Varieties of capitalism and

responses to the financial crisis:

the European Social model versus

the US model

JEAN MONNET CHAIR

Pasquale Tridico

University Roma Tre

Outline

Financial crisis 2007 and real effect with

economic crisis 2008-10: Great Recession (-

3.2%), Unemployment (10%) and losses (5

trillion $)

Resurgence of Keynesian policy and demise

of Washington Consensus

Responses in EU and in US (comparative

analysis and varieties of capitalism)

Conclusion and policy suggestions

Domino Effect of the Subprime Crisis (has hit the

US economy and other economies)

Commodity price

Housing price

Mortgages

CDO Volumes

BUBBLES AND BURSTS

Failed banks in US

0

50

100

150

200

250

300

350

400

2007 2008 2009 2010

Ass

ets

in $

bn a

nd n

umbe

r of

ban

ks

0

1

2

3

4

5

6

ratio

ass

ets/

bank

s

Assets $bn Number failed banks ratio assets/banks

Mortgage Delinquencies

Bank Failures

The sequence of the financial crisis

Background: household debt and bubble in the housing sector, low interest rates coupled with global imbalances and saving glut

Fall of 2007: US housing sector crisis and collapse of the sub-prime market.

Default correlations on mortgages spread to the world through the complex system of securitization.

MBS downgraded by CRA (some months before were giving artificially high ratings); nobody wanted them now. Lost value, poor returns (toxic assets)

Credit markets seized up, expectations worsened, interbank lending crunched, banks failed, Interest rates went up with more trouble for mortgage owners and increased default correlations. Bubbles burst!

Solvency problems and liquidity problems

Central banks liquidity injections.

The end of a dream?

Characteris

tics

Models

Competi

tion

Economic

Regulation

Main

Economic

Actors

Rel. betwn

public &

private

Int.national

Eco

Relation

Taxation Finance

Anglo-

saxon

model

(USA, UK,

Irland)

Promoting

free

competition

Deregulatn,

withdrawal

of the State

from the

Economy

Firms,

Corpora

tions,

Markets,

Residual

public

sector:

Market-

oriented

Global

competition

Low taxes,

no or little

progressive

rate

Deregulatn.

Liberalizatn

Finance for

Consumptn

Investments

Corporative

model

(Germany)

European

Balancing

Cooperation

and

Competition

Stricter

regulation

Tripartite

structures

(business

clubs, Trade

unions,

govrnment)

Public-

private

partnerships

Protection

of strategic

sectors in an

open

economy

High

taxation to

finance

Welfare

State

Developed

finance for

Investments

; extensive

credit for

small firms;

limited

finance and

credit for

consumptio

n; financial

regulation,

transparenc

y, protection

of saving;

higher taxes

on financial

corporation;

Dirigiste

model

(France)

Social

State

Control,

regulated

competition

National

Accumulati

on and

Regulation

Strategy

Private and

Public

sectors

Public-

private

partnerships

under State

guide

Protectio

nism

High Taxes

and

Collective

Recourses

Social

Democratic

model

(Scandinavi

an

countries)

Model

State

controlled

liberalisa

tion and

competition

Knowledge

and

innovation

as economic

guide for

regulation

Public and

Private

Firms and

Ethic

Corpora

tions

Public-

private

partnership

in order to

realize

Social

Cohesion

National

Actors,

moderate

free

competition,

open

economy

High wages,

career

perspective,

High and

progressive

tax rate

Avg. Growth of GDP per capita in EU and US, 1961-2009

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

Germany France Spain Italy EU15 USA

1961-80 1981-91 1992-2009

FORDISM (1946-1970) AND POST-FORDISM (1980-TODAY)

Post fordism Market Financialization 1988-2006

Market Finacialization: 1988-2006 (% of GDP)

0

20

40

60

80

100

120

140

160

180

Aus

tralia

Can

ada

Den

mark

Franc

e

German

y

Greece

Irelan

dIta

ly

Japa

n

Nethe

rlan

ds

Norway

Portuga

l

Spa

in

United Kingd

om

United States

1988 2006

Correlation between Labur Flexibility and Capital Financialization

Flexibility and finacialization, selected countries

-100

-50

0

50

100

150

Belgi

um

Den

mar

k

Finla

nd

Ger

man

y

Gre

ece

Italy

Japa

n

Net

herla

nds

Nor

way

Portu

gal

Spain

Swed

en

aver

age

EPL trend 1990-2000 financialization 2000s

Source: World Bank 2010, online database

The root of the crisis since the end of

1970

Profit soar

Wages stagnated

Inequality increased

Consumption kept up thanks to

financialization

private debt (financial innovation)

public debt (bonds China-US)

Post fordism: Market Financialization and Inequality

Australia

Canada

Denmark

France

Germania

Greece

Ireland

Italy

Japan

Netherland

Norway

Portugal

Spain

Sweden

United Kingdom

United States

25

30

35

40

G

ini M

id 2

00

0s

60 80 100 120 140 160 Financialization 2006

Australia

Canada

Denmark

France

GermaniaGreece

IrelandItaly Japan

NetherlandNorway

Portugal Spain

Sweden

United KingdomUnited States0

12

3

EP

L 2

000

s

60 80 100 120 140 1602006fncz

Post fordism: Market Financialization and Lab Flexibility

Wage dispersion, selected countries

Source: Euromemorandum 2010

Wage shares on GDP, selected countries

Source: Euromemorandum 2010

Family debt and inequality in US

• 1980 : 80% of GDP (debt)

• 2007: 140% of GDP (debt)

• 1980: 5% share of the top of the

distribution had 20% of income

• 2007: 5% share of the top of the

distribution had 35% of income

Indebitamento delle famiglie e disuguaglianze di reddito (US, 1984-2008)

Fonte: IMF, 2010

Disuguaglianze di reddito e dei livelli di consumo (US 1980-2006)

US weekly real wage 1947-2007

$0,00

$100,00

$200,00

$300,00

$400,00

$500,00

$600,00

$700,00

1947

1949

1951

1953

1955

1957

1959

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

avg weekly earnings

Real Wage, Non-supervisor Workers (In 2007 $)

Source: US Department of Labor, Bureau of Labor statistics

US productivity (1992=100) and hourly wage 1973-2007

0,00

20,00

40,00

60,00

80,00

100,00

120,00

140,00

160,00

1973

1974

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Avg hourly earnings Productivity

US Economy, Non-agricultural Sector (In 2007 $)

Source: US Department of Labor, Bureau of Labor statistics

Compensation financial sector and other sectors

Avg compensation financial sector

Avg Compensation other sectors

Source: Financial Crisis Inquiry Commission (2011)

Rapporto tra i compensi dei manager e i

salari medi dei lavoratori dipendenti

Fonte: ILO 2010

Interactions and bubbles within the Finance-led Growth Model

LABOR FINANCE

↓ w/p Financialization

Instable wages ↑ Demand for finance

Precarious job ↑ Price shares

(financial) BUBBLE

↑Finance for consumption ↑ Movement of Portfolio

↑ Credits, loans, mortgages ↑ Financial investments

(credit) BUBBLE (speculative) BUBBLE

(Prices in the commodity ↓ Productive investments

market increase too)

CONSUMPTION INVESTMENTS

Financial crisis responses

Competitive Market Economy (CME)

- US, UK, Ireland, Australia, Netherlands, Canada.

European Social model (ESM)

- Eurozone17 (except Ireland) rather than EU27

At the G20 meeting in London in 2009, # models, #

strategies: the Franco-Allemande

(Sarkozy&Merkel) called for state regulation and

financial restrictions. The Anglo-Saxon axe

(Brown&Obama) aimed mostly to reach a

consensus to provide monetary liquidity for the

financial system.

Central Banks strong reactions:

quantitative easing and zero interest rate

Posner (2009) estimates that the total amount

of the spending of the Fed during the period

2007-2010 for the financial crisis was of $5.2

trillion. It is unclear however, how much and

where exactly the Fed money went at the

beginning of the crisis in the desperate

attempt to save banks and financial

institutions (Westbrook, 2010).

Similarly in Europe: ECB and Bank of

England

Fed quantitative easing

Reserve money 2008-10

0

1

2

3

4

5

6

2006 2007 2008 2009 2010

Fed

ECB

Fed and ECB interest rates 2006-2010

Fiscal stimulus in US and EU 2007-10

Germany UK Netherlands Italy France Spain Tot

EU

US

Bn.

euro

82 31 8.5 9 26 40 200

(apx)

775

Arra

USbn$

+ 700

USbn$

Tarpa

%

GDP

3.3 2.2 1.4 0.6 1.3 3.7 1.5%

(apx)

2.7%

+

2.3%

Government rescuing banks

US and EU

US (bailing out, saving plans or

govmt shares for firms and

financial institutions)

700 US $ bln TARPA

EU

Apprx 100 US $ bln

AIG

Fannie Mae

Freddie Mac

Merril Lynch

Goldman Sachs

Morgan Stanley

Washington Mutual

Bank of America

Maiden Lane

Citigroup

Govmt shares

ING (Netherlands)

BNP Paribas (France)

Unicredit (Italy)

Swedebank (Sweden)

Alpha (Greece)

Lloyds and RBS (UK)

Commerzbank (Germany)

Nationalisation

Fortis (Belgium)

Anglo Irish (Ireland)

Northern Rock (UK)

Hypo Real Estate (Germany)

Financial Regulation in US and EU

US regulation (the “Frank-Dodd Act”)

new supervisory architecture system, major role of Fed in

oversight large firms and involvement of the Treasury. A

Council of Regulators is set up to coordinate supervision with

Fed.

EU regulation and responses

Contrary to the weaker reaction of ECB the EU regulation

response was stronger. The De Larosière Report (2009) was

absorbed by EU directives and regulations, declaration of

support of the EU Commission (2009), the European Council

(2009). However, the EU regulation is weakened by the

fragmentation among the EU member states and their

different national “operative” regulations in the financial

markets.

US regulation: macro and micro “soft”

oversight

Micro

prudency

Consumer Financial Protection Agency.

The Fed monitors commercial banks

and large firms.

The SEC monitors the securities.

The CFTC futures

Macro

prudency

Financial Services Oversight Council to

monitor WS. Council of Regulators

on systemic risks run by Treasury

(with Fed)

A stronger EU regulation

US financial regualtion EU/Eurozone financial regulation

CRA No significant changes. Strict surveillance of methodologies and ratings.

Registration and certification requirements.

Derivative

s and OTC

markets

Tighter regulation with the institution of a

central counterpart authorized to issue

derivatives. SEC and CFTC monitor

Tighter regulation with the institution of a central

counterpart authorized to issue derivatives. The

ESMA monitors

Basel

agreement

for Banks’

capital

Mostly Basel II. Capital requirement for

Banks increased to 8% (Basel III) only

for large top 20 firms (Basel II for the

rest, 2% of capital). Banks must hold 5%

of securities in credit risk products.

Similarly for UK

Basel III. Capital requirement for Banks increased

to 8% and higher standard required as in Basel III

(limit to leverage ratio at 3%, liquidity ratio

improved to meet short term obligation). Banks

must hold 5%-10% (Eurozone 10%) of securities in

credit risk products.

Micro

prudency

Consumer Financial Protection Agency.

The Fed monitors commercial banks. The

SEC monitors the securities. The CFTC

futures

European System of Financial Supervisors (ESFS)

with 3 functional authorities and supervision

powers for banks, insurance and securities: EBA

EIOP, ESMA

Macro

prudency

Financial Services Oversight Council to

monitor WS. Fed over large firms.

Council of Regulators on systemic risks

European Systemic Risk Board (ESRB) within

ECB: Macro prudential supervision

Hedge

Funds (all

kinds)

Supervision by SEC and CFTC. More

transparency required.

Strongly restricted: authorization, transparency,

liquidity leverage, supervision, information,

strategies, auditing, interest conflicts.

Securities

and CDS

Supervision by SEC. More transparency

required.

Stricter supervision & transparency. Disclosure

positions, and short selling option bans (Eurozone)

Tax financ Bank levy (US, Uk and Canada) FTT (Eurozone)

Main divergences US-Eurozone

The most important disagreement concerns a financial transaction tax (FTT)

the FTT would serve to finance the huge costs of this crisis (German and France)

UK, US Congress and Canada strongly object it and the G20 Pittsburg meeting already rejected it. Bank lobbies are strongly against the FTT too.

The Obama administration would see as a good compromise a sort of Bank Levy which would have a more modest impact on tax collection

Other issues: hedge funds, Basel agreements, capital requirements, CRAs, etc

US and EU vulnerability

Beyond these differences, and despite the attempt to reform the financial sector, finance and economy still remain vulnerable, both in EU and US. This is due to a combination of 4 indicators in badly dangerous position:

1) government deficits,

2) unemployment,

3) Current Account deficit (CA)

4) slow recovery.

Out of these 4 variables the Synthetic Vulnerability Index (SVI) was calculated

For 2011: US -4.5 worse than Eurozone -3.72

US economy: Synthetic Vulnerability Index

-2,625 -2,625

-5,8-4,8 -4,5

-3,9525

-15

-10

-5

0

5

10

15

2006 2007 2008 2009 2010 2011

govmt balance unemployment Synthetic Vulnerability Index CA GDP growth

Eurozone economy: Synthetic Vulnerability Index

-1,675 -1,3-2,5

-5,15-3,975 -3,725

-15

-10

-5

0

5

10

15

2006 2007 2008 2009 2010 2011

govmt balance unemployment Synthetic Vulnerability Index CA GDP growth

US-EU27 trade in merchandise (values in millions $)

($200,000.00)

($100,000.00)

$0.00

$100,000.00

$200,000.00

$300,000.00

$400,000.00

2005 2006 2007 2008 2009

US Import from Eu27 US Export to Eu27 Balance

EU27 CA surplus/deficit with main partners, 2008 (millions of Euros)

-200

-150

-100

-50

0

50

100

Series1 68.3 12.6 2.6 2.5 -6.5 -32 -61.3 -157.6

United States Switzerland India Canada Brazil Japan Russia China

Labour market: again US more

vulnerable than Eurozone

Despite a lower recession in US in

comparison with Eurozone (-2.6% against -

4.2%) in US unemployment went from 4.6%

to 9.8% (+5.2) and employment rate fell from

72% to 64.5% (-7.5) in 2010.

In the Eurozone the unemployment rate looks

much better: it went from 8.6% to 9.6% (+1.2)

and employment fell from 66.2% to 65.7% (-

0.5%).

GDP growth before and after 2009 recession

-0,6

-3,2

-2,6

-4,1

2,5

4,6

2,6 2,5

1

6,8

4,3

2,4

1,5 1,5

6,4

-6

-4

-2

0

2

4

6

8

World Output   Advanced

Economies

  United States   Euro Area   Emerging and

Developing Economies

2008 2009 2010 2011

Employment (left) and unemployment (right) rates in US 2006-2010

72

64.54.6

9.8

60

62

64

66

68

70

72

74

2006 2007 2009 2008 2010

0.0

2.0

4.0

6.0

8.0

10.0

12.0

US Employ. US Unempl.

Employment (right) and unemployment (left) rates in Eurozone 2006-10

66.2

65.7

8.4

9.6

64.5

65

65.5

66

66.5

67

67.5

2006 2007 2009 2008 2010

0.0

2.0

4.0

6.0

8.0

10.0

12.0

Eurozone Employ. Eurozone Unempl.

Marika Carboni Tesi di Laurea Università degli Studi Roma Tre

L’impatto sul mercato del lavoro: paesi dell’Unione europea

Andamento del tasso di disoccupazione (2000-2010)

Fonte: (2010) e Istat (2010)

Public expenditure for labour market

Moreover, given the relatively lower percentage

of US public expenditure for unemployment

policies (passive and active measures) 0,49% of

GDP against 2,8% of GDP on average among

countries of the European Social Model, the

human costs of US unemployment with respect

to EU appear much bigger.

All this confirms our argument that the Eurozone

and in particular the ESM is better able to cope

with the crisis, allowing for less social costs and

better social performance than US.

Passive and Active Unemployment measures (% of GDP), OECD 2007-08

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

Den

mar

k

Belgium

Nethe

rland

Finland

Ger

man

y

Swed

en

Fra

nce

Spa

in

Aus

tria

Irelan

dIta

ly

Can

ada

Aus

tralia

New

Zea

land

Japa

n

United Kingd

om

S. K

orea

USA

Avg

ESM

active passive

0,49

2,8

US and EU closer comparison Eurozone 2009 US 2009

World share of GDP 14.8% (EU27: 21%) 20.2%

Global market share in terms of exports (world

%)

15% (EU27: 20%) 13%

Population 328 mln: (EU 27:

498mln)

317mln

Inequality - Gini coefficient 0.29% 41%

GDP per capita $ ppp 33,452 46,653

Life expectancy at birth 81 79

Poverty (50% of median income) 2006 10% 17.1%

Combined gross enrolment ratio in education

(primary, secondary & tertiary levels, % of pop)

Secondary enrolment ratio (% of

secondary school-age population)

Primary enrolment ratio (% of primary

school-age population)

Expected years of schooling (children)

95%

91%

97%

16

92%

88%

91%

15

Social Expenditure, % of GDP (OECD selected countries 2007)

0

5

10

15

20

25

30

Aus

tralia

Aus

tria

Belgium

Can

ada

Den

mar

k

Finlan

d

Fran

ce

Ger

man

y

Ireland

Italy

Japa

n

Net

herla

nds

New

Zea

land

Swed

en

Unite

d Kingd

om

Unite

d Sta

tes

Avg

ESM

Avg

Ang

losa

x co

.

2006 2007 2008 2009 2010 2011

US Eu

17

US Eu

17

US Eu

17

US Eu

17

US Eu

17

US Eu

17

An. Gdp

Growth

2.6 3.0 2.1 2.8 0.3 0.6 -2.6 -4.1 2.5 1 1.5 1.5

Unemplo

yment

4,6 8.3 4,6 7.5 5,8 7.5 10 9.4 9.8 9.6 9.7 9.8

Inflation 3.2 2.2 2.8 2.1 3.8 3.3 0 0.3 2 1.5 2.7 1.7

GBudget

-%gdp

-2,5 -1.3 -2,8 -0.6 -5,4 -2.0 -7,9 -6.3 -9,2 -6.6 -7,3 -6.1

G Debt -

%gdp

61 68.3 62 66 71 69. 83 78 93 84. 98 88.

CA (%

GDP)

-6 -0.1 -5,2 0.1 -4,9 -1.1 -2,9 -0.8 -3,3 -0.6 -3,4 -0.5

ECB/Fed

int rates

4.2 2.25 5.2 3.5 2 4 1 2.5 0.2 1

Ex rate 1

€ over $

1.25$ 1.34$ 1.59$ 1.40$ 1.19$ 1.34$

Within EU: Public debt

in 2009, as %of GDP

Unemployment rate 2010 EU members and US

0

5

10

15

20

25

Eurozo

ne

Belgium

Bulgaria

Czech

R

Den

mark

Germ

any

Estonia

Ireland

Greece

Spain

France

Italy

Cyprus

Latvia

Lith

uania

Luxe

mb

Hun

gary

Malta

Netherla

Austria

Poland

Portugal

Rom

ania

Slove

nia

Slova

kia

Finland

Sweden

UK

Norway

US

Policy suggestions

From Keynes and from the fordism: where finance has a secondary role and it is a tool which guarantees productive investments.

Wage is the main nexus which guarantees consumption (not credit)

the ESM: a slightly better position than US (see SVI) because the system is anchored to the wage nexus, and finance is not the main institutional form, although in the past 20 years also in…Europe.

The ESM is able to combine, better than US, efficiency (GDP growth) and social performance (inequality, poverty, mass education and life expectancy).

After the IIWW ESM grew faster than US and reached better social performances. Only in the last two decades US had slightly faster GDP growth, with further worsening of social indicators.

However, this growth in US was led by finance which caused the big crash and the Great recession of 2007-2009.

On this light, the US model led by finance raises many doubts and should be radically reformed. I suggested this has to be done on the lines of the ESM.

Avg. Growth of GDP per capita in EU and US, 1961-2009

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

5

Germany France Spain Italy EU15 USA

1961-80 1981-91 1992-2009

FORDISM (1946-1970) AND POST-FORDISM (1980-TODAY)

Varieties of capitalism within the enlarged

European Union (17 Eurozone members, with *)

Competitive Market

Economies (Anglo-Saxon

model)

European

Social model:

Austria*

Belgium*

Finland*

France*

German*

Netherlands*

Slovenia*

Denmark

Sweden

Luxemburg*

Hungary

Czech Rep

Greece*

Italy*

Portugal*

Spain*

Hybrid model

(mixed between

ESM and LME)

Cyprus*

Malta*

Latvia

Lithuania

Poland

Romania

Bulgaria

Estonia*

Slovakia*

Competitive

Market

Economies

(CME)

UK

Ireland*

US, UK, Ireland, Canada, New

Zealand, Australia

Conclusion

In the same vein of Kindleberger (2005) we can conclude that if there are manias governing finance, which are not rational, then governments should intervene and regulate.

Monetary policies should not accommodate manias. A financial transaction tax will limit manias.

Finance, regulated under supervision of the state, should serves investments and not consumption.

Governments need to do more not only regulation: to guarantee an appropriate level of consumption which should be sustained by an appropriate level of wage in order to maintain an appropriate level of aggregate demand (AD). AD is supported by an appropriate level of public investment (in particular health and education).

On the contrary, the last austerity policies, both in Europe and in US, go just in the opposite direction.