Chapter 4. Temporary crisis, permanent damage?
Peter Broer, Adam Elbourne, Bert Smid & Nick Zubanov
Contact: Peter Broer
In this chapter
Effects of systemic financial crises on gdp per capita
GDP-loss after crisis large and longlasting
After crises in Sweden and Finland unemployment remained high for a long period
Temporary or permanent
Why is the damage so extensive?
Consequences of the current crisis
Who is who
The credit crisis is likely to have negative effects on the economy long after the initial problems with the banks have been solved. Economists know this because there have been many financial crises in the past and these have often had long-lasting effects. For example, even ten years after the end of a crisis, incomes are lower than they were expected to have been without the crisis and unemployment is markedly higher than when the crisis started. Although economists know that long-term effects are likely, their exact size is not known. The severity of the long-lasting effects is currently the subject of a fierce debate amongst prominent economists.
This chapter discusses several possible explanations for the long-term effects of financial crises. It argues that the effects are likely due to a combination of two causes. First, a reduction in R&D efforts, as a result of higher capital costs and lower growth prospects, leads to a slackening in the pace of technical progress. Second, the severity of the recession leads to a boost in unemployed and skill loss among workers. Low-skilled workers are more likely to remain unemployment and, if employed, are less productive. Additionally, the global character of the current crisis will delay recovery, as export-led growth is not a way out.
A look at the possible prospects for the Netherlands in the coming years contrasts with the positive outlook we had just a year ago. A highly visible long-term effect of the crisis is the structural deterioration in the government finances. The efforts of recent governments to reduce the national debt are likely to be undone without additional policy changes.