End of a Crisis

IESE professors confirm the end of a cycle


Pedro Videla

Developed economies have now stepped out of the crisis that was unleashed in 2008, placing countless companies, banks and governments in jeopardy. The most critical stage appears to be over, and the countries in question have applied multiple measures, tested the euro’s resilience and are once again experiencing growth, not only throughout Europe, but also in the U.S. and Japan.

IESE professors Núria Mas, Alfredo Pastor and Pedro Videla came together to affirm the conclusion of a cycle, sharing their insights with an audience of Continuous Education participants on the Barcelona campus on November 28, in “2014: Moving Towards Recovery,” a session organized by the Alumni Association.

Prof. Mas, the session’s moderator, began by reviewing the current state of affairs of the world economy’s key players. “We see the emerging economies, who have led world growth over the last several years, slowing down, partly because of the decreasing availability of capital, and export capacity. Despite this change, they are still the countries with greater growth,” she said. 

Mas continued discussing the situation in the U.S. “We can confirm the full recovery of the U.S. with growth nearing 2%. In Europe the situation has also improved, but there continues to be a financial rift between the north and south, with loans being much more difficult and expensive to obtain in the south. The best news in the E.U. is that it is making steady progress towards a banking union.”

According to Prof. Pastor, the recovery of confidence that we are beginning to see is the most crucial ingredient in Europe. “Just two years ago, Europe was plagued by doubts about the future viability of the euro. Today these doubts have dissipated. In addition, we are seeing the return of foreign capital and a reduction in external debt. Getting here has required tremendous belt-tightening and tough austerity measures such as salary and budget cuts, a burden carried by ordinary citizens. These measures have put out fires, but now we have to decide where we are headed,” he explained.

Inequality in Latin America and Profound Changes in China

Among the audience’s questions that the professors addressed were the roles of China and Latin America in the world economy. With regard to Latin America, Pedro Videla pointed out that Peru seen the greatest growth, in a democratic environment, together with Chile and Colombia. “In contrast,” he said, “we have countries like Ecuador, Nicaragua and Venezuela, who are still facing serious difficulties in this region. Nevertheless, the one that worries me the most is Brazil, since all of its growth has been based on encouraging consumption and not investment. In addition, the country is tremendously indebted, and even some of the positive indicators that it has enjoyed over the last several years, such as the inflow of capital, are drying up.”

Referring to China, Alfredo Pastor explained, “The Chinese model reveals huge social inequalities. The country’s tremendous growth has been based solely on investment, since this was the path of progress for leaders within the party. There is an excess of accumulated capital that should be channeled to private consumption, but this would involve handing over more power to the people.”

Next steps for Spain

“Just because the crisis is over and developed economies are growing does not mean that unemployment is going to disappear overnight. It’s a gradual, slow process that still needs further measures,” explained Professor Videla. “In Spain, the unemployment rate is 27% because, during the construction boom, unqualified youth dropped out of school in huge numbers to work in a sector that today holds bleak prospects of offering them employment. To help these people get their foot in the door in the labor market, we need a more flexible system that is less costly to companies,” he continued.

Continuing along the same lines, Pastor emphasized the need to recover the role of the apprentice.  “We need to make it possible for people who are unqualified to be able to work and study at the same time. We cannot return to the 2005 paradigm; we need to work towards creating jobs that Spaniards want.  We will achieve it, but it will be slow process,” he explained.

Another of Spain’s fundamental problems is debt, both public and private. “Spain needs to put its financial affairs in order if it wants to have a voice in the E.U.  We need to be more serious and emulate Germany,” declared Prof. Pastor.  Meanwhile, Prof. Videla suggested the possibility of restructuring Spanish debt in the medium term even though, he pointed out, “It is a complicated discussion given the number of parties involved.”

As for reforms that the government is yet to implement, Pedro Videla supported an overhaul of the public sector with the goal of increasing the system’s efficiency and reducing unnecessary costs. “It is not about cut-backs, but about more intelligent spending,” he explained. Prof. Pastor discussed the need for Spain to find its own way and shape its own plans by the next decade. “Since the sixties, Spain has taken on ambitious national projects, such as the transition to democracy, acceptance into the U.N., becoming a member of the E.U. and more recently, the adoption of the euro. Today, its plan cannot be simply exiting the crisis, for this has already been done. What we need instead is to build an economy that compensates our citizens well for jobs that they actually want to perform,” he concluded.