Eight decades ago in the 1930s, what started as a commodity and financial crisis developed first into an economic catastrophe and soon after into a political one. Austerity budgetary measures and international market protectionism deepened the economic crisis and helped destroy further the economic and political links of the civilized world, while totalitarian regimes in Germany and Russia re-organized growth into war economies.
In my view, democratic experiences such as the US New Deal or the French Popular Front cannot be considered successful experiments; the so-called “Swedish model” fully initiated in 1932 is the only significant case where the general economic situation as well as democratic institutions not only survived but developed and reinforced themselves in reaction to the crisis.
The world was able to fully recover from the crisis of the thirties only after a devastation of biblical proportions: the Second World War, and the subsequent formation of a New World Order by a dominant power willing and capable of imposing one, the USA.
It goes without saying that no one should expect history to repeat itself and therefore we have to be careful of drawing parallels between the present crisis with the one of the thirties. Perhaps the most obvious difference between the two crises has been the fact that, five years after the beginning of the present crisis, democracy has not been fundamentally challenged in the developed world. There are obvious reasons for concern in what happens in countries like Greece or Hungary, but we are, as yet, far from seeing a massive anti-democratic movement like the one that swept through Europe during the thirties.
Things are different in monetary policy terms too: central banks have been concerned with combating deflation and avoiding bankruptcy contagion, quite contrary to what happened before. Calls to end central bank intervention or for a return to the gold standard have so far had little influence in shaping policies.
Nor do we see a generalized protectionist movement, although some recent developments in this area are far from positive.
Budgetary policies have also been evolving differently than they did 80 years ago
The first unanimous reaction across the World to the present crisis was to allow massive budgetary deficits to occur. However, more recently we have seen budgetary austerity policies being developed as was the case in the thirties. The recent European Treaty on Stability, Coordination and Governance (TSCG) which sets out a uniform draconian pro-cyclical budgetary policy is actually quite similar to the policy followed in the beginning of the thirties.
At the same time, reaction to the excesses of financial system actors has been weaker. Reforms introduced in the US, the UK and the EU do not seem as bold as Glass-Steagall Act of 1933 for example.
On the whole, one could say that the recent crisis has not yet swept away pre-existing economic and political structures as it did during the thirties. Some obvious lessons have been at least partly learned from the past and some mitigating measures have been applied. Still, nothing is certain, as the main ingredients for crisis are still very much there.
An important difference between the present and the thirties has however escaped most comparisons, that is, the dimension and role of tax havens this time round. Nothing equivalent existed eighty years ago. The recent report on China by Global Financial Integrity reveals that the most important sources of Foreign Direct Investment or destination of funds are small island states with tax haven statutes. Even minority positions occupied in Europe are located in countries that work like near tax-havens in the European context, as the City of London or Luxembourg.
According to the Global Financial Integrity report, Chinese trade surplus might actually be double of what statistics point to, due to misinvoincing allowing funds to be detoured through tax havens. Surely this shows how important tax havens may be in shaping world trade equilibriums.
The global dimension of funds held in tax havens is difficult to assess, but some existing estimates based on partial data put the amount of funds in tax havens at enormous proportions. According to Tax Justice Network the 100,000 wealthiest people in the world have a fortune estimated at between US 21 and 31 trillion dollars sheltered away in tax havens. This upper limit represents twice the current value of US GDP.
The question is that a very large and likely the most strategic part of today’s global liquid funds are stowed away in tax havens. These funds are not directly affected by conventional monetary or budgetary policies from states. It is reasonable to ask if the reverse is not the case that is, can these capital flows play a key role in defining exchange rates, trade policies, capital inflows and even budgetary positions?
The history of the last five centuries has shown that global economic crises tend to coincide with periods of political instability characterized by the absence of a clear dominant ruling pole in the world economy.
The end of the gold/pound system on September 21, 1931, was perhaps the crucial moment symbolizing the end of the long British-dominated system that had been ever more apparent since the first World War, and it came as a surprise to most observers that the end of the gold/dollar system on August 15, 1971, did not mark a similar end to the US-dominated World system.
I believe the massive amounts of currency stored in Tax Havens have, in some way, now become the core of our globalized system. This means I am convinced it will not be possible to think of a new architecture for the World system without having a very clear idea of how to deal with these funds.
Paulo Casaca, founder and executive director of the Brussels-based NGO Alliance to Renew Co-operation among Humankind, has been a MEP from 1999 to 2009 and a Councillor of the Portuguese Permanent Representation from 1996 to 1999. He has taught economics at the University of the Azores and the University of Lisbon, and has served as an economics adviser to the Socialist Group in Portugal. Paulo was a member of the Portuguese National Parliament and the Azorean Regional Parliament. Read other articles by Paulo.