Olivier Blanchard, IMF chief economist, draws four lessons from the crisis. You won't find any earth-shattering surprises here, but it's good to be reminded of what events have demonstrated. Three key points:
We saw how perceptions often got worse after high-level meetings promised a solution, but delivered only half of one. Or when plans announced with fanfare turned out to be insufficient or hit practical obstacles.And:
The reason, I believe, is that these meetings and plans revealed the limits of policy, typically because of disagreements across countries. Before the fact, investors could not be certain, but put some probability on the ability of players to deliver. The high-profile attempts made it clear that delivery simply could not be fully achieved, at least not then. Clearly, the proverb, “Better to have tried and failed, than not to have tried at all,” does not always apply.
Third, financial investors are schizophrenic about fiscal consolidation and growth.And finally:
They react positively to news of fiscal consolidation, but then react negatively later, when consolidation leads to lower growth—which it often does.
Right or wrong, conceptual frames change with events. And once they have changed, there is no going back. For example, nothing much happened in Italy over the summer. But, once Italy was perceived as at risk, this perception did not go away. And perceptions matter: once the “real money’’ investors have left a market, they do not come back overnight.