What was interpreted as a cyclical problem was fundamentally a structural problem. There was a pressing need for restructuring. Norwegian industries – shipping and wood processing, shipyards and steel works – had allowed themselves to become dependent on high growth and cheap energy. High wage increases pushed up cost levels in manufacturing, and inflation accelerated, amplifying imbalances instead of solving problems and weakening international competitiveness even further. The current account deficit was record-high. A countercyclical policy that resulted in labour market pressures and that kept firms alive artificially provided little help. It delayed restructuring, while inflation and fiscal deficits made restructuring even more urgent. Economic structures were protected rather than being reformed. Countercyclical policy became counterstructural policy. 2 When economic policy changed course around 1980, the Norwegian economy started to get back on its feet again, but Norway’s growth potential was low and new imbalances were building up. The fall in oil prices in 1986 sparked a new, and even deeper, crisis in the Norwegian economy. The economic policy conducted in the 1970s was intended to follow Keynes’ advice. Subsequent developments proved Hayek’s point. To curb a crisis on a lasting basis, the measures implemented must also address the deeper causes of the crisis. The global financial crisis was triggered by the Lehman Brothers bankruptcy on 15 September 2008. The crisis has been attributed to a number of factors. One important event was China’s accession to the World Trade Organization (WTO) on 11 December 2001, almost seven years earlier.
Such reforms will take time. Immune system The situation in Europe illustrates how difficult it can be to curb a crisis once it has arisen. It might therefore be wise to give priority to crisis prevention. A healthy economic system is less vulnerable. Crises can be curbed – or even avoided – by boosting the resilience of the economy. Rather than treating the disease after it has taken hold, much can be accomplished by strengthening the economy’s immune system. The financial crisis revealed deficiencies and system failures worldwide. Many governments and households had taken on too much debt. US investment banks such as Lehman Brothers operated a high-risk business model with low levels of equity. European banks were too dependent on short-term funding in international markets. In a period of growth, it is easy for banks to obtain funding. But the system is fundamentally unstable. Without adequate capital requirements in the banking system, credit growth can spiral out of control. Hayek gave lectures on this topic at the London School of Economics in the early 1930s. 4 The LSE is still home to many economists who argue against the risks of debt-financed growth. 5 Solid banks are built in good times. Solid banks bolster the resilience of the economy and make crises easier to manage. Since the financial crisis, the G20 countries have implemented substantial changes in the global regulatory framework for banks.