NEW OPINION ABOUT THE GLOBAL ECONOMIC CRISIS

NEW OPINION ABOUT THE GLOBAL ECONOMIC CRISIS

Dr. Sanaa Abdel Kader Mustafa –Assistant Prof. Norway

ABSTRACT

This research article seeks to discuss and explain the various and contradictory causes cited by scholars and experts as leading to the burst of the latest global economic crisis in an attempt to locate what really caused the largest economic turmoil in the capitalism system at the last decades. The article is based on a comprehensive review of the literature sources on the roots, the causes of the USA and Scandinavia current economic crisis. It investigates highlights and discusses the suggested factors that led to support and fueled the disaster.
The purpose of this study is to examine the causes and consequences of the economic and financial crises of that hit the Scandinavian countries in the early 1990s and to extract the major lessons from this episode. The focus is on the macroeconomic record of Finland, Norway Sweden and Denmark as these three economies were hit by a uniquely deep recession. This is partly due to processes unleashed by economic integration. The long-run effects of economic integration may prove to be more important over time than the short-run effects, although not as dramatic as the boom-bust cycle that followed immediately upon economic deregulation.

Keywords – Economic crisis, monetary policy, subprime mortgages, rating agencies deregulation, Economic crisis, financial crisis, financial openness, Scandinavia.
INTRODUCTION

The current economic crisis, which began from the middle of April 2008, is the worst the world has seen since the Great Depression of the 1930s. For younger generations, accustomed to mild recessions of the new phase of globalization, the misery of the Great Depression is hitherto nothing more than a distant legend. However, the collapse of two Bear Stearns Hedge funds in summer of 2007 exposed what came to be known as the subprime mortgage crisis, reintroducing the world to an era of bank failures, a credit crunch, private defaults and massive layoffs. In the new, globalized world of closely interdependent economies, the crisis affected almost every part of the world, receiving extensive coverage in the international media. “In an Interconnected World, American Homeowner Woes Can Be Felt from Beijing to Rio de Janeiro,” observed the International Herald Tribune at the onset of the crisis. “Chinese Steelmakers Shiver, Indian Miners Catch Flu,” noted the Hindustan Times. “US and China Must Tame Imbalances Together,” suggested Yale Global, as the frenzied search for a solution continues around the globe.
In this special report, Yale Global offers essential information on why the crisis started, how it affected the industries and consumers around the world, and what solutions have been proposed by experts and regulators across countries.
The current sovereign debt crisis in Europe, now threatening the existence of the euro, has revealed major faults in the design of the fiscal framework of the Eurozone. It has inspired a heated debate reflected in a steady flow of proposals concerning the proper rules and institutions for fiscal policymaking in the EU. The debate shows no sign of an emerging consensus {(see for instance Jordi Gual 2011(www.voxeu.org) and Charles Wyplose, Happy 2012?(www.nber.org)}.
One reason for this lack of unanimity is that the Eurozone represents a new type of monetary -union-. It is the first monetary -union- where monetary policy is decided at the central (European) level while fiscal policy is carried out at the sub-central (member state) level. Thus, the economics profession lacks historical cases to use as guidance for theoretical, empirical, and policy-oriented work. The debate also reflects different country perspectives. Economists and policymakers in EU member states like Germany with strong fiscal positions and current-account surpluses tend to have other views than economists and policymakers in debtor countries like Greece and Italy with weak fiscal records.
In a recent working paper (Bordo and others, 2011), we add to the current debate by turning to the history of fiscal federalism for an answer to the question: What are the lessons from the past for the fiscal arrangements in the Eurozone? In short, we ask, which fiscal arrangements in the federal states that we study would help to avoid the centripetal forces that threaten the stability of the Eurozone? This is done by exploring the record of five federal states: Argentina, Brazil, Canada, Germany, and the US.
The five federal states studied by us are monetary -union-s as well as fiscal -union-s based on fiscal federalism. They are monetary -union-s in the sense that they have all one common currency and one central bank managing monetary policy for the -union-. They are fiscal -union-s in the sense that one central authority is in charge of -union--wide fiscal policy. However, these fiscal -union-s are organized as federations, where sub-central (regional´-or-state) political entities enjoy significant independence to decide legislation, including taxes and government expenditures, at a level below the national (central) one. Within the fiscal -union-, there is a common market characterized by free trade and mobility of labour and capital.
The governance structure of the Eurozone has important similarities with that of a federal state. It is set up as a monetary -union- with the ECB as the central bank of the Eurozone. However, the central budget, the EU budget, is much smaller than the size of the budget of the central government of a typical federal country reflecting the fact that the political power of the centre (‘Brussels’ for short) is also much weaker in the Eurozone.

1. THE HISTORICAL BACKGROUND OF ECONOMIC CRISIS
It is important to look over the Marxist theories about the economic crisis. Recurrent major depressions in the world economy at the pace of 20 and 50 years (often referred to as the business cycle) have been the subject of studies since Jean Charles Leonard de Sismondi (1773–1842) provided the first theory of crisis in a critique of classical political economy s assumption of equilibrium between supply and demand. Developing an economic crisis theory becomes the central recurring concept throughout Karl Marx s mature work. Marx s law of the tendency for the rate of profit to fall borrowed many features of the presentation of John Stuart Mill s (www.britannca.com) discussion Of the Tendency of Profits to a Minimum (Principles of Political Economy Book IV Chapter IV). The theory is a corollary of the Tendency towards the Centralization of Profits.
In a capitalist system, successfully-operating businesses return less money to their workers (in the form of wages) than the value of the goods produced by those workers (i.e. the amount of money the products are sold for). This profit first goes towards covering the initial investment in the business. In the long-run, however, when one considers the combined economic activity of all successfully-operating business, it is clear that less money (in the form of wages) is being returned to the mass of the population (the workers) than is available to them to buy all of these goods being produced. Furthermore, the expansion of businesses in the process of competing for markets leads to an abundance of goods and a general fall in their prices, further exacerbating the tendency for the rate of profit to fall.
The viability of this theory depends upon two main factors: firstly, the degree to which profit is taxed by government and returned to the mass of people in the form of welfare, family benefits and health and education spending-;- and secondly, the proportion of the population who are workers rather than investors/business owners. Given the extraordinary capital expenditure required to enter modern economic sectors like airline transport, the military industry,´-or-chemical production, these sectors are extremely difficult for new businesses to enter and are being concentrated in fewer and fewer hands.
Empirical and econometric research continues especially in the world systems theory and in the debate about Nikolai Kondratiev and the so-called 50-years Kondratiev waves. Major figures of world systems theory, like Andre Gunder Frank and Immanuel Wallerstein, consistently warned about the crash that the world economy is now facing the big finicial problem. World systems scholars and Kondratiev cycle researchers always implied that Washington Consensus oriented economists never understood the dangers and perils, which leading industrial nations will be facing and are now facing at the end of the long economic cycle which began after the oil crisis of 1972.
1.2. HYMAN MINSK S THEORY
Hyman Philip Minsky (WWW.bbc.com) has proposed a post-Keynesian explanation that is most applicable to a closed economy. He theorized that financial fragility is a typical feature of any capitalist economy. High fragility leads to a higher risk of a financial crisis. To facilitate his analysis, Minsky defines three approaches to financing firms may choose, according to their tolerance of risk. They are hedge finance, speculative finance, and Carlo Ponzi finance. Ponzi finance leads to the most fragility, for hedge finance, income flows are expected to meet financial obligations in every period, including both the principal and the interest on loans.
• for speculative finance, a firm must roll over debt because income flows are expected to only cover interest costs. None of the principal is paid off.
• for Ponzi finance, expected income flows will not even cover interest cost, so the firm must borrow more´-or-sell off assets simply to service its debt. The hope is that either the market value of assets´-or-income will rise enough to pay off interest and principal.
Financial fragility levels move together with the business cycle. After a recession, firms have lost much financing and choose only hedge, the safest. As the economy grows and expected profits rise, firms tend to believe that they can allow themselves to take on speculative financing. In this case, they know that profits will not cover all the interest all the time. Firms, however, believe that profits will rise and the loans will eventually be repaid without much trouble. More loans lead to more investment, and the economy grows further. Then lenders also start believing that they will get back all the money they lend. Therefore, they are ready to lend to firms without full guarantees of success.
Lenders know that such firms will have problems repaying. Still, they believe these firms will refinance from elsewhere as their expected profits rise. This is Ponzi financing. In this way, the economy has taken on much risky credit. Now it is only a question of time before some big firm actually defaults. Lenders understand the actual risks in the economy and stop giving credit so easily. Refinancing becomes impossible for many, and more firms default. If no new money comes into the economy to allow the refinancing process, a real economic crisis begins. During the recession, firms start to hedge again, and the cycle is closed.
1.3. COORDINATION GAMES
Mathematical approaches to modeling financial crises have emphasized that there is often positive feedback between market participants decisions positive feedback implies that there may be dramatic changes in asset values in response to small changes in economic fundamentals. For example, some models of currency crises including Paul Krugman ( International Economics, 2012.) implied to fix exchange rate may be stable for a long period of time, but will collapse suddenly in an avalanche of currency sales in response to a sufficient deterioration of government finances´-or-underlying economic conditions.
According to some theories, positive feedback implies that the economy can have more than equilibrium. There may be an equilibrium in which market participants invest heavily in asset markets because they expect assets to be valuable, but there may be equilibrium where participants flee asset markets because they expect others to flee too. This is the type of argument underlying Diamond and Dybvig s model of bank runs, in which savers withdraw their assets from the bank because they expect others to withdraw too. Likewise, in Obstfeld s model of currency crises, when economic conditions are neither too bad nor too good, there are two possible outcomes: speculators may´-or-may not decide to attack the currency depending on what they expect other speculators to do.
2. HERDING MODELS AND LEARING MODELS

3. A variety of models have been developed in which asset values may spiral excessively up´-or-down as investors learn from each other. In these models, asset purchases by a few agents encourage others to buy too, not because the true value of the asset increases when many buy (which is called "strategic complementarily"), but because investors come to believe the true asset value is high when they observe others buying.
In "herding" models, it is assumed that investors are fully rational, but only have partial information about the economy. In these models, when a few investors buy some type of asset, this reveals that they have some positive information about that asset, which increases the rational incentive of others to buy the asset too. Even though this is a fully rational decision, it may sometimes lead to mistakenly high asset values (implying, eventually, a crash) since the first investors may, by chance, have been mistaken. (Stefan Penczynski, University of Mannheim, Department of Economics, 2013).
In "adaptive learning"´-or-"adaptive expectations" models, investors are assumed to be imperfectly rational, basing their reasoning only on recent experience. In such models, if the price of a given asset rises for some period of time, investors may begin to believe that its price always rises, which increases their tendency to buy and thus drives the price up further. Likewise, observing a few price decreases may give rise to a downward price spiral, so in models of this type large fluctuations in asset prices may occur. Agent-based models of financial markets often assume investors act on the basis of adaptive learning´-or-adaptive expectations. (DouglasW. Diamond (2007), “Banks and Liquidity Creation: A Simple Exposition of the Diamond-Dybvig Model,”)


3. THE REAL CAUSES OF THE GLOBAL ECONOMIC CRISIS
The late-2000s economic crisis is an ongoing economic crisis. Many economists say that it is the worst financial crisis since the Great Depression during the 1930s. Many important businesses have shut down because of it, which has caused many people to lose their jobs. This means that people have been buying less, which is very bad for the economy.
There are many reasons economists think this happened. Most economists believe that it started in the United States. From 1997 to 2006, people bought very expensive houses even though they did not have enough money. But because of the money coming into the U.S. from other countries, it was easy to have good credit. People used this credit for expensive home loans. This created a housing bubble, which made the price of houses rise more. Because they had a lot of money, the loaning companies made it easier to get a loan, even if the borrower didn t have a good credit history. These loans are called subprime loans.
During this time, many homeowners refinanced their homes. This means that their mortgage was changed so that they had lower interest. After they refinanced, homeowners could take out another mortgage to use as spending money. The loaning companies changed their loans so that they had low interest at first, which would increase later. This is called adjustable rate mortgage. The companies did this to try to convince more people to take loans. Many people with subprime loans also took these adjustable rate mortgages, hoping that the good price of housing would help them refinance later.
While the housing prices were still high, many American and European companies, including banks, invested in subprime loans. These investments gave more money to the loaning companies, who used it to give out more subprime loans. These investments would make a lot of money as long as the prices of housing were high.
However, the housing companies built too many houses. This caused the price of housing to decrease beginning in the summer of 2006. When this happened, many people were paying more money than their homes were worth. This is called negative equity. About 8.8 million homeowners in the U.S. had 0´-or-negative equity by March 2008. This caused the number of foreclosures on homes to increase, meaning that many people lost their homes. During 2007, almost 1.3 million U.S. homes could be foreclosed on. The number of houses for sale continued to increase, which made the prices decrease. The homeowners with subprime loans left their houses with less value than they had when they were bought, which meant that the loans were worth more money than the house. This meant that the loaning companies were not able to make money from these houses.
The collapse of the housing bubble caused the value of investments to fall. The companies that had invested in subprime loans lost a total of about -$-512 billion. Citigroup and Merrill Lynch were two of the companies which lost the most money. More than half of the money lost, -$-260 billion, was lost by American firms.

3.1. OTHER SIDES OF THE ECONOMIC CRISIS
The 2008 financial crisis is considered by many economists to be the worst financial and economic crisis since the Great Depression of the 1930s. It began as financial crisis but turn to economic crisis. It resulted in the threat of total collapse of large financial institutions, the bailout of banks by national governments, and downturns in stock markets around the world. In many areas, the housing market also suffered, resulting in evictions, foreclosures and prolonged unemployment. The crisis played a significant role in the failure of key businesses, declines in consumer wealth estimated in trillions of US dollars, and a downturn in economic activity leading to the 2008–2012 global recession and contributing to the European sovereign-debt crisis. The active phase of the crisis, which manifested as a liquidity crisis, can be dated from August 7, 2007, when BNP Paribas terminated withdrawals from three hedge funds citing "a complete evaporation of liquidity".
The bursting of the U.S. housing bubble, which peaked in 2006, caused the values of securities tied to U.S. real estate pricing to plummet, damaging financial institutions globally. The economic crisis was triggered by a complex interplay of government policies that encouraged home ownership, providing easier access to loans for subprime borrowers, overvaluation of bundled sub-prime mortgages based on the theory that housing prices would continue to escalate, questionable trading practices on behalf of both buyers and sellers, compensation structures that prioritize short-term deal flow over long-term value creation, and a lack of adequate capital holdings from banks and insurance companies to back the financial commitments they were making. Questions regarding bank solvency, declines in credit availability and damaged investor confidence had an impact on global stock markets, where securities suffered large losses during 2008 and early 2009. Economies worldwide slowed during this period, as credit tightened and international trade declined. Governments and central banks responded with unprecedented fiscal stimulus, monetary policy expansion and institutional bailouts. In the U.S., Congress passed the American Recovery and Reinvestment Act of 2009. In the EU, the UK responded with austerity measures of spending cuts and tax increases without export growth and it has since slid into a double-dip recession.
Many causes for the financial crisis have been suggested, with varying weight assigned by experts. The U.S. Senate s Levin–Coburn Report asserted that the crisis was the result of "high risk, complex financial products-;- undisclosed conflicts of interest-;- the failure of regulators, the credit rating agencies, and the market itself to rein in the excesses of Wall Street." The 1999 repeal of the Glass–Steagall Act effectively removed the separation between investment banks and depository banks in the United States. Critics argued that credit rating agencies and investors failed to accurately price the risk involved with mortgage-related financial products, and that governments did not adjust their regulatory practices to address 21st-century financial markets. Research into the causes of the financial crisis has also focused on the role of interest rate spreads. U.S. Senate Investigations Subcommittee Releases Levin-Coburn Report On the Financial Crisis Wednesday, April 13, 2011.
In December 2008, Gordon Brown, Angela Merkel and Nikolai Sarkozy visited Middle-east and Golf States as Saudi Arabia, United Arab Emirates, Qatar and Kuwait. They organized with Golf States the Finacial Fund to help Eurozon to reduce the consequence of the economic crisis and Iraq war. (http://shrewdeconomist.blogspot.no)
In the immediate aftermath of the financial crisis palliative fiscal and monetary policies were adopted to lessen the shock to the economy. In July, 2010, the Dodd-Frank regulatory reforms were enacted to lessen the chance of a recurrence. (The Dodd–Frank Wall Street Reform and Consumer Protection Act was commonly referred to as Dodd-Frank was signed into federal law by President Barack Obama on July 21, 2010. Passed as a response to the Great Recession, it brought the most significant changes to financial regulation in the United States since the regulatory reform that followed the Great Depression. It made changes in the American financial regulatory environment that affect all federal financial regulatory agencies and almost every part of the nation s financial services industry).

3.2. THE REAL COST OF THE IRAQ WAR- IMPORTANT REASON OF ECONOMIC CRISIS

I think that the major reason of financial crisis which became later economic crisis is the war on Iraq 2003 (The true cost of the Iraq war, Joseph E. Stiglitz and Linda J. Bilmes, 2010).

The authors wrote in 2008 that they estimated the total cost to USA of the Iraq war was at -$-3 trillion. This price tag dwarfed previous estimates, including the Bush administration s 2003 projections of a -$-50 billion to -$-60 billion war. But today, as the United States ends combat in Iraq, it appears that -$-3 trillion estimate (which accounted for both government expenses and the war s broader impact on the U.S. economy) was too low. For example, the cost of diagnosing, treating and compensating disabled veterans has proved higher than they expected.
Moreover, two years on, it has become clear to us that our estimate did not capture what may have been the conflict s most sobering expenses: those in the category of "might have been,"´-or-what economists call opportunity costs. For instance, many have wondered aloud whether, absent the Iraq invasion, we would still be stuck in Afghanistan. And this is not the only "what if" worth contemplating. We might also ask: If not for the war in Iraq, would oil prices have risen so rapidly? Would the federal debt be so high? Would the economic crisis have been so severe?
The answer to all four of these questions is probably no. The central lesson of economics is that resources including both money and attention are scarce. What was devoted to one theater, Iraq, was not available elsewhere.
When the United States went to war in Iraq, the price of oil was less than -$-25 a barrel and futures markets expected it to remain around that level. With the war, prices started to soar, reaching -$-145 a barrel by 2008. We believe that the war and its impact on the Middle East, the largest supplier of oil in the world, were major factors. Not only was Iraqi production interrupted, but the instability the war brought to the Middle East dampened investment in the region.
“In calculating -$-3 trillion estimate two years ago, we blamed the war for a -$-5-per-barrel oil price increase. We now believe that a more realistic (if still conservative) estimate of the war s impact on prices works out to at least -$-10 per barrel. That would add at least -$-250 billion in -dir-ect costs to our original assessment of the war s price tag. But the cost of this increase doesn t stop there: Higher oil prices had a devastating effect on the economy” (See: The true cost of the Iraq war, Stiglitz and Bilmes, 2010)
3.3. FEDERAL DEBT
There is no question that the Iraq war added substantially to the federal debt. This was the first time in American history that the government cut taxes as it went to war. The result: a war completely funded by borrowing. U.S. debt soared from -$-6.4 trillion in March 2003 to -$-10 trillion in 2008 (before the financial crisis)-;- at least a quarter of that increase is -dir-ectly attributable to the war. And that doesn t include future health care and disability payments for veterans, which will add other half-trillion dollars to the debt.
As a result of two costly wars funded by debt, our fiscal house was in dismal shape even before the financial crisis and those fiscal woes compounded the downturn.
The global financial crisis was due, at least in part, to the war. Higher oil prices meant that money spent buying oil abroad was money not being spent at home. Meanwhile, war spending provided less of an economic boost than other forms of spending would have. Paying foreign contractors working in Iraq was neither an effective short-term stimulus (not compared with spending on education, infrastructure´-or-technology) nor a basis for long-term growth.
Instead, loose monetary policy and lax regulations kept the economy going -- right up until the housing bubble burst, bringing on the economic freefall.
Saying what might have been is always difficult, especially with something as complex as the global financial crisis, which had many contributing factors. Perhaps the crisis would have happened in any case. But almost surely, with more spending at home, and without the need for such low interest rates and such soft regulation to keep the economy going in its absence, the bubble would have been smaller, and the consequences of its breaking therefore less severe. To put it more bluntly: The war contributed in-dir-ectly to disastrous monetary policy and regulations.
The Iraq war didn t just contribute to the severity of the financial crisis, though-;- it also kept us from responding to it effectively. Increased indebtedness meant that the government had far less room to maneuver than it otherwise would have had. More specifically, worries about the (war-inflated) debt and deficit constrained the size of the stimulus, and they continue to hamper our ability to respond to the recession. With the unemployment rate remaining stubbornly high, the country needs a second stimulus. But mounting government debt means support for this is low. The result is that the recession will be longer, output lower, unemployment higher and deficits larger than they would have been absent the war.
Reimagining history is a perilous exercise. Nonetheless, it seems clear that without this war, not only would America s standing in the world be higher, our economy would be stronger. The question today is: Can we learn from this costly mistake? AS emphasize Stiglitz and Bilmes.
4. MACROECONOMIC AND FISICAL POLICY
Krugman has done much to revive discussion of the liquidity trap as a topic in economics. He recommended pursuing aggressive fiscal policy and unconventional monetary policy to counter Japan s lost decade in the 1990s, arguing that the country was mired in a Keynesian liquidity trap. The debate he started at that time over liquidity traps and what policies best address them continues in the economics literature.
Krugman had argued in The Return of Depression Economics that Japan was in a liquidity trap in the late 1990s, since the central bank could not interest rates any lower to escape economic stagnation[ The core of Krugman s policy proposal for addressing Japan s liquidity trap was inflation targeting, which, he argued "most nearly approaches the usual goal of modern stabilization policy, which is to provide adequate demand in a clean, unobtrusive way that does not distort the allocation of resources." The proposal appeared first in a web posting on his academic site. This mimeo-draft was soon cited, but was also misread by some as repeating his earlier advice that Japan s best hope was in "turning on the -print-ing presses", as recommended by Milton Friedman, John Makin, and others.
Krugman has since drawn parallels between Japan s lost decade and the late 2000s recession, arguing that expansionary fiscal policy is necessary as the major industrialized economies are mired in a liquidity trap. In response to economists who point out that the Japanese economy recovered despite not pursuing his policy pre-script-ions, Krugman maintains that it was an export-led boom that pulled Japan out of its economic slump in the late-90s, rather than reforms of the financial system.
Krugman was one of the most prominent advocates of the 2008–2009 Keynesian resurgence, so much so that economics commentator Noah Smith referred to it as the "Krugman insurgency." In June 2012, Krugman and Richard Layard launched A manifesto for economic sense, where they call for greater use of fiscal stimulus policy to reduce unemployment and foster growth. The manifesto received over four thousand signatures within two days of its launch, including from prominent economists, and has attracted both positive and critical responses.
5. HOW SCANDINAVIA AVOIDS THE ECONOMIC CRISIS?
Peter Levring comment on Krugman in his article “Scandinavian Debt Crisis Waiting to Happen Puzzles Krugman”(Jan, 2014) that, Scandinavia, which attracted investors during Europe’s sovereign debt crisis, is now coming under international scrutiny on concern that record household debt levels from Denmark to Swedenaren’t sustainable.“You wonder if that’s a crisis waiting to happen,” Nobel Laureate Paul Krugman said in a Jan. 9 interview in Copenhagen.
Scandinavia, which attracted investors during Europe’s sovereign debt crisis, is now coming under international sure, but it’s nervous-making.”Sweden and Denmark boast public debt loads that are less than half the euro-zone average. Norway’s -$-820 billion sovereign wealth fund means its government has no net debt. Yet in all three nations, stable AAA ratings have driven down borrowing costs and fed consumer borrowing sprees that the International Monetary Fund and Organization for Economic Cooperation and Development argue pose a threat to stability.
“You’d think that if you survived the financial crisis without major damage you’re okay, but you’re not,” Krugman said.
In Denmark, consumers owe their creditors 321 percent of disposable incomes, a world record that the Paris-based OECD said in November demands a policy response. In Sweden, debt by that measure is close to 180 percent, a level the government and central bank say can’t be allowed to rise. Norway’s central bank has struggled to find a policy mix that addresses its 200 percent private debt burden.
While many western countries are still reeling from the widening economic crisis and some southern European economies are regarded as basket cases, Scandinavia has been weathering the global financial storm surprisingly well.
The fact that Scandinavian countries have onerous tax systems and generous state welfare benefits seems to contradict accepted economic wisdom in other parts of the world, such as in the United States and the United Kingdom, where the role of the state is generally being rolled back where possible in response to the global crisis.
"Denmark, Finland, Norway and Sweden all belong to the exclusive club of countries with top ratings from the major credit rating agencies. These countries have status as safe havens in financial markets," says Helge Pedersen, the global chief economist at Nordea Bank, a financial services group in the Nordic and Baltic region.
Economists and governments in other less-favoured economies are now starting to ask why it is that Scandinavian economies have been able to avoid the economic turmoil so successfully.
One crucial factor is that some Scandinavian countries received an early inoculation against the kind of boom and bust that has derailed larger and apparently more robust economies, which are still floundering since the US-led housing crash and subsequent financial crisis.
"At the beginning of the 1990s, Norway, Sweden and Finland experienced a banking crisis when the housing bubble burst in the same way that other western economies have now been experiencing," says Steinar Juel, the chief Norwegian economist at Nordea Bank. "Sweden and Finland subsequently implemented good policies in banks together with new fiscal policy rulings."
However, it is inaccurate to lump all of Scandinavia s economies together under the assumption that all are equally robust´-or-subject to the same pressures. Norway s robust economy, for instance, is underpinned by its oil industry, which has benefited massively from the global rise in oil prices. "The Norwegian economy is showing few signs of weakness and we see no reason to change our optimistic view of the economy going forward," says Eric Bruce, an economist who also works for Nordea Bank.
"Growth looks set to be high, but with increased labour immigration, an overheating of the economy and sharply rising costs will probably be avoided. Wage growth will be much higher than in neighbouring countries, but not so high as to push inflation above target."
Strong wage and employment growth, coupled with low inflation, are boosting consumer purchasing power in Norway, with the result that consumption growth in the first half of this year was very high after last year s weaker-than-expected trend. With an initial high level of savings and a sustained strong labour market, economists and market watchers see consumption growth continuing unabated into the next year.
Even at a time when many of Norway s export markets are floundering, Norwegian companies continue to expand globally.
Companies in Scandinavia s other economies are also pressing ahead with overseas expansion. Sweden s Ericsson, the world s largest mobile network equipment maker, is working with Mobile Communication Company of Iran to expand its network. Ericsson s growing investment in Iran comes at a time when many western companies have stopped doing business there because of international sanctions.
But lacking Norway s buffer of oil reserves Sweden may still be facing tougher times ahead. Last month, Sweden s pony-tailed finance minister Anders Borg, announced that he might have to cut the country s growth estimates following the adverse effect of Europe s debt crisis on the country s exports.
According to economists, however, Sweden has been surprisingly resilient to the global turbulence and is significantly strengthened by consumer growth. "Household finances are generally stable. A low inflation level and pay rises jack up households purchasing power," says Torbjorn Isaksson, an economist at Nordea Bank.
It is expected that real disposable income in Sweden will rise by about 2 per cent a year until 2014. Economists are also looking towards growth in consumer spending to boost Denmark s economy. Danish economists predict that the economy will expand at a rate of 0.7 per cent this year, 1.9 per cent next year and 2.1 per cent in 2014.
Finland, however, is facing a slowdown in consumer spending growth, with economic activity decreasing across the board after the first quarter of this year. Nevertheless, Nordea Bank expects the Danish economy to gradually return to growth this year.
No one is certain that Scandinavia will continue to weather the global financial storm. But economists remain confident that their social systems will act as a stabiliser. "When companies face difficulties and lay off staff, the government gives them money to live on and helps them find another job. This is focused to keep the economy on at an even level through difficult times," Mr. Steinar Juel says.
Strengthening social networks could be difficult medicine for some western economies to swallow. But it should be remembered that many of the social safeguards existing in non-Scandinavian economies were put in place as a -dir-ect response to financial crises in the last century.
CONCLUSION
The current crisis represents the most significant set of economic events internationally since the decade spanning the mid-1970s and the mid-1980s. The economic order created following that turbulent decade is now breaking down. What replaces it will depend not just on `objective’ circumstances but on the ability of the left to put forward its own vision of an economy based on need rather than profit as a replacement for the finance-driven accumulation of the last twenty years.
The Nordic experience of financial integration and financial crisis in the 1990s adds to our understanding about the causes and consequences of financial crises. In short, it demonstrates a general pattern that holds for the three countries displaying a boom-bust pattern. There should be no doubt that the financial opening of Finland, Norway and Sweden was the main impulse that initiated a sequence of events that brought these economies into depression. Eventually, the crisis led to major changes and restructuring that transformed the crisis-ridden Nordics into some of the fastest-growing economies in Europe. The long-run effects of financial integration are not as dramatic as the short-run effects, but they may prove to be of greater importance over time.
The history of fiscal federations provides us with a number of conditions necessary for a fiscal -union- to -function- smoothly and successfully and thus also the monetary -union- on which the fiscal -union- is based. The first and probably the most important condition is a credible commitment to a no-bailout rule for the members of the fiscal -union-. The second one is a degree of revenue and expenditure independence of the members of the fiscal -union- reflecting their political preferences. The third condition is a well-developed transfer mechanism to be used in episodes of distress. This transfer mechanism can be facilitated by the establishment of a common bond. The fourth condition is a capacity to learn from past mistakes and adapt to new economic and political circumstances.
The Eurozone was created without an effective fiscal -union-. The institutions that were established to serve as the foundation for the fiscal -union- (the Maastricht Treaty and the Stability and Growth Pact) – to discipline domestic fiscal policies – did not -function- as planned as revealed by the crises and recession from 2007-2009 and onwards. The lessons from the historical experience of the five federal states surveyed by us could be helpful for the Eurozone to avoid disintegration.



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