Fadda tridico (eds ) the economic crisis in social and institutional context; theories, policies and exit strategies (2015)

The Economic Crisis in Social and
Institutional Context

This book explores the foundations of the current economic crisis. Offering a
heterodox approach to interpretation it examines the policies implemented before
and during the crisis, and the main institutions that shaped the model of advanced
economies, particularly in the last two decades.
The first part of the book provides a theoretical analysis of the crisis. The
roots of the ‘great recession’ are divided into fundamentals with origins in financial liberalization, financial innovation and income distribution, and complementary or contributory factors such as the international imbalances, the monetary
policy and the role of credit rating agencies. Part II suggests various paths to
recovery while emphasizing that it will be necessary to develop alternative strategies for sustainable economic recovery and growth. These strategies will
require genuine political support and a new ‘great European vision’ to address
major issues concerning the EU such as unemployment, structural regional differences and federalism.
Drawing on various schools of thought, this book explains the complexities
of the crisis through a wider evolutionary-institutional and heterodox
framework.
Sebastiano Fadda is Professor of Economics and Director of the Research
Center ASTRIL at the Department of Economics, University Roma Tre, Italy.
Pasquale Tridico is Professor of Economic Policy and Jean Monnet Chair at the
Department of Economics, University Roma Tre, Italy.


Routledge Advances in Heterodox Economics
Edited by
Wolfram Elsner
University of Bremen

and
Peter Kriesler
University of New South Wales

Over the past two decades, the intellectual agendas of heterodox economists
have taken a decidedly pluralist turn. Leading thinkers have begun to move
beyond the established paradigms of Austrian, feminist, institutionalevolutionary, Marxian, Post Keynesian, radical, social and Sraffian economics –
opening up new lines of analysis, criticism and dialogue among dissenting
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of scholarship in which novel combinations of heterodox ideas are being brought
to bear on important contemporary and historical problems.
Routledge Advances in Heterodox Economics aims to promote this new
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policy, philosophy, intellectual history, institutional history and pedagogy. Syntheses or critical engagement of two or more heterodox traditions are especially
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1 Ontology and Economics
Tony Lawson and his critics
Edited by Edward Fullbrook
2 Currencies, Capital Flows and
Crises
A post Keynesian analysis of
exchange rate determination
John T. Harvey
3 Radical Economics and Labor
Frederic Lee and Jon Bekken
4 A History of Heterodox
Economics
Challenging the mainstream in
the twentieth century
Frederic Lee

5 Heterodox Macroeconomics
Edited by Jonathan P. Goldstein

and Michael G. Hillard
6 The Marginal Productivity
Theory of Distribution
A critical history
John Pullen
7 Informal Work in Developed
Nations
Edited by Enrico A. Marcelli,
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Pascale Jossart
8 The Foundations of
Non-Equilibrium Economics
The principle of circular and
cumulative causation
Edited by Sebastian Berger


9 The Handbook of Pluralist
Economics Education
Edited by Jack Reardon
10 The Coming of Age of
Information Technologies and
the Path of Transformational
Growth
A long run perspective on the
2000s recession
Davide Gualerzi
11 Cultural Economics and Theory
The evolutionary economics of
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William M. Dugger, William Waller,
David Hamilton, and Glen Atkinson
12 The Cultural and Political
Economy of Recovery
Social learning in a post-disaster
environment
Emily Chamlee-Wright
13 The Foundations of Institutional
Economics
K. William Kapp
Edited by Sebastian Berger and
Rolf Steppacher
14 Alternative Theories of
Competition
Edited by Jamee K. Moudud,
Cyrus Bina and Patrick L. Mason
15 In Defense of Post-Keynesian
and Heterodox Economics
Responses to their critics
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16 The US Economy and
Neoliberalism
Alternative strategies and policies
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17 Technological Change and
Network Effects in Growth

Regimes
Exploring the microfoundations of
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Torsten Heinrich
18 The Foundations of
Evolutionary Institutional
Economics
Generic institutionalism
Manuel Wäckerle
19 Re-Thinking Economics
Exploring the work of
Pierre Bourdieu
Edited by Asimina Christoforou
and Michael Lainé
20 Networks of Institutions
Institutional emergence, social
structure and national systems of
policies
Shuanping Dai
21 An Ecosystem Approach to
Economic Stabilization
Escaping the neoliberal wilderness
Rodrick Wallace
22 The Economic Crisis in Social
and Institutional Context
Theories, policies and exit
strategies
Edited by Sebastiano Fadda and
Pasquale Tridico

This series was previously published by The University of Michigan Press and
the following books are available (please contact UMP for more information):
Economics in Real Time
A theoretical reconstruction
John McDermott
Liberating Economics
Feminist perspectives on families, work, and globalization
Drucilla K. Barker and Susan F. Feiner
Socialism After Hayek
Theodore A. Burczak
Future Directions for Heterodox Economics
Edited by John T. Harvey and Robert F. Garnett, Jr.
Are Worker Rights Human Rights?
Richard P. McIntyre


The Economic Crisis in Social
and Institutional Context
Theories, policies and exit strategies

Edited by Sebastiano Fadda and
Pasquale Tridico


First published 2015
by Routledge
2 Park Square, Milton Park, Abingdon, Oxon OX14 4RN
and by Routledge
711 Third Avenue, New York, NY 10017

Routledge is an imprint of the Taylor & Francis Group, an informa business
© 2015 selection and editorial matter, Sebastiano Fadda and Pasquale
Tridico; individual chapters, the contributors
The right of the editors to be identified as the authors of the editorial
matter, and of the authors for their individual chapters, has been asserted
in accordance with sections 77 and 78 of the Copyright, Designs and
Patents Act 1988.
All rights reserved. No part of this book may be reprinted or reproduced or
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Trademark notice: Product or corporate names may be trademarks or
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without intent to infringe.
British Library Cataloguing in Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging in Publication Data
The economic crisis in social and institutional context: theories, policies
and exit strategies/[edited by] Sebastiano Fadda.
pages cm.
Includes bibliographical references and index.
1. Recessions. 2. Financial crises. 3. Economic development.
4. Economic policy. 5. Global Financial Crisis, 2008–2009.
I. Fadda, Sebastiano.
HB3711.E424 2015
330.9′0511–dc23
2014036829
ISBN: 978-1-138-80559-0 (hbk)
ISBN: 978-1-315-75219-8 (ebk)

Typeset in Times New Roman
by Wearset Ltd, Boldon, Tyne and Wear


Contents

List of figures
List of tables
List of contributors
Acknowledgements
About the book
Introduction

ix
x
xii
xiv
xv
1

SEBASTIANO FADDA AND PASQUALE TRIDICO

PART I

Crisis interpretation: a heterodox approach
1 Economic crisis and the explanatory power of (institutional)
economics

7

9

JOHN GROENEWEGEN

2 Causes of the ‘great recession’ and economic policy
implications

26

PHILIP ARESTIS AND ELIAS KARAKITSOS

3 Financialization, financial systems and sustainable
development

42

MALCOLM SAWYER

4 Financial capitalism trapped in an ‘impossible’ profit rate:
the infeasibility of a ‘usual’ profit rate, considering fictitious
capital, and its redistributive, ecological and political
implications
WOLFRAM ELSNER

55


viii Contents
5 The battle of ideas in the Eurozone crisis management:
German ordoliberalism versus post-Keynesianism

78

BRIGITTE YOUNG

6 From economic decline to the current crisis: a comparison
between Italy, France and Germany

91

PASQUALE TRIDICO

PART II

Exit perspectives and development strategies
7

Should we cut the welfare state in order to get out of the
crisis? Some methodological considerations

117

119

SEBASTIANO FADDA

8

The future of the euro

134

VINCENT DUWICQUET, JACQUES MAZIER, PASCAL PETIT
AND JAMEL SAADAOUI

9

Consumption and credit for households in the run-up to
crisis and in the efforts to overcome recession

151

MARIA LISSOWSKA

10 United in diversity: consequences for common labour
market policy in the times of crisis

178

JACEK WALLUSCH AND BEATA WOŹNIAK-JĘCHOREK

11 A cultural political economy of crisis recovery:
(trans-)national imaginaries, growth dynamics in the
‘BRIC’ and the Chinese case

200

NGAI-LING SUM

Index

220


Figures

4.1
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
6.10
6.11
6.12
6.13
6.14
6.15
6.16
6.17
6.18
6.19
6.20
6.21
8.1
8.2

8.3
8.4
10.1
10.2
10.3

PR for Germany, conventional and corrected
Labour flexibility of regular employees
Labour flexibility of temporary employees
Labour flexibility – temporary work
Italian stagnant wages
The declining of wage shares in the economy
Labour and capital in Italy 1990–2005
Indirect wage, total public expenditure
Indirect wage, social expenditure
Labour policies and unemployment subsidies
Income inequality
Correlation scatter inequality and EPL
The decline in the consumption level
The decline in the investment level
The Italian decline
The decline in investment changes
The industrial decline
The gap in R&D
Labour productivity
Employment trends
Unemployment trends
GDP performance during the crisis
REERs based on unit labour cost (relative ULC)
REERs based on unit wage cost (relative unit wage cost)

REERs based on export price deflator (export price
competitiveness)
Level (RULC) and equilibrium relative unit labour cost
(RULC*)
Kernel distributions of variables expressed in first differences
Impulse response analysis results: responses to shocks in real
wage
Impulse response analysis results: responses to shocks in
institutional variables

67
96
96
97
98
99
90
100
100
101
102
103
104
104
106
107
108
109
110
111

112
113
137
138
139
140
190
193
194


Tables

6.1
6.2
8.1
8.2
8.3
9.1
9.2
9.3
9.4
9.5
9.6
9.7
9.8
9.9
9.10
9.11
9.12

9.13
9.14
9.15
10.1
10.2
11.1
11.2

National accounts: contribution to growth
Regression table, cross-country
Misalignments in real effective terms
Panel unit root test with structural breaks
Panel cointegration tests
Compensation of employees in value added
Growth and convergence of GDP and consumption
Increase/decrease of GDP 2009–2011
Consumption per inhabitant vs average earnings in
post-transition countries, as a percentage of the Netherlands
Expenditure on social protection as a percentage of GDP
Indebtedness of households and NPISH – debt as a
percentage of disposable income
Inflow of foreign credits as percentage of GDP
Rate of unemployment in post-transition countries
Indicators of inequality and poverty in 2000s
Gross debt to gross disposable income of households and
NPISH
Residential mortgage debt as a percentage of gross
disposable income of households and NPISH
Consumer credit outstanding in percentage of household
disposable income

Comparison of the growth of indebtedness and growth of
consumption of households
The indicators of inequality and poverty in European
countries
Gross debt to household income in post-crisis period
Descriptive statistics of variables expressed in first differences
Summary of the impulse-response analysis
The production of ‘hope’/‘strength’: three overlapping stages
in the production of ‘BRIC’ knowledge
Major BRIC knowledge products constructed by Goldman
Sachs team

104
106
136
142
142
154
157
158
158
158
160
160
161
162
165
166
167
168

170
171
191
192
202
205


Tables xi
11.3
11.4

Net inflows of portfolio equity to the BRIC economies
2002–2008
The central–local government’s share of the stimulus
package and sources of finance in China 2008–2010

206
209


Contributors

Editors
Sebastiano Fadda is Professor of Economics and Director of the Research
Center ASTRIL at the Department of Economics, University Roma Tre, Italy,
where he teaches Advanced Labour Economics and Economic Growth. He is
the director of a two-year Master’s degree course (Labour Market, Industrial
Relations and Welfare Systems). He has worked extensively on institutions,
economic development and labour economics issues. He is the author of

many journal articles and books on these issues, including two edited books
with Routledge (Financial Crisis, Labour Markets and Institutions, 2013;
Institutions and Development after the Financial Crisis, 2013).
Pasquale Tridico is Professor of Economic Policy and Jean Monnet Chair at the
Department of Economics, University Roma Tre, Italy, where he lectures in
Labour Economics, European Labour Market and Development Economics.
He is General Secretary of the EAEPE (European Association for Evolutionary Political Economy). In the academic year 2010–2011 he was a Fulbright
Research Scholar at the New York University. He is the author of several
books and articles on institutional economics, labour markets, varieties of
capitalism and financial crisis, including three edited books with Routledge
(Financial Crisis, Labour Markets and Institutions, 2013; Institutions and
Development after the Financial Crisis, 2013; Economic Policy and the Financial Crisis, 2014). He is also the author of Institutions, Human Development and Economic Growth in Transition Economies (Palgrave, 2011).

Contributors
Philip Arestis, University of Cambridge, UK.
Vincent Duwicquet, CLERSE, University of Lille 1, France.
Wolfram Elsner, University of Bremen, Germany.
Sebastiano Fadda, University Roma Tre, Italy.


Contributors

xiii

John Groenewegen, Delft University.
Elias Karakitsos, Global Economic Research.
Maria Lissowska, Warsaw School of Economics and European Commission.
Jacques Mazier, CEPN, University Paris 13.
Pascal Petit, CEPN, University Paris 13.
Jamel Saadaoui, BETA, University of Strasbourg.

Malcolm Sawyer, University of Leeds.
Ngai-Ling Sum, Lancaster University.
Pasquale Tridico, University Roma Tre.
Jacek Wallusch, Institute of Cliometrics and Transition Studies.
Beata Woźniak-Jęchorek, Poznan University of Economics.
Brigitte Young, University of Muenster.


Acknowledgements

This book is a collection of papers presented at the EAEPE (European Association for Evolutionary Political Economy) Summer School held at the University
Roma Tre, in Italy, 1–5 July 2013. The Summer School’s main theme was
‘Social and institutional context of the crisis’. Authors elaborated policies, institutions and exit strategies from the crisis. We wish to thank all the participants at
the Summer School, students and professors, who were a source of great
inspiration.


About the book

The aim of this book is to explore both the foundations of the current economic
crisis, offering a heterodox approach to interpret the crisis, and the policies
implemented during the crisis and before, along with the main institutions which
shaped the model of advanced economies in the last two decades in particular.
The book is divided in two parts. In the first part a theoretical analysis to interpret the crisis is put forward. The main interpretation here is that in the current
socio-economic systems the understanding of the causes and remedies of a crisis
is a complex issue in which the level of actors, the level of private governance,
the level of public governance and the level of social values need to be addressed
in an interdependent, systemic, evolutionary way. In this context, the origins of
the ‘great recession’ are divided into fundamentals (which originate in the financial liberalization, financial innovation and income distribution) and complementary or contributory factors (such as the international imbalances, the
monetary policy and the role of credit rating agencies). In the second part, we

show, through a range of different examples, empirical evidences, varieties of
capitalism and of political economy frameworks, observed policy options and
discourse analysis that there are several ways to go out from the crisis, to
develop alternative strategies for sustainable economic recovery and growth.
These strategies need first of all genuine political support, and, as far as the
European Union is concerned, a new scheme of governance, a new ‘great European vision’ which would address the major EU issues such as unemployment,
structural regional differences and federalism.
The advantage of this analysis is connected with its complexity and with the
multi-task attempts and scientific three purposes of the book. First of all the
attempt to explain the crisis through a wider evolutionary-institutional and heterodox approach, which is not at all based on a single school of thought, but quite
multi-disciplinary and complex. Second, the attempt to propose alternative development strategies. Third, the attempt to propose a critical review of the current
political economy paradigm in which advanced economies are inserted.


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Introduction
Sebastiano Fadda and Pasquale Tridico

This book focuses on the current financial and economic crisis that advanced
economies in particular have been suffering in the past seven years at least since
2007. It has the objective to explore both the foundations of the economic crisis,
offering a heterodox approach to interpret the crisis, and the policies implemented during the crisis and before, along with the main institutions which
shaped the model of advanced economies in the last two decades in particular.
The book offers also an exit perspective explored through case studies, and
development strategies.
The book is divided into two parts. The first part has the broad ambition to
show that the current financial and economic crisis can be considered a systemic
crisis, and it involves politics, social values and economics. In general, the

origins of the ‘great recession’ are found in the financial liberalization, financial
innovation and distributional effects. The contributory factors were: international
imbalances; monetary policy; the role of credit rating agencies. The book
reviews the changes in the structure of the financial sector associated with financialization, and argues that those changes have made for a financial system more
prone to crisis. It is argued that those changes may have tended to reduce the rate
of growth. In this context, the financial and economic crisis appears also as a
crisis of dramatic over-accumulation, favoured by the emerging and circulation,
during the booming period of financial innovation, of fictitious capital at a global
level.
In Europe, economic diffi
difficulties
culties are deepened by strong philosophical differences based on economic doctrines that are conditioned by a legacy of national
Varieties of Capitalism. On the one side, there is the German ordoliberal doctrine which hails from the late nineteenth century, which is an anti-Keynesian,
supply side export-led, monetarist rule-based model, and on the other a demandled Keynesian doctrine. The first seems to dominate due to the veto that
Germany is able to play within the EU and within the Eurozone in particular.
These ordoliberal policies, and in particular the supply side policies in place in
the past 15–20 years in the EU, worsened the position of Mediterranean economies. The reforms of the labour market, with the introduction of labour flexflexibility, the neoliberal policies adopted following both the Washington Consensus
at international level and the Maastricht Treaty at European level, along with


2

S. Fadda and P. Tridico

other policies introduced in parallel, such as retrenchment of welfare state and
privatization of public goods, had cumulative negative consequences on the
inequality, on the consumption, on the aggregate demand, on the labour productivity and on the GDP dynamics.
The second part is more policy oriented. First of all it criticizes the attempt to
implement in Europe structural reforms aiming at reducing social expenditure.
We argue that neither the budget constraint, nor the globalization process, nor

the efficiency issue are to be considered valid reasons why the welfare state
should be reduced. While a deep restructuring of the welfare system seems
necessary in order to improve its effectiveness and its response to the changing
social needs, the restructuring efforts should focus on increasing productivity
and reducing the unit costs of welfare services.
We present a collection of stylized facts about economic and institutional
convergence/divergence in Eurozone countries in the period 2007–2011, from a
Varieties of Capitalism perspective. The aim is to show a sort of ‘Germanization’ of macroeconomic policies in the Eurozone as reflected in the Fiscal
Compact which do not seem to solve problems, in particular in Mediterranean
economies. In fact, it will be argued that the diversity in the Eurozone has costs
and advantages respectively for countries whether they are confronted with an
overvalued or undervalued euro. In order to overcome these problems, we
propose a budgetary federalism, based on long-term investment programmes
with an enlarged political support.
Another focus of this second part of the book will be the damages, in particular in post-transition countries (new member states of the European Union),
created by extreme financialization, where growing inequality and poverty
together with consumerism may be indicated as a reason of rapidly growing
debt, mostly in the form of consumer credits. Indebtedness enabled by foreign
financing amplified the possibilities to consume, but, when easy credit disappeared, deepened recession. Recovery strategies here can be offered only by
demand side policies. It emerges also clearly that differentiated strategies are
needed in Europe, in particular when one adds the new EU member states’ perspective. Finally, it is interesting to look at the cultural political economy
approach to examine the current discourses and practices of crisis recovery. This
would allow to see the inconsistencies of political leadership and the tensions
which arise between reality and rhetorical discourses.

The structure of the book
The book is structured in two parts. In the first part (‘Crisis interpretation: A heterodox approach) the authors try to give alternative explanations of the crisis and
of the contradictions of the financial capitalism model which was embraced by
most of the advanced economies in the last two to three decades. In Chapter 1
John Groenewegen argues that all scientific knowledge is formulated in models

of the real world. In applying concepts, theories and models inevitably choices
are made: in representing the real world the scientist isolates vertically and


Introduction 3
horizontally such that reality becomes ‘manageable’. These choices are not arbitrary. On the contrary: the debate among scientists is about the relevancy of specific models for on the one hand the research questions one is interested in (what
causes the economic crisis?) and on the other hand about the resemblance of the
assumptions in the models with the conditions in the real world. Groenewegen
distinguishes two schools of thought in institutional economics: one based on the
methodological principles of neoclassical economics (NIE) and the other based
on alternative principles (OIE). On the basis of that markets and the actors are
modelled and consideration about consequences and causes of the crisis vary.
In Chapter 2 Philip Arestis and Elias Karakitsos discuss the causes of the
‘great recession’ and the policy implications. They concentrate on the financial
liberalization and income redistribution, which produced the new financial engineering rooted in the USA, which led to an extraordinary mispricing of risk. The
new financial engineering practice led to the growth of collateralized debt instruments, especially so collateralized mortgages, essentially through the parallel
banking sector in the USA. When that market collapsed the ‘great recession’
emerged. The authors distinguish between the main factors and the contributory
factors of the crisis. Then they turn to economic policy implications with a
number of very interesting proposals for countries or groups of countries, and
the European Union in particular.
In Chapter 3 Malcolm Sawyer discusses the characteristics of a sustainable
development model. An ecologically sustainable growth path, he argues, has
many prerequisites: amongst those would be the construction of a financial
system which is itself sustainable and which is consistent with the funding of
investment which supports a sustainable growth path. The financial system has
often been viewed as something of a driver for economic growth, and as such
lower and sustainable growth requires some taming of the financial system. The
first part of his chapter discusses the relationships between financialization,
growth of the financial sector and growth of economic activity. It is particularly

concerned with whether indeed the financial system fosters growth, and whether
more recently the relationship between financial growth and economic growth
has changed. The second is based on the argument that there is not a general
shortage of finance for investment particularly in a slower growth era, and that
much more attention should be paid to ensuring that the direction of finance is
towards environmentally friendly and ‘green’ investment. It cannot be expected
that a financial system will ensure such a direction of finance, and that measures
will be needed in terms of regulation and restructuring the financial system to
aid the redirection of finance.
In Chapter 4 Wolfram Elsner puts forward an interesting Marxian explanation
of the crisis. He explores the crisis and some implications against the Marxian
profit rate (PR). The PR helps in explaining a number of phenomena often considered disparate. The focus is on integrating exploded fictitious capital in the
PR and to estimate a corrected PR. Elsner estimates global fictitious capital and
calculates a conventional and a corrected PR for Germany. The corrected PR has
reached a historical low under neoliberalism, in spite of an increase in profit


4

S. Fadda and P. Tridico

masses and profit shares in GDP, between one-half and one-fifth of the conventional PR (for post-WWII USA and UK, and post-1991 Germany, respectively).
In contrast to the conventional PR, it also has further decreased. The financial
crisis thus appears to be a crisis of dramatic over-accumulation. The consequences include reinforced redistribution and a run for transformation into real
values (resources-/land-grabbing). The redistribution requirements for a ‘usual’
PR appear inconsistent even with formal democracy.
In Chapter 5 Brigitte Young confronts the different ideas on the basis of
which the Eurozone crisis was managed. In particular she compares the German
ordoliberalism models versus the post-Keynesian model and she argues that the
inability of European member states of the Eurozone to arrive at a coordinated

reform agenda for the Euro crisis is not due to failures of individual leaders, but
rather due to philosophical differences based on economic doctrines that are conditioned by a legacy of national Varieties of Capitalism. On the one side, there is
the German ordoliberal doctrine which hails from the late nineteenth century
which is an anti-Keynesian, supply side export-led, monetarist rule-based model,
and on the other a demand-led Keynesian model. The author tries to demonstrate
how economic ideas of ordoliberalism have become agenda setters and actors
using these ideas have become veto players in preventing an alternative discourse and practice, i.e. non-austerity at the Euro level. In the present Euro crisis
resolution scenario, the influence of ordoliberalism is most evident in the institutions such as the German Bundesbank and the Federal Ministry of Finance with
its focus on price stability. This argument differs from more traditional explanations which cite geopolitical factors such as Germany becoming a more normal
nation, to the hypothesis of Germany being a ‘reluctant Hegemon’ (The Economist), to subjective factors such that Angela Merkel has little connection to the
European idea (Tony Judt).
In Chapter 6 Pasquale Tridico compares the economic crisis and the decline
which is occurring in Italy with the crisis in France and Germany. The current
global economic crisis, which also Italy fell into in 2008, represents just the last
step of a long declining path for the Italian economy which began in the 1990s,
or to be more precise in 1992 and 1993. This was not the case for France and
Germany. In particular, the author argues, the reasons which explain the long
Italian decline, and partly also the deeper recession today, as well as the lack of
recovery from the current crisis, can be found in the past reforms of the labour
market. We focus on the labour flexibility introduced in the last 15 years, which
had, along with other policies introduced in parallel, cumulative negative consequences on the inequality, on the consumption, on the aggregate demand, on
the labour productivity and finally on the GDP dynamics. These policies were
possible within the neoliberal model inaugurated in Italy with the adhesion to the
Washington Consensus doctrine, and the changes introduced by the Maastricht
Treaty.
In the second part of the book (‘Exit perspectives and development strategies’) the authors advance possible solutions, alternative models and empirical
analysis on the basis of which good policies and institutions could be designed.


Introduction 5

In Chapter 7 Sebastiano Fadda argues that a deep restructuring of the welfare
system is necessary in order to improve its effectiveness and its response to
changing social needs. However, restructuring efforts should focus on increasing
productivity and reducing the unit costs of welfare services. In fact, neither the
budget constraint, nor the globalization process, nor the efficiency issues are to
be considered valid reasons as to why the welfare state should be reduced.
Unfortunately, widespread ideological preferences and perverse resistance
against unit cost reduction seem to be supporting the trend towards a reduction
in social expenditures through a substantial downsizing, if not the full dismantling, of the welfare state.
In Chapter 8 Vincent Duwicquet, Jacques Mazier, Pascal Petit and Jamel
Saadaoui discuss the future of the euro. The Euro crisis, they argue, illustrates
the deficiencies of adjustment mechanisms in a monetary union characterized by
a large heterogeneity. Exchange rate adjustments being impossible, few alternative mechanisms are available. Nevertheless, fiscal policy could play an active
role. In a federal state like the USA its stabilization coefficient is around 20 per
cent. But there is no equivalent in the European case. Well-integrated capital
markets, with portfolio diversification and intra-zone credit, have been proposed
as a powerful adjustment mechanism by the ‘international risk sharing’
approach. Intra-zone credit and capital income from international portfolios
would have stabilization coefficients around 20–30 per cent each. These results
have been used during the 2000s by proponents of liberal economic policies in
the EU to promote deeper financial integration without having to develop a
federal budget. However, the theoretical basis and the results, the authors conclude, appear highly questionable.
In Chapter 9 Maria Lissowska discusses the role of credit to households as an
element speeding up consumption to unsustainable levels and thus contributing
to the run up to financial crisis of 2008. She provides an overview of the literature indicating different underpinnings of the crisis. This chapter analyses the
particular case of post-transition countries where increase of household debt was
very fast and underpinned by rising income inequalities, suspicious consumption
and availability of credit. However, a similar process of cumulating of household
debt took place in Western European countries, while the initial debt level was
higher and mortgage credit constituted its prevailing part. The chapter then

points out the differentiated degree of deleveraging of households and its reasons
across countries. It confirms that increase of lending to households should be
very prudent to avoid further risk of non-performing loans and over-indebted
consumers, by the spiral of broadening risk margins and the negative selection
of more and more risky borrowers.
In Chapter 10 Jacek Wallusch and Beata Woźniak-Jęchorek argue that the
labour market policy in unified Europe operates in an extremely diversified
environment. Persistent unemployment has structural characteristics, which ultimately depend on the institutional arrangement regarding unemployment benefits and employment protection. The relationship between unemployment and
labour market institutions, however, goes much deeper and concerns norms,


6

S. Fadda and P. Tridico

habits, traditions and culture. The aim of this chapter is to trace the impact of
real wage and selected institutional variables (Kaitz index, gender gap, tax
wedge and union density) on the unemployment rate in the old and new EU
countries. The authors’ estimations show that both magnitude and the direction
of unemployment rate responses differ in old and new EU economies. These
conclusions seem to be particularly important from the perspective of creating
recommendations for EU Labour Market Policy.
Finally, in Chapter 11 Ngai-Ling Sum discusses the cultural political
economy (CPE) roots of the crisis recovery. In particular she applies a cultural
political approach to examine the ‘BRIC’ (Brazil, Russia, India and China)
cases. During crises, economic and political actors search for and/or construct
objects of ‘growth’ and ‘hope’ that may secure recovery. She examines three
overlapping stages in the (re-)making of the ‘BRIC’ as an object of ‘hope’, starting with its invention after the 9/11 attacks. Then she examines how ‘BRIC’ discourses were recontextualized in the Sinophone world, focusing on how China’s
‘growth’ was supported by a vast stimulus package following the 2008 global
financial crisis. This package posed serious fiscal challenges, especially for

regional-local authorities. It intensified land-based accumulation, inflated the
‘property bubble’, stimulated land clearance/dispossession, local government
debt and social unrest. Finally, she summarizes the main lessons of this CPEinspired analysis of the ‘BRIC’ imaginaries and the Chinese case and considers
alternative imaginaries.


Part I

Crisis interpretation
A heterodox approach


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