Finance: Research, Policy and Anecdotes

I had the privilege of moderating a panel discussion at the DebtCon (Interdisciplinary Sovereign Debt Research and Management Conference) in Geneva this week under the theme of “Whither Europe?” As impressive as the individual panelists were, the combination was even more interesting, as were the exchanges among panelists and with the audience. We touched upon a broad array of topics under one overarching theme: what are the long-term perspectives for the Eurozone and the European Union?

Frank Gill from Standard and Poor’s thinks the Eurozone crisis is over and pointed to reduced balance of payments imbalances as clearest indication.  However, he also pointed to continuous imbalances in financial accounts, which raises the perspective of future fragility, especially in the absence of effective private risk sharing mechanisms in the form of a pan-Eurozone banking market.

Chiara Zilioli (ECB) reported on the progress that has been made in converting the ESM into a full-fledged EMF, which should make future sovereign crises easier to handle (by an explicit mandate to restructure an unsustainable sovereign debt burden, provision of liquidity to financially distressed Eurozone governments, but also with policy conditionality) and would be a more institutionalized replacement for the Troika.  On the other hand, Maria Cannata from the Italian Treasury thinks it is rather risky to discuss debt restructuring in the first place, so as to not invite speculative attacks.  She insisted that Italian sovereign debt is categorically sustainable, in spite of doubts expressed by academics (e.g., by co-organizer Ugo Panizza and Barry Eichengreen).  Is the problem really solved if we do not talk about it, I wonder? And do such sustainability predictions rely on permanently low interest rates?

Michel Aglietta (CEPII) took a long-term perspective and focused on the need for joint, infrastructure investment and countercyclical fiscal policy in the Eurozone or even the European Union, similar to the Juncker plan, and on the suggestions of creating a small Eurozone budget with a finance minister.  My doubt is to what extent such long-term investing and infrastructure projects have to be undertaken exclusively with public money and under government management or whether this should be a task for and provide the impetus to construct a capital market union to lever private resources. Several panelists pointed to the need for a fiscal union (however small it starts) in spite of arguments by Martin Sandbu to the contrary. I am in the middle of this and agree with Martin that in the presence of a well working private risk sharing mechanism (which would imply not just completing the banking union but getting effectively to a single Eurozone banking market and frictionless capital markets) a fiscal union might not be as necessary.  The problem is that it’ll take some time until we get to this single Eurozone banking market and the start into a fiscal union cannot only be a useful macroeconomic tool but might also help reignite popular support for the European idea, if done correctly.

Last but not least, Yannis Manuelides pointed to the accountability-decision-taking conundrum (my wording) in the Eurozone and European Union. Political accountability is currently primarily at the national level but more and more of the decision-taking has to happen on the Eurozone level, without there being an equivalent institutional structure of voice and accountability.   This important point relates back to the discussion on the rise of populism across Europe and the increasing disenchantment of people with the European Union and the European idea. Some contributors to our book Quo Vadis Europe? have pointed to a concrete example in that it is the European Union that imposes austerity while at the same time seemingly not offering any social safety net (which has stayed on the national level).   In my view, this points to a deeper problem: the European project including the Eurozone has been constructed through inter-governmental agreements (even though ratified by national parliaments or even national referendums) – does Europe need a Constituante?

In conclusion – yes, the crisis is over, but after the last crisis is always before the next crisis.  Europe has started the process of building better crisis management institutions and tools.  Are we there yet?  Not quite yet…   Whither Europe?  No, as long as we avoid the pitfalls of nationalist and populist politics and economics. 

8. Oct, 2017