Comments, Economy, In Focus

How much longer for the Crisis?

August has passed and with it the five-year mark of the economic crisis and financial storm that erupted in the same month of 2007. It is a crisis with worldwide repercussions that split the foundations of the capitalist system and whose consequences are still wrapped in indefinite uncertainty.

Cira Rodríguez César


What began with the crash of the real-estate bubble in the United States caused a domino effect for the world economy that was the start of a complex situation whose end is still uncertain.

According to an old saying, to remember is to return to living, well, in August 2007 there was an outbreak of economic, financial and real-estate disasters in the most developed nations, which formed the start of a chain of on-going events.

Everything developed very quickly into the perfect storm, which made the structures of the American and European financial systems shake.

Since its beginning, renowned economists have rated the current crisis as the worst since the event last century in the 1930s. This is a global recession marked by an extremely high degree of productivity on the world financial market, in which the so-called ‘big bubbles’ occur, above the level of the real-world gross domestic product.

Information about mass redundancies, business closures, an increase in poverty, bank collapses and elevated financial debts have crossed the globe. But it is now five years later and the same news is being repeated on a daily basis.

What for many was a financial or real-estate crisis, for others was a full-scale global economic crisis in which no-one can escape or will be able to escape, because it concerns a conflict that compromises international finances and the real economy.

That is why those who were unable to forecast the crisis and intercept it, let alone suggest ideas towards a solution – The International Monetary Fund and The World Bank – are still looking for the slightest lead to fight it and seek salvation.

It was with the collapse of Lehman Brothers, in September 2008, that the intensification of the current crisis began. The fall of the financial giant not only almost fatally wounded the model of investment banking as a specific and individual business, but brought about the closure of the financial markets.

This factor, to a greater or lesser extent, has been a feature throughout the whole of the last five-year period and has provoked a ferocious level of distrust among the financial institutions that is still prevalent today.

Five years later the United States still has not found the path to recovery. Germany has forced itself to the head of the Eurozone to avoid the collapse and to avoid the loss of the single currency. The rest of the European Union wants to escape a domino effect should the Euro disappear, and Japan is seeing a fall in industry production and with it a decline in exports.

Within the Eurozone, Greece, Ireland, Portugal, Spain and Cyprus have asked for bailouts for their economies and banking systems.

Whatever help there has been has done little to solve these complex economic scenarios, because for example, Greece is waiting on its international accreditors to finalise a €130 million package, marked by five years of recession, with a fall of 17.5% in gross domestic product (GDP) and unemployment at 23%.

Spain approved its third financial reform, faced with demands from Europe to unfreeze its recovery up to €100 billion, with which the aim is to restructure its deteriorating banking sector.

Italy’s GDP has contracted to 1.9% in the second quarter of this year, which is now the fourth consecutive quarter with a negative rating, a recession which has caused the decline in added value of the three biggest sectors of its economy: agriculture, industry and services.

In France, the François Hollande government is confronting the increase in unemployment and a downturn in the economy, while the United Kingdom has fallen into a second recession with still no signs of recovery, after its GDP went backwards during the second quarter of this year.

At the fifth anniversary of the world economic crisis there are many who are in agreement that following the mortgage, real-estate and credit crisis, the recession and huge debt crisis came suddenly, precisely as the result of increased debt that governments incurred to mitigate the effects of the economic slump.

Like a hurricane with great magnitude the crisis has brought down governments, large banks and wreaked havoc, especially in the West, whilst financial institutions transfer risks to the point that there is no way of knowing the true state of toxic activity and who is exposed to these risks.

The events of August 2008 contaminated and brought down the financial markets and obliged the Central European Bank, the United States Federal Reserve and other central banks to take extraordinary measures.

Such is the scale of the world economic phenomenon that today it is a whirlwind that has flattened the governments of Athens, Rome and Paris, as well as mortgage lenders such as Fannie Mae and Freddie Mac, also the investment bank Bear Sterns and the Wall Street giant Lehman Brothers.

Moreover, it has brought down the economies of Greece, Portugal and Ireland and put into question the capabilities of Spain, and also Italy, to continue as part of the Eurozone.

According to the analysts, the financial crisis of trust and credit that erupted in August 2008 caused a recession like no other in the developed world and put the brakes on growth in the emerging markets of Brazil and China. But above all it has posed a threat to the single European currency and has provided evidence of the lack of a common European plan.

Today experts, research centres, institutions and political leaders are still unable to forecast the duration of the crisis, particularly in the Eurozone and whether monetary integration will stay intact.

Where everyone is in agreement is that the consequences will be long and severe for Europe and the rest of the world economy, with devastating effects for the least developed nations.

However, for other regions such as Latin America, without escaping its effects, these five years of crisis have been favourable as it continues to have good international financing and very positive terms of trade, the opposite to Europe.

In these countries there are no macroeconomic imbalances or inequalities in their banking systems, despite remaining the most unequal region on the planet.

Nevertheless, contamination is inevitable if Europe does not recover quickly and the United States continues to stagnate, as well as other unforeseen events, such as the price of petrol as a result of tensions in the Middle East. However, Latin America can face the future with more optimism than the rich countries.

Also as commentators predict, unless something extraordinary and unfavourable happens to Latin America, the recovery of its economies will be much quicker and less severe. (PL)

(Translated by Claire Donneky – Email: claire.donneky@ukgateway.net)

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