Empirical results on the long-run effects of financialisation and on the recent financial and economic crises
The theoretical and historical studies of the first part of the work package informed the empirical studies of the second part. Here a range of country studies and sectoral and market studies were conducted.
The country studies on the long-run effects of financialisation covered a set of 11 European Union countries and four non-EU countries. The structure for each of these studies was inspired by the review and presentation of theoretical models on the long-run effects of an increasing dominance of finance on the macro economy through various channels conducted by Hein and Dodig (WP no 23). First, the country studies provide a general overview of the long-run development in the era of financialisation since the early 1980s and present some initial ideas on the type of development before the crisis looking at the financial balances of the main economic sectors and at the growth contributions of the main demand aggregates: ‘export-led mercantilist’, ‘debt-led private demand boom’, or ‘domestic demand-led’. Second, the country studies examined the channels of transmission of financialisation to the macro-economy (distribution, consumption, investment, current account) in more detail. And third, the country studies contain an overview over the crisis and the economic policy responses towards the crisis in the respective countries.
The following countries were examined and published as FESSUD studies in financial systems 18 – 34:
- No. 18: Germany by Detzer, D., Hein, E.
- No. 19: Spain by Ferreiro, J., Gálvez, C., González, A.
- No. 20: Estonia by Kattel, R., Juuse, E.
- No. 21: Turkey by Bahçe, S., Cömert, H., Çolak, S., Özgür Orhangazi, N., Özgür, G., Yalman, G.
- No. 22: France by Cornilleau, G., Creel, J.
- No. 23: Italy by Gabbi, G., Ticci, E., Vozzella, P.
- No. 24: Portugal by Lagoa, S., Leão, E., Mamede, P. R., Barrada, R.
- No. 25: Greece by Varoufakis , Y., Leão, E., Tserkezis, L.
- No. 26: South Afrcia by Newman, S.
- No. 27: Sweden by Stenfors, A.
- No. 28: Japan by Shabani, M., Toporowski, J.
- No. 29: Poland by Dymarski, W.
- No. 30: U.K. by Lepper, J., Shabani, M., Toporowski, J., Tyson, J.
- No. 31: Hungary by Badics, T., Szikszai, S.
- No. 32: USA by Evans, T.
- No. 33: The Netherlands by Bezemer, D., Muysken, J.
- No. 34: Iceland by Guðmundsson, B. R.
Nina Dodig, Eckhard Hein and Daniel Detzer, based on the country studies and some additional data analysis, clustered the 15 countries according to the typology of demand regimes for the trade cycle of the early 2000s before the crises and for the period after the crisis. They find that after the crisis, more countries have shifted towards an export-led regime or have become domestic-demand-led with the government as the main deficit sector. They note however, that this new global constellation suffers from economic and political risks and might also not be sustainable and propose some alternatives.
The sectoral and market studies on energy, currency and residential housing were each supposed to follow a common structure: first, the long-run empirical developments in the respective market or sector should be covered; second, institutional changes should be dealt with; and third, an interpretation of the development of the respective market or sector against the background of financialisation, as well as consequences for the overall economy should be provided. Lis, Piotr (WP no 99) conducted the study on residential housing, Franco Ruzzenenti (WP no 105) on the energy sector and Barbara Simon and Szabolcs Szikszai on the markets for currency.
Drawing on the studies as well as on own literature and data research, Trevor Evans and Hansjörg Herr (WP no 113) have derived and summarized the following results. The markets for foreign exchange, energy and residential housing have all been strongly affected by the deregulation and expansion of the financial sector. One key result was that, as a consequence of deregulation, these markets have begun to follow the logic of asset markets and so have begun to attracting more speculative-oriented investors. Also prices are driven by expectations which lack a firm anchor and which can move within a very wide, weakly defined range. The marked instability of the three markets has contributed to greater instability in the broader economy. These results lead to a very clear policy conclusion. The deregulation of currency, energy and housing markets has led to far greater price volatility and the rise of unsustainable price bubbles which, when they burst, can pose a significant threat to financial and economic stability. In order to guard against this in the future, it is therefore important that these three markets should be subjected to new and appropriate forms of regulation.