Nobel Prize Economist: Crisis could be back

Nobel Prize economist Jean Tirole told digital Portuguese newspaper ECO – Economia online that while Portugal’s economic indicators have improved, it should not declare a victory because the crisis could return and there was still much to do.

The French economist was in Lisbon this week to promote his latest book “The Economy of the Common Good” when he said Portugal needed to tackle its debt and consumers and government need to save for the next crisis.

He said that the 2008 crisis did and did not make ordinary people more aware of economic problems. “They understood that the economy is incredibly important, but at the same time many people blamed the economists for the crisis which wasn’t entirely fair.

“It’s precisely when things are going well that problems are created,” he said, adding that in the case of France, over the past 40 years, that despite periods of economic growth, France had never achieved a positive balance in terms of savings and budget surpluses.

“It’s tempting for politicians to go on a spending spree when the economy is expanding, but that’s precisely when governments need to prepare for the next crisis,” Tirole pointed out.

“This [the banking crisis) was a crisis of the State, because the politicians didn’t regulate the banks as they should have done and now we have a better understanding of the need to better regulate the banks and why. It’s just a shame that this was only done after the crisis and not before.”

Tirole became the second Frenchman to receive a Nobel Prize in 2014, winning the Economic Sciences award for his research into curtailing the power of oligopolies.

The committee praised Tirole for developing the first encompassing and coherent theory of industrial organisation — the field of economics that deals with industry structure and competition between companies — and lauded his contribution to the regulation of oligopolies.

The economist has strongly criticised the role of governments and regulators in the global financial crisis and the euro crisis which hit Portugal in 2008 and resulted in the country seeking a €78Bn bailout loan in 2011 from the International Monetary Fund (IMF) and the European Union (EU).

He said that both crises stemmed from lax prudential supervision in the case of the word financial crisis and lax government supervision in the run-up to the euro crisis.

The financial and debt crisis and ensuing recession led to Portugal being unable to repay or refinance its government debt without the assistance of third parties. To prevent bankruptcy, Portugal applied for a bail-out programme and drew a cumulated €79.0 billion (as of November 2014) from the International Monetary Fund (IMF), the European Financial Stabilisation Mechanism (EFSM), and the European Financial Stability Facility (EFSF).