The global financial crisis of 2008 has had major geopolitical implications. It marks a turning point in economic globalisation and ends the liberalisation phase that began in the 1980s. However, it is important to remember that it does not signal the end of capitalism. In fact, the crisis may even serve to give the institution of the state a greater legitimacy in relation to markets. Consequently, the liberal, Anglo-Saxon model of capitalism may lose its appeal and influence, while the more European-style models will benefit from increased government intervention.
The main policy response to the crisis was to lower interest rates in an effort to stimulate the economy. Interest rates had already begun to decline in late 2007, but after the collapse of Lehman Brothers and a downturn in global growth, the response began to accelerate. As the recession took hold, central banks rapidly lowered interest rates to near-zero levels and purchased huge amounts of financial securities. These measures were intended to stimulate economic activity by reducing the cost of borrowing and increasing the liquidity in the system.
The initial catalyst for the GFC was the collapse of Lehman Brothers, a large US mortgage lending firm. The collapse of this company triggered a global financial panic as investors began to pull their money out of banks and investment funds all over the world. They were uncertain about which financial firm would come next and whether they were overexposed to subprime mortgages. As a result, the global financial system became highly unstable and many institutions were unable to obtain new financing.
The global financial crisis is a serious threat to the economy. The US is preparing a plan for a global economic crisis that may require hefty government bailouts and recapitalisation of the banking system. This plan will require a coordinated fiscal stimulus package for the developed world as well as emerging economies. While the plan will not avert the recession, it may help to reduce its duration and impact on employment. However, it is important to remember that a unilateral response will only be ineffective and may end up increasing the public debt of the wealthy countries.
In the US, the government approved a plan for a TARP bailout in the amount of US$700 billion. This will inject $250 billion into the banking industry and nationalise some institutions. The rest of the money will be used to purchase toxic assets. The UK has also nationalised part of the banking system and backed inter-bank loans.
The global financial crisis of 2008 may prove to be a great opportunity for the EU and the euro as a global reserve currency. In the coming years, the EU will likely be able to take on more global leadership and speak with a unified voice on the global stage. As a result, the euro could gain ground against the US dollar as the international reserve currency.