Amid one of the worst market routs on record, a chorus of reassuring economic commentators insists that global fundamentals are sound and investors are overreacting, behaving like a panicked herd. Don’t be so sure.

Consider, for example, how wrong economists have been about the effects of the 2008 financial debacle. In April 2010, the IMF declared the crisis over and projected annualized global growth of 4.6 percent by 2015. By April 2015, the forecast had declined to 3.4 percent. When the weak last quarter’s results are released, the reality will probably be 3 percent or less.
Economists are used to linear models, in which changes follow a relatively gradual and predictable path. But thanks in part to the political and economic shocks of recent years, we live in a highly non-linear world. The late Danish physicist Per Bak explained that after long absences, earthquakes come in quick succession. A breached fault line sends shockwaves that weaken other fault lines, spreading the vulnerabilities.
The subprime crisis of 2007 breached the initial fault line. It damaged U.S. and European banks that had indulged in its excesses. The Americans responded and controlled the damage. Euro-area authorities did not, making them even more susceptible to the Greek earthquake that hit in late-2009.

Wrapped up in the details of pension reforms and home foreclosure—matters that, no doubt, have important consequences for many— the big picture has faded into the background. It is easy to forget how we got here, and where we are going.

This op-ed was originally published in Kathimerini.

From 2009 to 2015, the Greek government’s primary deficit (deficit not counting interest payments) declined from 10 percent of GDP to nearly zero. Greece ran a 10 percent of GDP current account deficit with the rest of the world; now the balance shows a surplus. Compare the numbers with Ireland, Portugal, and Spain, or compare them with the historical record of reducing deficits: Greece has delivered as much, or more.
But the austerity was much harsher for Greece. Public spending was pushed down by about 25 percent, an order of magnitude more than in the other countries. This caused GDP and tax revenues to collapse. The perverse consequence was a soaring public debt ratio, which rose from 145 percent of GDP in 2009 to 200 percent of GDP. Simply put, Greece was pushed to run much harder and fell further behind.
Greece’s creditors now want more austerity. Because, once again, growth projections are absurdly optimistic, the debt burden could escalate uncontrollably, leading to calls for more austerity in a never-ending cycle.

Are the eurozone’s continuing woes the result of its incomplete construction or because of policy errors in responding to the crisis?

The euro area member states gave up monetary policies for countering economic adversities, but the founding fathers lacked political will to compensate with pooled resources for helping each other. This incompleteness is surely made worse by wrong-headed policies, delays, and half measures. That said, the distinction is overstated: the incomplete monetary union and repeated policy errors likely come from the same source.
Recent research shows the ECB fell behind the curve at critical junctures of the crisis. As the U.S. Federal Reserve slashed interest rates to fight the Great Recession, the ECB at first raised the policy interest rate in July 2008. That hike came just as euro area industrial production began a prolonged economic contraction. In April and July 2011, the ECB raised interest rates when the American rate was near zero and the Fed was adding stimulus through quantitative easing.
Aside from the Outright Monetary Transactions promise in July 2012 to bail out countries in distress, the ECB has been unable to inspire confidence. Since late-2013, it has reacted to rather than led the fight against deflationary tendencies.

The factors that dragged down the global economy in 2015 will persist – and in some cases even intensify – in the new year.

Last April, the International Monetary Fund projected that the world economy would grow by 3.5% in 2015. In the ensuing months, that forecast was steadily whittled down, reaching 3.1% in October. But the IMF continues to insist – as it has, with almost banal predictability, for the last seven years – that next year will be better. But it is almost certainly wrong yet again.
For starters, world trade is growing at an anemic annual rate of 2%, compared to 8% from 2003 to 2007. Whereas trade growth during those heady years far exceeded that of world GDP, which averaged 4.5%, lately, trade and GDP growth rates have been about the same. Even if GDP growth outstrips growth in trade this year, it will likely amount to no more than 2.7%.
The question is why. According to Christina and David Romer of the University of California, Berkeley, the aftershocks of modern financial crises – that is, since World War II – fade after 2-3 years. The Harvard economists Carmen Reinhart and Kenneth Rogoff say that it takes five years for a country to dig itself out of a financial crisis. And, indeed, the financial dislocations of 2007-2008 have largely receded.