecht, Flandreau & Zumer, Commission services 60 50 40 30 20 10 0 1870 1913 1920 1937 1960 1996 2001 2003 2008 2011 23
An illustration of crisis control and mitigation: unprecedented fiscal stimulus in 2009… Fiscal stimulus in 2009 3.0 Fiscal impulse 2.5 Impact lower extreme: if stimulus is permanent Impact upper extreme: if stimulus is temporary and accommodated 2.0 % of GDP Impact if stimulus is temporary 1.5 1.0 0.5 0.0 BG DK HU LT LV MA SK CY EE EL IT NL IE BE FR PT FI PO CZ EA EU SL LU SE DE UK AT ES US Source: European Commission. 24
Public debt is higher and rises much faster in current crisis Advanced economies - gross government debt ratio to GDP (%) source: Tanzi & Schuknecht, Flandreau & Zumer, Commission services 90 80 70 60 50 40 30 20 10 0 1870 1913 1920 1937 1960 1996 2001 2003 2008 2011 25
One illustration: the US 26
Historical comparisons: instructive, certainly interesting from an analytical point of view but limited by nature in ability to inform policy • Comparisons to the 30s add some insights but the situation is much different now • In some respects pattern of crisis and recovery fits better the 1907 experience – but also that analogy is far from perfect 27
Key parameters for policy • Balancing act between stabilisation, (fiscal) sustainability and overcoming of imbalances • Handling the debt overhang imposes constraints • (Re)learning lessons from the 1930s while not forgetting those of the 1970s • Classical Gold Standard reminder of the anchoring role of rules and importance of ‘invisible’ stabilisers • Rethinking macro-economics 28
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