Research editorial: The Frankfurt consensus


​By Ludovic Subran, Group chief economist


In Latin America, the “lost decade” of the 1980s was marked by a profound economic crisis, devastating hyperinflation and sociopolitical instability. In 1989, inspired by the ideology of the Chicago School, John Williamson recommended a series of measures aimed at pulling the States out of debt and liberalising foreign trade. This became known as the Washington Consensus. These measures set the direction of multilateral
aid for the next decade. The consequences of these measures are still being debated today.


In Globalization and its Discontents, Joseph Stiglitz looks back on the difficulties and setbacks faced by the international authorities when seeking to apply this range of measures almost to the letter in numerous developing countries. It took until the early 2000s before positions finally changed. Faced with the crisis of 2008, the IMF
even asked the States to use their budget deficits (up to 5 points of GDP) to finance a recovery. The question which now arises is the following: are we not today witnessing the creation of a “Frankfurt Consensus” in Europe?


There are many similarities with the Washington Consensus concerningthe necessary budgetary discipline or structural efforts that have to be made, including privatisation. These similarities are all the more striking when we examine the political and institutional considerations of the current European debates. Strong countries at the heart of the eurozone, such as Germany, are becoming mired in attempts to manage the recovery of peripheral countries which receive conditional aid, such as Greece or Spain. We are also seeing a burgeoning number of mechanisms (including the ESFS and ESM) which in many respects resemble the Bretton Woods institutions. The themes are certainly more elaborate these days.


Today, we talk about competitiveness (instead of liberalisation) and redistribution (instead of taxation) but the effects risk being the same. The scale of the efforts to be made is huge and undeniable, but is there really no otherway to overcome the crisis? An interesting example is the introduction of the European growth pact (1% of the eurozone’s GDP to finance structural reforms). Could we not instead envisage this being used to finance projects with a high return on investment in terms of employment and competitiveness? Faced with budgetary cutbacks, often implemented very quickly, we need to find a different approach both in the short-termand the medium-term, as it is the very industrial and social fabric of nations which is now at stake.



Extract from Euler Hermes Macroeconomic, Risk and Insolvency Outlook - August 2012.
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