Market forces and reminders of the 2008 and 2012 financial crises are warnings for governments. But there’s still time for policymakers to take action.
When the Eurozone debt crisis was spiralling out of control in 2012, it took one man, Mario Draghi, to bring markets back into line. The European Central Bank chief’s speech promising to do “whatever it takes” to keep the euro together helped to calm investors’ jitters. This week, the world finds itself hurtling towards a similar moment and public reassurance is needed. But can anyone play Draghi’s role this time around?
Financial crises are never just about finance; they’re inevitably political. The global crisis of 2008 was largely driven by private banks and credit institutions, helping to usher in the European collapse of 2012. Yet both events needed the intervention of policymakers – and global displays of unity – to be brought back under control. In 2008 and 2009, globally co-ordinated stimuli, bailouts and central bank currency swaps kept the financial world afloat. In 2012, European bailouts and a united front behind Draghi were essential to keep the euro intact.
This week, market forces from Japan and the UK to Germany and the US are once again testing administrations’ resolve, driving the price of public debt to levels not seen in decades. This is a course correction rather than a full-blown financial meltdown: markets are warning governments that debt levels and interest rates are rising. They’re likely to give policymakers time to respond to the new normal and pledge fiscal responsibility. But amid the more fractured, nationalist and populist brand of politics that we see today, will governments listen?
So far, the answer is no. A meeting of G20 finance ministers in Asheville, North Carolina, this week descended into vicious internal squabbling: the US engaged in a petty war of words with Canada, Europe complained about the US’s invitation of Russia’s finance minister and China withheld its approval from any final joint statement. Governments disagree on the way forward. The US treasury secretary Scott Bessent – who says that growth is the only path out of debt, even as US borrowing last month surpassed the $40trn (€35trn) mark – sought to put pressure on Japan to continue raising interest rates. Asheville marked an opportunity for governments to reassure investors but they failed the test, as borrowing costs have only risen further this week.
Markets have a habit of bringing even the most resistant populists into line on both sides of the political spectrum – think former Greek prime minister Aléxis Tsípras or Liz Truss in the UK. In 2008, for instance, the US Congress rejected a bailout before markets forced them to reverse course. Even at a time when multilateralism is hardly in vogue, conflicts are abounding and leaders such as Draghi are few and far between, markets have the ability to send a much fiercer message to policymakers. Do we really need another full-blown financial meltdown for governments to take the hint?
Chris Cermak is Monocle’s senior news editor. For more news and views, tune in to monocle.com.
