Ten years have passed since the start of the Great Recession, and we still do not fully understand the factors that caused it, nor its potential medium and long-term consequences. However, this does not mean that uncertainty should paralyze us. During this period, significant structural measures have been taken in economies, credit institutions have been strengthened, and clear progress has been made towards greater international coordination. Uncertainty acts as a warning factor against the temptation to let our guard down.
The crisis had a financial origin, with a fertile ground provided by a lax monetary policy maintained during the previous decade, known as the Great Moderation. During this period, central banks focused excessively on inflation stability and less on financial stability. Low inflation in a context of rapid and intense globalization, demographic factors, and the central banks’ own credibility fostered expansive financial conditions amid high global economic growth. Fiscal stabilizers were also not as counter-cyclical as would have been desirable during this period. The accumulation of financial and economic imbalances did not translate into new supply-side measures or structural reforms that would have mitigated the subsequent consequences of the crisis.
The joint application of expansive monetary and fiscal measures has been key to overcoming the recession. The unprecedented prominence of monetary policy has resulted in a combination of conventional measures pushed to their limits alongside unorthodox ones, such as the purchase of fixed-income assets and negative interest rates in Europe. The limited room for maneuver in fiscal policy prior to the crisis did not prevent its use, although it led to the largest stock of public debt since World War II. International institutions like the IMF and the BIS frequently allude to the medium and long-term vulnerabilities created by these extreme economic policy measures. However, they consider that their normalization must be prudent given the high existing uncertainty, which these very measures have helped to generate.
The international crisis was exacerbated in Europe by initial deficiencies in achieving an optimal monetary union. Its impact demonstrated that the initial monetary convergence was insufficient to provide stability to the union. What is needed is greater real convergence, as well as mechanisms for risk sharing, completion of the banking union, and the creation of a single capital market. The crisis has served as an impetus to advance on these issues, though without fully resolving them. Progress in banking union has required credit institutions to now be subject to a fully regulated and supervised framework, with the dual objective of protecting consumers and strengthening financial stability. However, it is precisely this second objective that is threatened by existing vulnerabilities, which in most cases are external to banks. In this difficult scenario, our institutions face three challenges: digitalization, competition from non-bank third parties offering financial services, and the necessary improvement in profitability, which remains below the cost of capital.
The main conclusion from everything experienced in this last decade is precisely that we must prepare for what may come. The willingness of our authorities and other economic agents to anticipate risks and, if they materialize, take the necessary measures to combat them, is fundamental.
