The curse of advanced economies in resolving banking crises
Do advanced economies have an edge in resolving financial crises? In this column Tilburg University Professor Luc Laeven and his IMF colleague Fabian Valencia show that the record thus far supports the opposite view, with the average crisis lasting about twice as long as in developing and emerging market economies. They argue that macroeconomic stabilization policies in advanced countries often delay the necessary financial restructuring.
'ECB should devise exit strategy'
The European Central Bank (ECB) should, as soon as possible, devise a plan for an orderly exit of the measures that have been taken in a response to the euro crisis. Such an 'exit strategy' is lacking at the moment, which could have dangerous side effects, Sylvester Eijffinger states in the briefing paper Crisis Response of Central Banks – the ECB Policy in Comparison to the Policy of the FED and the Bank of England, that he wrote for the monetary dialogue with the President of the ECB Mario Draghi.
Read the summary (in Dutch) or the briefing paper
'Economists partly responsible for recession'
One of the key issues that economists have to face up to today, is their responsibility for the recession and their responsibility for the failure to put together coherent policies to get us out of recession, states Lord Eatwell of Cambridge University in a video interview on Me Judice. According to him, economic policy is based on the wrong assumptions, and our financial institutions are flawed. There is no such thing as an automatic tendency towards full employment in an economy, which is one of the economic theory that is are at the core of today's policy. He also argues that our financial leaders like Ben Bernanke have failed to take onboard the role of finance in determining the level of expenditure and consequently output, which has led to disastrous interpretations of the financial crisis.
Banking union instead of Eurobonds
After more than two years of efforts and innumerable emergency summits, the Eurozone crisis shows signs of responding to treatment. In a column, published shortly prior to the Eurozone summit on June 27 and June 28 in Brussels, Tilburg University's Thorsten Beck and his Duisenberg School of Finance colleague Dirk Schoenmaker and Daniel Gros of European Policy Studies in Brussels argue that solving the Eurozone crisis requires policies that separate the banking and sovereign facets of the crisis. The losses incurred by Europe's banks must be swiftly recognized by establishing a European Resolution Authority to identify weak banks and fix or liquidate them. Such an institution needs a fiscal backstop and the ESM should provide one. But this would not create Eurobonds – the very need for Eurobonds might to some extent disappear with a strong banking union.
Re-Energizing the Eurozone
As Europe's sovereign-debt crisis threatens to unravel the common currency and roils the region's banks, Europe's pioneering “green energy” sector could be at risk. This is one of the statements that Sylvester Eijffinger makes in an article he wrote on the website Project Syndicate, together with Wim Sinke, Klaas van Egmond, Herman Wijffels and Marco Witsche. They argue that Europe's financial crisis and its looming energy crisis can be tackled with one program: converting existing debt into renewable-energy concessions.
The European Central Bank in (the) crisis
The ECB has been put in a difficult position due to the crisis. Views about the appropriate response to the crisis differ greatly within the Governing Council, while Council members may find themselves taking a national perspective rather than a euro area one. Another problem is that the recent unconventional measures lead to a further segmentation of euro area financial markets and, ultimately, renationalization of monetary policy. A plan for an orderly exit of these measures is of utmost importance for the ECB. However, if it moves too early, it may create serious financial instability. If it moves too late, inflation may go up significantly. The ECB should strike a careful balance between these two. The greatest challenge in devising an exit strategy is probably the different degrees to which euro area members fulfill the convergence criteria; this is not likely to change soon. This is the conclusion that Sylvester Eijffinger draws in the CESinfo DICE Report 1/2012 with his University of Amsterdam colleague Lex Hoogduin.
'The euro zone will survive, but not with all countries'
The euro zone will survive the financial crisis, but the question is with how many member states, says influential German economist and President of the IFO institute in Munich Hans-Werner Sinn. He was the keynote speaker during the Van Lanschot Lecture on May 24 2012, which was organized by Tilburg University and Van Lanschot. He believes Greece and Portugal will leave the euro zone. The fundamental problem in the euro zone, according to Sinn, is the fact that countries like Spain, Portugal, Greece but also France, are not competitive at the moment. Wages and prices there are too high and need to come down.
'China's booming economy caused the financial crisis'
Since the 2008 financial crisis, Wall Street has been the perpetual whipping boy for the ensuing recession that has rocked the global economy. In the United States, Manhattan bankers relied too heavily on subprime mortgages, the story goes. In Europe, the debt crisis is often blamed on the fact that eurozone governments maintained outsized debt-to-GDP ratios, thereby breaking the rules laid down in the Stability and Growth Pact they signed when they joined the currency union. According to economist/publicist Heleen Mees (Tilburg University) the sharp fall of interest rates in the early 2000s as well as emerging economies like China are responsible for the financial crisis. Without China’s boom the crisis would not have been this bad. Read more.