Five years after Lehman

The Lehman bankruptcy five years ago marked a massive decline that changed the global economy. However, it was only the final straw.


 

The Lehman bankruptcy five years ago marked a massive decline that changed the global economy. However, it was only the final straw. Over the course of many years, especially in industrialized nations, imbalances had built up in the private and public sector, regulatory shortcomings had been overlooked, and the monetary and real economy evolved into separate worlds.
 

The shock of the Lehman bankruptcy was followed by the steepest decline in world trade and the deepest recession since the Second World War. Global production decreased by more than two percent and production in industrialized nations by nearly four percent. Many countries decided to meet the shortfall in demand in the private sector with massive fiscal stimuli. Large economic stimulus packages were generated, and new government borrowing soared. In addition, a number of countries were forced into high spending to support the banking system.
 

Financial markets lost confidence in the financial viability of some European countries' public debt. Greece was the tip of the iceberg. The real estate and banking crisis had become a government debt crisis and mainly a European one. Turmoil in the financial markets and the need to consolidate government budgets quickly, led the euro zone into a double-dip recession in 2011, which only ended this spring, after one and a half years.
 

Although the Lehman crisis has its roots in the American property market and the American financial system, it has to be noted that the US handled the crisis better and faster than Europe, even though new government borrowing and debt ratios were considerably higher on average than in the euro zone. GDP in the US is now about five percent higher than at the start of 2008, the euro zone's is still three percent lower than it was then.

A whole range of reasons may have been beneficial to the US. Firstly, the US managed to quickly get the problems in the banking system under control, by means of the TARP rescue package in particular, while in the EU (which still does not have a banking union) the necessary measures for rehabilitating the banks were addressed hesitantly in some countries. Secondly, as the US dollar is the world's number-one currency, the US could fall back on trust gained over decades and refinance at lower interest rates. Thirdly – and this is probably the most important point – although the euro zone had managed to implement a common monetary policy, it lacked functioning common fiscal rules. For too long, breaches of the Maastricht criteria had hardly been punished.
 

Due to the reforms brought about by the crisis, new “rules” have developed at a European level. The Euro Plus Pact, the European Semester, the revised Stability and Growth Pact and balanced budget amendments are just a few of the keywords from the economic governance reform. Europe is on track to tackle the crisis. The economic stabilization in recent months is the first sign of success.
 

Prof. Michael Heise, Chief Economist of Allianz Group

Heise: "Although the euro zone had managed to implement a common monetary policy, it lacked functioning common fiscal rules."
Heise: "Although the euro zone had managed to implement a common monetary policy, it lacked functioning common fiscal rules."

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Dr. Lorenz Weimann
Allianz SE
Phone +49.89.3800-16891
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