12 January 2018
Ten years on from the global financial upheaval, it is increasingly clear that there will never be a return to the old ‘normal’.
Matthew Oxenford

Matthew Oxenford

Research Associate, Global Economy and Finance


The combination of loose money and fiscal austerity may have prevented a financial meltdown, but has had profound distributional effects. Photo: Getty Images.
The combination of loose money and fiscal austerity may have prevented a financial meltdown, but has had profound distributional effects. Photo: Getty Images.


This year marks the 10th anniversary of the 2008 global financial crisis, the most significant financial and economic upheaval since the Great Depression. Recently, it has become tempting to believe that – following expected growth of over 2% in the eurozone for 2017 and a return to increasing interest rates by the Federal Reserve and Bank of England – the global economy has finally returned to normal.

However, this is to ignore the profound and permanent ways in which the global economy has changed as a result of the crisis itself and the policy responses to it, and to underplay the importance of these changes for global economic policy going forward.

It is worth reiterating the scale of the crisis. The crisis required a write-down of over $2 trillion from financial institutions alone, while the lost growth resulting from the crisis and ensuing recession has been estimated at over $10 trillion (over one-sixth of global GDP in 2008). The year 2009 became the first on record where global GDP contracted in real terms. The process of responding to the crisis, the subsequent deep recession and the impacts on governance of the global financial system – and the eurozone in particular – took the better part of the decade to implement before there was a reliable return to growth across the US and Europe.

Many of the direct effects of the crisis still remain active concerns: debt levels across advanced economies, while declining, are still far above where they were before the crisis. (Currently gross debt across advanced economies stands at 106% of GDP as of 2016, compared to 72% in 2007.) Although unemployment in Mediterranean Europe has begun to decline, it still remains incredibly high – over 15% in Spain and 20% in Greece.

And while the banking sector in the US and UK have written off non-performing loans, many eurozone banks even now retain pre-2008 non-performing loans on their books. The World Bank estimates that over 4% of eurozone loans are still non-performing loans, with the number as high as 17% in Italy.

The architecture of economic policymaking has also changed profoundly. Both the political power and balance sheets of central banks have reached unprecedented levels as they have taken on an increased role in regulating the financial system in addition to managing monetary policy, and have employed new tools such as quantitative easing and bank ‘stress testing’.  Internationally, this has been coordinated by the G20, previously considered a minor ‘talking shop’ for finance ministers and central bankers, which had the side effect of bestowing a new level of legitimacy for a body that represented a much wider group of countries than other rich-country ‘clubs’ such as the G7 or OECD.

Meanwhile, after a brief revival of Keynesian stimulus in 2009, including a $787 billion stimulus package in the US, governments increasingly began programmes of austerity, designed to achieve fiscal consolidation and structural reform of the economy, often at the price of high unemployment and diminished public services. The combination of loose money and fiscal austerity may have prevented a financial meltdown, but has had profound distributional effects that are only now being grappled with. While austerity programmes lowered the level of support available for those at the bottom of the income distribution, quantitative easing artificially inflated the prices of many financial assets, rewarding the usually already wealthy holders of these assets.   

Finally, and less tangibly, the credibility of economists remains tarnished. As the Queen famously asked of distinguished economists at the London School of Economics during the height of the crisis, it is still unclear to many observers how so many economists so badly misjudged such a critical risk within their own profession. Additionally, the combination of recovery of financial assets, capital injections of banks and austerity programmes created an impression of an economic logic that prioritized the needs of moneyed interests over those of most individuals.

This combination of scepticism of both the motives and accuracy of the economics profession has had profound political effects, most notably the failures of economic analysis to be persuasive in the Brexit referendum or in response to protectionist platforms such as those of Bernie Sanders and Donald Trump. Indeed, a year ago, there was controversy when the chief economist of the Bank of England went so far as to claim the economics profession remains in an ongoing state of crisis, suggesting the profession is only beginning to engage with questions of its own public legitimacy.

Meanwhile, new economic challenges have arisen over the last decade. Advanced economies’ importance in the global economy has shrunk dramatically, from 69% to 60% of global GDP. Technology has created new markets for data, while threatening mass unemployment and an end to a manufacturing-based development model. Meanwhile, the demographic transition of advanced economies has continued apace as their populations age, with the attendant strains on pensions and health care systems.

Policymakers over the next decade must face these new challenges with still-untested policy tools created for the crisis, while being handicapped by increased debt burdens, higher inequality and unprecedented public scepticism of their endeavours. Understanding how the legacy of the financial crisis remains with us is imperative to addressing this new landscape: over the next 12 months, Chatham House will be providing a retrospective view on the impact of the financial crisis and how it will impact the future of economics.

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