Time to take stock of the Great Recession

In 2008, before the financial crisis had even reached its nadir, Rahm Emanuel famously said: “You never want a serious crisis to go to waste.” Emanuel’s quote became the conventional wisdom for crisis management, even if the idea is age-old: John F. Kennedy Jr. famously pointed out that the Chinese word for “crisis” is composed of two characters, one for “danger” and one for “opportunity.

Nearly five years after the global economic meltdown, we can now look at the world’s major powers and assess how well they’ve responded to their various crises. Three categories emerge. Who took advantage of crisis? Who never really had a true crisis? And who is letting crisis go to waste?

Let’s begin with Europe, which experienced a real and urgent crisis. Remember that as little as 18 months ago, the media and bond markets had the Eurozone pegged for imminent fracture, when the debts of its member countries and the untenable divide between its core countries and those on the periphery threatened to overwhelm the political unity and economic cohesion that the bloc enjoyed.

A lack of fiscal co-ordination, political and monetary dexterity, and balance between strong and weak states pushed the world’s largest economic bloc into existential crisis.

Europe on sounder footing

But with the help of Germany, bolder monetary policy from the European Cebtral Bank (ECB), and some very painful budget control measures, Europe has emerged on sounder footing, and the prospect of collapse is firmly behind it. There has been a fundamental restructuring, and now Europe is on the mend.

The looming crisis itself helped affect structural change. Without market pressure and alarm bells, the periphery would not have been shaken from complacency, nor would the ECB have taken a bolder stance to put a floor under the crisis.

Japan had a very different crisis than Europe did. Two “lost decades” didn’t spur the Japanese into action. What shook Japan out of its malaise?

In part, it was an increasingly acrimonious challenge from China, which has surpassed Japan to become the world’s second-largest economy. Japanese voters’ economic and security fears from the regional superpower prompted them to give Shinzo Abe another crack at the prime minister’s post.

He’s used it to create an economic plan heavy on stimulus, join the Trans-Pacific Partnership trade pact negotiations, and work toward making all “three arrows” (monetary easing, government spending and structural reform) of his economic plan take flight. It’s still unclear whether Abe’s ambitious plans will succeed, but there is no question that Japan has converted its slow-motion crisis into a remarkable opportunity.

US debt ceiling

It was only two years ago when all anyone in Washington could talk about was the debt ceiling. Standard & Poor’s downgraded the US’ credit rating, Congress embarrassed itself, markets plunged and then everyone just moved on. What’s happened since?

America went over the fiscal cliff by a day, the debt ceiling is still a bargaining chip in Washington power politics, and Congress couldn’t avoid the sequester that subsequently took effect.

And yet America’s still kicking and its major stock market indices continue to reach new heights. That’s because the only genuine emergency America experienced was its banking crisis, and in 2008 and 2009, Washington met the challenge, much like the Eurozone met its own existential threat.

The US’ standing is so firm that it’s hard to saddle it with a structural crisis like the ones we saw in Europe and Japan. Debt matters less here — for at least as long as the US can continue to finance it at such low rates.

In that sense, it’s true that the US failed to take advantage of a crisis a few years ago — but that’s because the crisis wasn’t big and imminent enough. Americans were not desperate enough to force their leaders to change.

Looming threats

There are plenty of looming threats that might eventually beget a full-fledged American crisis. For example, income inequality isn’t a crisis today — it’s an alarming and growing problem in the longer term.

China is a similar story. Many fear a hard landing in China. And yet, China remains stable. Its growth is declining, but manageably, and its state capitalist model is inefficient but still robust for the near future. This is the kind of casual, slow change you expect to see when a country doesn’t face an imminent shock to the system.

Does China have huge hurdles on the horizon? Absolutely. The demographics are worsening, state capitalism cannot last forever, and an enriched citizenry will increasingly demand more accountability and transparency from its government.

But none of these are sufficiently urgent to send Beijing into crisis management today. For the time being, China might be tackling these issues insufficiently, precisely because they are not yet worrisome enough to warrant a broader response.

In the third and final category, we have a country in crisis that has refused to acknowledge it. France is facing deep structural troubles, with an unemployment rate above 10 per cent, an underproductive workforce, fiscal imbalances, and unsustainable spending on social services and pensions.

France’s woes

Today, public spending in France has reached 57 per cent of GDP — good for first place in the Eurozone — even though 15 years ago, France’s tally was on par with Germany’s.

And the French haven’t given President Francois Hollande the political capital necessary to do enough about it — nor did Hollande really make his case any easier. He campaigned on a platform that pushed back against much of the austerity that the country so sorely needs.

Because France was considered part of the European core, it was able to skirt the wave of Eurozone pressure that led to change in the periphery.

On June 8, Hollande declared: “What you need to understand is that the crisis in Europe is over.” He was more or less correct, and that’s precisely the problem.

The rest of the Eurozone leveraged its crisis to make structural changes; the peripheral European states have already made their corrections. France used the Eurozone’s turbulent restructuring to brush its own inaction under the rug.

Some countries have proved far more adept at crisis management than others. And some countries are not facing true crisis at all; while that explains their complacency, it is no justification for it.

After all, those who work to avoid a crisis in the first place are in a category above the rest.