In response to the crisis, the State has intervened to rescue banks and financial institutions, to restore confidence in the market, and to guarantee loans and transactions. Within the space of a few weeks, the State in many countries has become the largest shareholder in major banks and insurance companies, resuming the role it had abandoned during the protracted era of privatizations. The participants in this seminar emphasized, however, that this intervention has involved emergency or essential measures which have not been backed up by any theoretical formulation of their underlying rationale or modeling of their effects.
The market remains a pillar of the economic system, but it still is not clear how long it will remain so. Nor, it was observed, is there any exit strategy for this type of crisis-driven “nationalization”. More generally, public authorities, both at the political and operational levels, need to adopt new rules, given that the market has proven incapable of regulating itself effectively. In this regard, collaboration between the public and private spheres, with the former delegating many control, oversight and rating responsibilities to the latter, appears to have been instrumental in fueling many of the causes of the current crisis. Hence, an overhaul of the control, oversight and antitrust framework has become crucial, including so as to restore a level playing field preventing distorted competition between banks in receipt of State assistance and others that are not. At the same time, there needs to be a commitment towards maintaining a market culture that preserves the values of fairness, competition and merit, whilst avoiding serious harm being inflicted on the functioning of the single European market.
The participants noted that, to date, public intervention has chiefly been concerned with preventing the tide of the financial crisis from sweeping away the banking system and people’s savings. However, in order to reduce the impact of the crisis on the real economy, initiatives are also needed to support the production system, starting with measures that guarantee an adequate flow of credit to businesses, including small to medium-sized enterprises. In other words, public authorities should not focus exclusively on rescuing the banking and finance sector without ensuring that it is then in a position to support investment and consumption by businesses and individuals. For their own part, banks find themselves in the difficult position of having to protect their capital strength in a situation which has seen a major deterioration in the quality of their loan assets.
There may be sectors where State assistance is needed. For Europe, the challenge is that of issuing EU government bonds and reviving European industrial policy, which so far has played second fiddle to agricultural policy. Hence, it is necessary to determine what role public demand for goods and services can play. In the U.S., for example, the military is still a driving sector of the economy, whilst infrastructure is a fundamental sector everywhere, particularly tangible transport infrastructure. Lastly, there is the question of whether the State could play a leading role in the areas of new technology, life sciences and broadband development, which, given they would require a range of civil infrastructure works, could also contribute to boosting the construction sector and creating a demand for labor.
Finally, the financial and economic crisis also, inevitably, involves a social crisis, which has exposed the gaps and distortions of our welfare State. Tax concessions and demand subsidies could be used to prop up consumption and meet the essential needs of citizens in conditions of serious hardship, whilst other measures could be aimed at guaranteeing mortgage repayments. Nevertheless, the participants acknowledged that the issue of how to fund social safety nets remains unresolved. Efforts also need to be made to determine the available margins for rebalancing welfare expenditure, for example, by redistributing resources from the area of contributions-based pension schemes to that of social welfare programs, with the introduction of measures such as a guaranteed minimum income and assistance for needy families. In this regard, an important contribution could also be made by private welfare initiatives and banking foundations, which, though benefiting from lower revenues, continue to financially support many socially strategic sectors, such as research and health.