Ten years ago, at the end of 2008, the entire world was shaken by a genuine earthquake. In the United States, a bank of colossal proportions, Lehman Brothers, declared its default — that is, its inability to repay its debts. A collapse that swiftly dragged down with it a large chunk of the American and global financial system.

Causes and consequences of the crisis: from subprime mortgages to bailout plans

The institution's ramifications were so numerous that it took dozens and dozens of experts, lawyers and liquidators, as well as years of work, to unpick the web of all its businesses. Work that also led to the discovery of the causes of the historic collapse. From subprime mortgages (loans granted to citizens who had no means of repaying them, simply to boost sales volumes) to market speculation; from "derivative" financial products (those that derive their value from other financial products), to the absence of adequate rules and oversight.

The vortex, within a short space of time, first brought dozens, then hundreds, then thousands of other banks to collapse. Giants such as Merrill Lynch, Aig, Freddie Mac, Fannie Mae, Hbos, Royal Bank of Scotland, Bradford & Bingley, Fortis, Hypo and Alliance & Leicester were the subject of emergency bailouts. The financial crisis then quickly spread to other countries: in particular the United Kingdom, Belgium, Iceland, Spain, Russia and Ukraine.

The contagion of the real economy and the (different) choices of the United States and the European Union

In the meantime, markets had already entered a panic: stock exchanges were crashing, funds were divesting, traders were trembling. So, in an attempt to stem the crisis and salvage what could be salvaged, numerous Western states found themselves compelled to reach for their wallets. Central banks such as the American Federal Reserve, the Bank of England and the European Central Bank itself decided, over the following months and years, to inject enormous quantities of liquidity into economic systems (the so-called quantitative easing). While alongside governments they supported (in some cases nationalising) banks, funds and insurance companies in order to prevent their default.

It is estimated that tens of thousands of billions were spent, adding together all the aid granted worldwide to the financial sector, to prevent the system from collapsing. A policy that was in some ways unavoidable, yet one that also represented one of the transmission chains between finance and the real economy.

Keynesian economists' criticisms of the austerity prescription

States found themselves having to cope, simultaneously, with the outlays required to prop up the financial world and with a paralysed economic system. Companies had suddenly stopped investing, citizens had stopped consuming, unemployment was rising, tax revenues were falling. What was to be done in the face of all this? Two economic policy strategies (economists will forgive the simplification) were put forward. On one side, the free-market approach, based on fiscal rigour and on faith in the markets' capacity to self-regulate and "resolve" the problem: the so-called austerity. On the other, the Keynesian approach, which instead proposed public investment to sustain demand and exit the crisis, alongside structural reforms aimed at eliminating the causes — starting with unbridled speculation — of the crisis.

Europe firmly chose the first option. Confronted with slowdowns in industrial output, the collapse of gross domestic products (GDP) and the explosion of debt-to-GDP ratios, all nations were handed the same prescription: tighten belts, make sacrifices, cut spending. From healthcare to education, from culture to public works, the axe spared nothing. Causing, in a case such as that of Greece, a genuine social massacre.

Read also: La Grecia esce dal piano di aiuti europeo. Come sta l'economia dopo otto anni di austerità

The failure to improve public finances

And yet, economic indicators such as the deficit-to-GDP ratio — regarded by most governments as the litmus test for judging the effectiveness of their policies — did not improve. On the contrary, the public finance crisis gradually worsened. The reason? Simple and mathematical, according to critics of Europe's choices: if we are talking about a ratio, we are talking about a fraction. Deficit (or debt) in the numerator, GDP in the denominator. It follows that if policies are adopted that reduce the numerator but also cause the denominator to contract, the ratio, at best, does not change.

To give a concrete example, the ratio of public debt to GDP in Italy stood at 99.7 per cent in 2007 (the year before the crisis). It then rose to 112 in 2009, to 123 in 2012, reaching 132 in 2016. How is it that, despite years of austerity and savings, the figures worsened in this way? According to Keynesian economists, the decisive factor was what in technical language is called the "multiplier".

This means that for every euro of spending cut, GDP does not fall by the same amount, but by something more: 1.2 or 1.5 euros, depending on estimates. This is because cutting funding to one sector imposes a kind of domino effect on supplier companies, the supply chain and the rest of the productive fabric. Other businesses, in turn, often find themselves forced to cut costs, perhaps by laying off staff. These workers then find themselves without an income and give up taking out a mortgage to buy a house, purchasing a car or going on holiday. In a word: the spiral of recession.

This "snowball effect" could theoretically be avoided by supporting the economy — for example by acting decisively on quantitative easing, maintaining public spending so as not to cause demand to collapse, and thereby limiting the social impact at the same time. In other words, the idea is to press the accelerator when the road gets steep, to prevent the car from stalling.

Read also: L'economista Mario Pianta. Ecco perché dalla crisi non abbiamo imparato nulla

The troika and austerity plans in exchange for financial aid

Of course, such a choice would have entailed, in the short term, a further economic effort on the part of states. But this, again according to advocates of an alternative policy, would have been recouped in subsequent years thanks to a living economy, the resilience of incomes and revenues, and therefore the greater flow of taxes and duties paid on them.

The fact remains that the Keynesian prescription was not applied in Europe. On the contrary, the so-called troika (composed of the European Commission, the International Monetary Fund and the World Bank) agreed to help countries in difficulty on condition that they approved draconian austerity plans. The three institutions were convinced that this would make it possible to reassure the markets (which in many cases were speculating on the dramatic debt conditions of certain nations). In practice, the prescription was imposed on everyone, above all on the less prosperous economies. This, according to anti-austerity economists, aggravated and prolonged the crisis.

Read also: Qual è il significato di troika, nata per promuovere l'austerity in Europa

The case of Greece and the International Monetary Fund's apology

It is worth considering that, according to the International Monetary Fund's forecasts for Greece, the austerity policy was supposed to make it possible not only to prevent a debt explosion, but also to maintain "acceptable" unemployment rates in the post-crisis years. From 2010 to 2013, the share of people out of work was supposed to be limited, according to the IMF's official forecasts, to 11.8 per cent, 14.6 per cent, 14.8 per cent and 14.3 per cent respectively. Estimates dramatically far removed from the real figures recorded in those years: 12.6 per cent, 17.7 per cent, 24.3 per cent and 27.3 per cent. It is no coincidence that the IMF itself was subsequently forced to apologise and admit its own failings.

In the European nation, the number of people in employment fell below its 1985 level. At the same time, a 2015 German study from the Institut für Makroökonomie und Konjunkturforschung explained that as a result of austerity policies, taxes on the poor rose by 337 per cent while those on the wealthy rose by only 9 per cent. The less well-off thus lost 86 per cent of their income, while the more affluent lost only between 17 and 20 per cent.

The radical left-wing government led by Alexis Tsipras sought, in the years that followed, to reverse course. But even today Greece is very far from having overcome the crisis. And even the considerably wealthier Italy, according to economist Mario Pianta, has still not emerged from it.