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Eurocrisis Conversation with Barry Eichengreen

Sony:  Nice to see you Barry, let’s jump straight into it. What would you say is the state of play in the Eurocrisis?

Barry:  European officials and leaders were telling us at the beginning of the year that the crisis was over. I doubt that most people believed them, although the markets were surprisingly sanguine for a time. None of the underlying problems had or have been solved; even before the fiasco surrounding Cyprus it was clear that the crisis would to be back.  There had been no real re-balancing within Europe, no progress on banking union, and no agreement on limited fiscal union. So, I do not think anything has been solved, which renders me more pessimistic with the passage of time. 

My view has always been that there would be no Eurozone collapse.  At the same time I see no signs of a miraculous resumption of growth.  Ruling out these alternatives leaves only the option of a lost decade in Europe, as the member states stumble towards deeper integration. But increasingly I worry that the political system cannot support a lost decade. 

The Cyprus fiasco has the hallmark of a classic whodunit

​The Cyprus fiasco has the hallmark of a classic whodunit. Someone somewhere took a decision that now no one no-where appears to have made – to impose an unprecedented levy on bank deposit holders in Cyprus. Most commentary on the deal has been terribly negative, sometimes alarmist – it will spark off bank runs in Spain or that it rips the shirts of the backs of the poor in Cyprus. There were some exceptions to this negative coverage including yours truly.

A school of thought agreed with the need for a depositor bail-in but was uncomfortable with not exempting depositors under the Euro 100,000 deposit insurance cap – though technically such a limit is irrelevant for the clever levy that has been proposed. We at Re-Define belong to this school and did not criticize the concept of bailing-in depositors having agreed with the IMF that this was both fair and unavoidable in order to make the numbers add up in the rescue of Cyprus.

Why we must cap banker bonuses

Note: This is the original longer version of an Opinion Piece arguing for imposing caps on banker bonuses that appeared in the Guardian newspaper on the 25th of Feb 2013.

The European parliament is right to limit the maximum bonus bankers can command as a proportion of base salary. This will help tackle the culture of excessive risk-taking and the bending of rules that has now become endemic to banking. Undertaking this at an EU-wide level will also limit any large-scale migration of the so-called ‘talent’. It will reduce the risks borne by tax-payers and go a long way to rehabilitate the industry, making it focus on serving the real economy again.

The EU's self-defeating approach must end now

As the depressing economic and unemployment picture from the European Commission's growth forecasts makes clear, we at Re-Define have been right to be heavily sceptical of the current strategy being pursued by EU policy-makers.

As we warned in July 2012 in our analysis on Spain, the fiscal multipliers being used were highly underestimated. We warned that on the path being pursued, the Spanish economy and employment would be pulled downwards by a combination of fiscal adjustment and related emergent banking problems. This is exactly what has happened. Our analysis was later confirmed by the IMF, when it issued a Mea culpa on having underestimated fiscal multipliers.

Seven Lessons from Finance as a Traffic System

Causes of the Financial Crisis

The world has still not recovered from the most serious financial and economic crisis in recent history. This exposed several aspects of financial system dysfunction which not only increased the instability of the financial markets but also impeded their normal functioning as tools to allocate economic resources efficiently throughout the real economy. Policy maker response to this crisis remains very inadequate and will do little to correct the deep structural flaws exposed by the crisis. 

In this new set of blog posts, we will serialize our 2009/2010 e-book "The Financial Crisis - Causes & Cures" which was written for both the layperson as well as policy-makers at the European Parliament, the European Commission and national finance ministries and regulators. The book may be a bit dated, but the issues are current.

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