Scars left by financial crisis in European and US labour market could last for a long time
But despite the ongoing challenges that policy makers face, stimulus has been mostly effective and job losses have relatively been contained under the circumstances
Dubai: At the international level, the crisis and the subsequent credit freeze were hard tests for the global financial system.
The response of the US Federal Reserve, the European Central Bank and other central banks was immediate and dramatic. During the last quarter of 2008, these central banks purchased $2.5 trillion (Dh9.1 trillion) of government debt and troubled private assets from banks around the globe.
This was the largest liquidity injection into the credit market, and the largest monetary policy action, in world history. The governments of European nations and the US also raised the capital of their national banking systems by $1.5 trillion.
The impact especially on the labour market was huge and painful. The global financial crisis forced as many as 30 million people out of work since 2007, and economies need ways to generate more decent jobs, the International Monetary Fund and the International Labour Organisation said in a report earlier this month.
The scars of this distress in labour markets could last for a very long time in the case of young workers unable to get their first job, a lifetime, the IMF said.
Severe consolidation
It added that most advanced economies should not tighten their fiscal policies before 2011. They should also avoid a more severe consolidation than what's been planned because demand is still weak, the IMF said, while acknowledging that the fiscal situation varies across nations.
The global financial meltdown hit Europe as a crisis of historic dimensions, the European Commission noted in its recent report by the Directorate General for Economic and Financial Affairs.
In the last two years, the European economy was seen in the midst of the deepest recession since the 1930s, with real GDP shrinking by some per cent in 2009, the sharpest contraction in the history of the European Union, said Paul van den Noord, member of the Directorate for Economic Studies and Research at the European Commission.
The crisis was preceded by a long period of rapid credit growth, low risk premiums, abundant availability of liquidity, strong leveraging, soaring asset prices and the development of bubbles in the real estate sector, he said.
Over-stretched leveraging positions rendered financial institutions extremely vulnerable to corrections in asset markets.
As a result, a turn-around in a relatively small corner of the financial system, most of all the US subprime market, was sufficient to topple the whole structure.
Transmission of distress
The transmission of financial distress to the real economy, Van den Noord said, "devolved at record speed, with credit restraint and sagging confidence hitting business investment and household demand, notably for consumer durables and housing."
He added that cross-border transmission was also extremely rapid, due to the tight connections within the financial system itself and also the strongly integrated supply chains in global product markets.
Concern about rising government deficits and debt levels across the globe together with a wave of downgrading of European government debt has created alarm in markets.
The debt crisis has been mostly centred on the events in Greece, where there is concern about the rising cost of financing government debt. On May 2, 2010, the Eurozone countries and the IMF agreed to a $110 billion loan for Greece, conditional on the implementation of harsh Greek austerity measures. On May 9, 2010, Europe's Finance Ministers approved a comprehensive rescue package worth almost a trillion dollars aimed at ensuring financial stability across Europe.
This means that the EU reacted with a crisis policy that managed to ease the impact of the financial meltdown. These crisis control policies are largely achieving their objectives, Van den Noord said.
Although the banks' balance sheets are still vulnerable to higher mortgage and credit default risk, there have been no defaults of major financial institutions in Europe and stocks have been recovering.
With short-term interest rates near the zero mark and non-conventional monetary policies boosting liquidity, stress in interbank credit markets has receded. Fiscal stimulus proves relatively effective. Economic contraction has been stemmed and the number of job losses contained relative to the size of economic contraction.
