Origins of the Great Recession
The collapse of Lehman Brothers five years ago exposed the rotten core of the west’s financial system, changing America, Ireland and the world
The tsunami hits Europe
In the event, a repeat of the 1930s spiral was narrowly avoided. Most economies had pulled out of their nosedives by the middle of 2009. That said, the downturn was deep enough to be named the Great Recession. However, and as with other recessions caused by financial collapses, there was never going to be a quick recovery from the crash of 2008.
Double and triple dips have been the lot of many economies as they have struggled to recover. In the US, only recently has per capita GDP returned to 2008 levels and there are still almost 2.5 million fewer people at work than before the crash.
Some regions have suffered more than others. Many state governments, including the largest – California – are flirting with bankruptcy and have introduced swingeing austerity, including mass lay-offs of public sector workers.
If the crash had its origins and epicentre in the US, such is the interconnectedness of the financial system on either side of the Atlantic, the effects of Lehman’s collapse hit Europe like a tsunami.
For the continent as a single economy, it has been the worst five years since the first half of the 20th century. While some economies have fared better than others, more than a handful have experienced shocks of previously unthinkable proportions. Countries as diverse as Greece, Iceland, Ireland, Latvia, Portugal and Spain have suffered depressions, defined by economists as a contraction in output of 10 per cent or more.
Even now, signs of recovery are limited and not particularly strong, and economies where high levels of debt – private, public or both – are making the slowest progress.
The euro crisis
Among the most serious effects of the financial crisis was the revealing of the profound weaknesses of Europe’s single currency. European monetary union was created without a fiscal and banking union. Although these deficiencies were recognised when the edifice was being designed in the 1990s, the degree to which they weakened the entire structure was as underestimated as the fragilities of the west’s financial system.
When the latter failed and the tectonic plates of the global economy started shifting, the euro construct began to wobble. On many occasions since the euro crisis began, it has appeared as if single currency was on the brink of collapse.
Although there has now been a year of calm, the fundamental weaknesses remain and will have to be addressed. A form of banking union is currently being negotiated and more changes, including yet another change to the EU’s treaties, is very likely in order to make the single currency sustainable.
But questions remain over whether the political will exists to do whatever it takes to save the currency. It is still perfectly possible that a return of financial market panic could pull the euro apart.
The failure of the rich world’s financial system had inevitable knock-on effects for the rest of the world. The global collapse in international trade had the most immediate impact, causing a dip in exports from the developing world to Europe and the US.
Despite a rebound in trade from late 2009, the half-decade of weak growth in the euro-American economy has depressed exports from emerging markets, thereby making their rates of growth lower than they would otherwise have been.
A more insidious effect has been the impact of the experiments western central banks have conducted in the hope of restarting growth. The flood of cheap money has probably been the single most important factor in avoiding depression in the west, but it has created new bubbles in financial markets across the world, affecting everything from food and energy prices to currencies and government bonds.
The recent signalling by the US central bank that it would begin pulling back on its provision of cheap money has caused those bubbles to deflate, destabilising developing economies and causing fears of slump (or worse) in some of the big emerging markets.