From the financial crisis to the world economic crisis: The role of inequality

A central cause of the crisis, which the public debate has taken little notice of so far, is the rapid increase of income inequality in many industrialised countries, but also in some emerging economies. In the USA many private households have reacted to stagnating real incomes by increasingly extending their borrowing. This was facilitated by a deregulated financial system. Only thus could private consumption become the main pillar of economic growth in the USA for years. The opposite holds for Germany: here the weak wage dynamics and social spending cuts have induced consumption restraint rather than higher debt, thus causing an extended period of weak domestic growth. High capital exports and a strong (and risky) foreign market involvement of the banking sector were the flip side of the extreme export hikes of the German economy, which were enhanced by weak wage increases. In the current financial crisis the limits of these opposite growth models become evident: both are based on the necessity to compensate the sluggish trend resulting from an increasing income inequality with other sources of demand. These consisted either in increased household borrowing (USA, UK, Spain) or in export- led growth (Germany, Japan, China).