These pressures then “found out” the whiz kids of the financial services sector. Their mathematical equations had led to a misplaced confidence in abstruse financial instruments with less and less relationship to the real economy. They had converted the ideology of neoclassical economics into mathematical models of risk, falsely believing that economies are purely market systems all of whose principal parameters can be precisely calculated and predicted. Almost no-one had foreseen that the various elements of risk might cascade on top of each other.
Crisis was then diffused internationally not because American hegemony was in decline but because America, its economy, its dollar, and its mathematical economists remained hegemonic. The decline in US economic activity then affected countries with debt problems and also countries which were major US trading partners but which had been “virtuous,” not seduced by debts or greatly widening inequality, neoliberalism, or finance capital, like Germany and France. Closer scrutiny by scared investors then “found out” sectors and countries whose debts were also revealed to be unsustainable once the recession and capital contraction started. In 2007, just before the recession, IMF figures for European states show that only Greece and Italy had public debt levels slightly higher than their GDPs. The average level of government debt across the EU was slightly lower than among the OECD countries as a whole (71% to 73%). Only in Greece was the level of government debt the real problem. In Ireland, Spain and Italy (as in America and Britain) it was private debt that had rocketed—though the main weakness of the Italian economy was its low level of productivity. These economies all had different weaknesses which might not have been “found out” without the American-driven financial crisis. But when recession struck and was worsened by austerity policies, lesser economic activity meant lesser revenues, and so government debt now rocketed everywhere.
The crisis in Europe then worsened when the recession “found out” a quite extraneous weakness of the Eurozone which turned the recession into a major sovereign debt crisis, caused in the first place by the zone’s own internal imbalances. There had been a big outflow of capital from the richer EU countries to the poorer ones, with the Greek government contributing its distinctive dose of fiscal dishonesty. But this crisis had only intensified because of the enthusiasm of the elites of the seventeen eurozone countries—not their peoples and not the elites of the remaining ten EU countries—for “deepening” the Union through a common currency without ensuring adequate backing of the euro by a central bank with treasury and fiscal functions. This was a structural political weakness. The elites knew they would not be able to adequately back up the euro if weaker countries the size of Italy or Spain went to the wall. But as convinced Europeanists they were willing to take this risk even though their national electorates would have rejected any proposal to create a single treasury, and they knew this because the voters had opposed a milder deepening of the EU in each of the last three national referenda held in eurozone countries. For these elites political ideals had trumped their economic sagacity to produce a terrible policy mistake. The European crisis was then worsened by the depth of the austerity programs being pushed for different ideological reasons by both Britain and Germany and forced on the weaker European economies. A contingent conjunction of different economic, ideological, and political causal chains (not military in this case) still threatens to cascade into a much worse “double-dip” recession.
Again, however, the Great Recession spread very unevenly around the world. From World Bank data on GDP growth we can see that almost every country had a difficult 2008 or 2009. In this brief phase the crisis was indeed global. It then deepened in the United States, and across Europe as far east as Russia and its eastern neighbors, and in some poor indebted countries. But by 2010 numerous countries had bounced back to achieve their highest GDP growth rates of the 21st century—including important countries like Brazil, Mexico, Turkey, Nigeria, Canada, Malaysia, Korea, and Singapore. India and Indonesia recovered to almost their previous highest levels, while China’s official growth rate fell from about 10% to 8%, still the envy of the world! All these countries except for Canada are what we used to refer to as “underdeveloped” countries. Most of them had learned the lessons of the structural adjustment decades and had built up reserves to avoid large debts to foreigners. Those countries which had not acted in this way were worse affected. Canada escaped because its newer extractive industries meant a lesser role for the banking sector, which it also kept tightly regulated. That might have been enough for escape in other countries. If this became a systemic crisis, it was one that could have been evaded by different policies.
So like the Great Depression, the Great Recession was only disastrous for some countries. The American virus did spread across the world, mainly through financial channels, though the reduction of international trade mattered too. But many countries got out quickly because they had different structural arrangements, some economic, some political, some ideological. The main structures that worked were: corporatist or developmental states (South Korea); economies whose strong growth did not include a large financial sector (most of them); little neoliberalism (most of them); or merely having prudent policies like the avoidance of foreign debt (most of the Asian cases) or maintaining strict regulation of finance capital (Canada). Almost the whole of South and Southeast Asia plus Oceania, a very large macro-region, was little affected for these reasons and also because this region traded heavily with China (important for the Australian recovery). As in the Great Depression the right policies could minimize the damage, the wrong policies could worsen it. The politics and ideologies which flourish within different macro-regions matter for the outcome. Thus the sovereign debt crisis of the eurozone came as the diffusion of the American crisis interacted with different causal chains—the distinctive political rhythms and institutions of the European Union, and the ideological preference for austerity and avoidance of inflation of German (and British) elites. The internal logic of capitalism in many developing countries would intrinsically lead to further growth. If there is a threat to this it comes from outside, from the self-induced weaknesses of America and Europe.