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Economic policies, credit systems and business strategies: how to overcome the crisis

    • Venice
    • 22 May 2009

          The crisis we are experiencing has not spared anyone, taking in the economy, society and institutions. It has hit the financial sector, spilled over into the real economy and labor market, and called into question the role of the State and international organizations. The crisis has also raised doubts regarding our model of development, the ability of the political sphere to control economic processes, and the reliability of those who had sufficient information from which to predict the worst financial disaster since the end of the Second World War and who did not do so. However, the crisis, which also represents one of the historic interludes of the last century, is a transient phenomenon – in the sense that it had a beginning and will come to an end.

          Hence, the starting premise of the discussions during this seminar was that we will come out of the current crisis, but the question posed was: How? What scenarios await us? What role can the policies of governments and global institutions still play in steering the transition from one economic system to another? How do we ensure that the huge injection of liquidity into the market aimed at stemming the crisis does not once again end up solely benefiting the financial sector, but rather is passed on to the business sphere and the labor market through the conduit of credit?

          Leaving aside particular views on the responsibility of individual States or patterns of behavior of market participants, the prevailing opinion amongst the seminar participants was that after the crisis, nothing will be the same as it was before. From the “turbo-capitalism” of recent years, fueled by a worship of the short term and an obsession for immediate profit, the world will emerge with a paradigm of growth that is different from that of the past. Whatever the visual transposition of this new paradigm – be it “bathtub” or “L-shaped”, to name but two of the models described during the seminar – the revolution will result in a transformation of global power relations. In truth, the change is already in progress, as demonstrated by the way in which the G20 has rapidly established itself in place of a G8 that is now devoid of any semblance of representativeness. Less clear, however, is the direction in which this development is heading. At the moment, the two most likely alternatives seem to be either a solution geared towards maintaining stability and comprising the formalization of a G13-14, which will also see the participation of countries considered “emerging” up till now, or, at the other extreme, the creation of a G2 consisting of the United States and China, the real global economic powerhouses.

          This latter scenario, it was observed, would come as a blow to Europe – and an even heavier one considering that the EU is now one of the largest integrated markets in the world. However, its institutional set-up is not equal to the task. The stalling of the EU integration process, which ran aground with the failure of the constitutional process and is symbolized by a weak Commission nearing the end of its term, has ended up hampering any serious attempt to coordinate the economic policies of EU Member States. Whilst the proposals put forward to revive its supranational profile – such as a review of the mechanisms for formulating the EU’s budget or the call for a gradual openness towards the coordination of fiscal policies – seem a step in the right direction, there is no doubt that unless there is an immediate communitarian drive the Europe Union risks being downgraded, especially given the long-term growth forecasts and inexorable trends such as the progressive aging of the European population.

          What is surprising about the lack of a coherent European response to the crisis, in terms of monetary policy, is the activism of the ECB, which, while not relinquishing its mission to maintain price stability, has sought to keep interest rates low and has proceeded to inject massive amounts of liquidity, establishing itself both as a system with global influence (equal only to the Fed) and as the candidate institution to take on the European role of supervising and overseeing the financial markets. The participants underlined that what remains to be seen is the extent to which this new approach to the management of monetary policy – never attempted before by the Frankfurt-based institution and, according to some, foreign to its statutory constituency – is sustainable in the long run. Also unclear is whether it is capable of translating into effective action on the use of exchange rates, especially as regards the relationship between the euro, the US dollar and Asian currencies, whilst at the same time resulting in an actual injection of liquidity into the real economy rather than into the financial sector.

          It was noted that with the onset of the crisis, the time factor has become critical. However, it is critical in a different way for the political sphere, responsible for taking action based on a medium to long-term perspective, than it is for the business world, which today must almost inevitably look to the short or very short term. Furthermore, the time factor also affects the development of the crisis from one sector to another and between different areas of policy. Put more simply, its effects do not manifest themselves simultaneously. For instance, whilst the red light now seems to be turning amber in the area of finance, it is not yet entirely clear when and at what rate the real crisis will hit the production system and the labor market.

          Of course, this uncertainty also affects Italy, even though it seems to be weathering the storm of the crisis better than other advanced countries. The participants felt that several factors have contributed to this resilience. Firstly, there is Italy’s credit system, still deeply-rooted in the local community and which, despite the mania for the mergers and acquisitions that have been all the rage in recent years, has succeeded – more so than the major banking groups – in gauging the real needs of the Italian production system, particularly those of the SMEs that make up a large part of it. Another especially important factor is knowledge. Small banks tend to interact directly with entrepreneurs and know their strengths and limitations. As a result, they are able to assess credit applications on the basis of more general – and not just financial – indicators of creditworthiness. Ultimately, this knowledge fosters trust and a willingness to share risk. Indeed, on closer examination, this theoretically represents a return to banks functioning as commercial undertakings but with a strong sense of responsibility towards the community.

          It is to this sense of responsibility that Italian businesses are now appealing, lamenting first and foremost an increasingly pressing lack of liquidity, in the sense of cashflow.

          Naturally, in the background there remains a range of public policies that need to be implemented in order to overcome the crisis. Italians, as is well-known, have an extraordinary propensity to accumulate personal savings, which relatively speaking has kept at bay the disaster which, for instance, has struck US consumers. Nevertheless, the participants noted that this strength is in stark contrast with the most worrying weakness of the Italian economy, namely, the state of its public finances.

          The consensus of those attending the seminar was that while Italy has chronic problems to resolve (such as lagging productivity, weak social capital, an unbalanced welfare system, and an inefficient and poorly organized public administration), it also has great potential. The challenge, above all, will be to use this period to engage the entire country – including institutions at all levels, the business sphere, the financial sector, employee groups and the non-profit sector, in the name of subsidiarity – in a nationwide effort aimed at correcting weaknesses and exploiting strengths so as to overcome the crisis and look beyond the narrow horizon of the short term.

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