Symposium on “The euro: (Greek) tragedy or Europe’s destiny? Economic, historical and legal perspectives on the common currency”

University of Bayreuth (Germany), 11 – 12 January 2012

Funded by the “Volkswagen Foundation”

CALL FOR PAPERS

The European debt crisis has brought the European Monetary Union (EMU) to the brink of collapse. A large variety of proposals are currently being discussed, ranging from different stabilisation mechanisms to outright default and the exit of individual countries from the euro zone; even a complete dissolution of EMU no longer appears unthinkable.

The aim of this symposium is twofold: First, we seek to encourage a genuinely pan-European debate on EMU that will overcome the multitude of (highly diverse) national debates. Currently, economic analyses and policy suggestions follow well-established national fault lines (mirroring earlier divisions between “soft” and “hard” currency countries), which makes agreeing on a common diagnosis of the problem and suggesting a therapy exceedingly difficult. Second, we wish to draw on the rich experience of past monetary unions in helping us master the present and the future of EMU.

Lessons from monetary history
(Call for papers)

Half of the sessions will be devoted to lessons from the past, i.e., explaining the conditions under which monetary unions have worked well in the past as well as appreciating the importance of monetary history in shaping the attitudes of different countries towards EMU. Researchers working in the fields of economics, economic history, European integration, political science, history, history of economic thought and legal studies all have important contributions to make in this regard and are encouraged to submit their papers. We will strive to maintain a balance between the different disciplines and we welcome in particular submissions from PhD students and early career researchers.

Different perspectives on the current crisis
(Invited presentations)

Speakers:

Prof. Albrecht Ritschl (key note speaker)
(London School of Economics)

Prof. Agnès Bénassy-Quéré
(CEPII and University of Paris I Panthéon-Sorbonne)

Prof. Manfred Neumann
(University of Bonn)

Prof. George Pagoulatos
(Athens University of Economics and Business and College of Europe Bruges)

Prof. Andreas Paulus
(German Constitutional Court and University of Göttingen)

Prof. Niels Thygesen
(University of Copenhagen)

A specific focus of the invited presentations will be on why economic analyses of the current crisis and policy suggestions to overcome it differ markedly from one country to the next. Following the key note lecture by Prof. Albrecht Ritschl, Prof. Niels Thygesen will elaborate on the “Different perceptions of EMU among the major initiators”. His analysis will be complemented by three country-specific perspectives, namely by Prof. George Pagoulatos’ view from the euro periphery, Prof. Manfred Neumann’s perspective from a “hard currency country” and the possibly “intermediate” French view by Prof. Agnès Bénassy-Quéré. Prof. Andreas Paulus will elaborate on legal aspects of the bail-out mechanism.

Submission and Selection process

Submission Deadline: Friday 18th November 2011

Applications by e-mail (with pdf-file attachments) should be sent to euro@uni-bayreuth.de by Friday 18th November the latest. Notifications of acceptance will be sent by Friday 25th November 2011.

Please submit a 1-page summary of the paper you wish to present accompanied by a 1-page CV and (in the case of PhD students only) a letter of support from the PhD advisor.

PhD students / early career researchers wishing to participate in the symposium without presenting a paper: Please submit a 1-page explanation as to how the topic of the symposium relates to your research, a 1-page CV and (in the case of PhD students only) a letter of support from the PhD advisor.

Expenses:  Accommodation and travel expenses will be covered for all participants. If travel expenses are expected to exceed 150 EUR (for Germany based participants) and 350 EUR (for all other participants), please do indicate in your application the level of travel expenses you would require.
Organizers

Prof. Dr. Bernhard Herz (University of Bayreuth, Germany)

Dr. Matthias Morys (University of York, UK)

Website:  www.euro.uni-bayreuth.de

Edited by Thorsten Beck, a new VOXEU e-book has been released on this topic.  An overview is here, while the free download of the e-book is here.

A call for action

A new VoxEU.org eBook, The Future of Banking, contains three headline messages:

• We need a forceful and swift resolution of the Eurozone crisis, without further delay! For this to happen, the sovereign debt and banking crises that are intertwined have to be addressed with separate policy tools. This concept finally seems to have dawned on policymakers. Now it is time to follow up on this insight and to be resolute.
• It’s all about incentives! We have to think beyond mechanical solutions that create cushions and buffers (exact percentage of capital requirements or net funding ratios) to incentives for financial institutions. How can regulations (capital, liquidity, tax, activity restrictions) be shaped in a way that forces financial institutions to internalise all repercussions of their risk, especially the external costs of their potential failure?
• It is the endgame, stupid. The interaction between banks and regulators/politicians is a multi-round game. As any game theorist will tell you, it is best to solve this from the end. A bailout upon failure will provide incentives for aggressive risk-taking throughout the life of a bank. Only a credible resolution regime that forces risk decision-takers to bear the losses of these decisions is an incentive compatible with aligning the interests of banks and the broader economy.

Policy recommendations

There are many policy recommendations, but I would like to point to three:

• European Safe Bonds: Several authors present the case for a forceful resolution of the Eurozone crisis. Critical of Eurobonds, Markus Brunnermeier and co-authors have proposed an alternative solution in the form of ‘European Safe Bonds’ – securities funded by currently outstanding government debt (up to 60% of GDP) that would constitute a large pool of ‘safe’ assets. The authors argue that these bonds would address both liquidity and solvency problems within the European banking system and, most critically, help to distinguish between the two. ‘European Safe Bonds’ could effectively separate the sovereign debt from the banking crisis, and would allow the ECB to disentangle more clearly liquidity support for the banks from propping up insolvent governments in the European periphery.
• Capital and liquidity requirements – risk weights are crucial. While ring-fencing might be part of a sensible regulatory reform, it is not sufficient. Capital requirements with risk weights that are dynamic, counter-cyclical and take into account co-dependence of financial institutions are critical. Capital requirements, however, do not work independently, but operate in their effect on banks’ risk-taking in interaction with ownership and governance structures – so one size does not necessarily fit all. Similarly, liquidity requirements have to be adjusted to make them less rigid and pro-cyclical. Though banks are under-taxed, the currently discussed financial transaction tax would not significantly affect banks’ risk-taking behaviour and might actually increase market volatility; in addition, its revenue potential could also be overestimated.

The need for a stronger European-wide regulatory framework. If the common European market in banking is to be saved – and the authors argue that it should be – then the geographic perimeter of banks has to be matched with a similar geographic perimeter in regulation, which ultimately requires stronger European-level institutions. Many of the regulatory reforms, including macro-prudential tools and bank resolution, have to be at least coordinated if not implemented at the European level. Critically, the resolution of financial institutions has an important cross-border element to it, which calls for a European-level resolution authority for systemically-important financial institutions.

Note: I had not seen Karl’s post before writing this one, so it is not meant as a response.   Since the two posts cover somewhat different ground I hope they are complementary. 

The argument is increasingly heard that if Greece is allowed a write-down on its debts then Ireland should be allowed a similar treatment.   Unfortunately, a number of different things seem to get jumbled together in the discussion: the costs and benefits of default on State debt; the costs and benefits of default on senior bonds in the former Anglo and INBS; and the costs and benefits of restructuring the promissory notes.   I don’t pretend to have all the answers, but it seems worthwhile to try to disentangle the different elements. 

(1) Implications of a Greek write-down for the possibilities of an Irish write-down

There is almost universal agreement that Greece’s debt is unsustainable.   Largely against the will of the Greek government, the EU/IMF funders are demanding burden sharing with private sovereign bondholders.   This is unlikely to ease the austerity burden being imposed on Greece.   The immediate benefits will go the official funders in the form of reduced loans that they have to make to Greece. 

So could Ireland follow the same path?   While we are certainly not out of the woods in terms of debt sustainability, the situation here is quite different.   The debt to GDP ratio is projected to peak at about 118 percent of GDP in 2013.   Irish bond 9-year bond yields have fallen from a peak of around 14 percent to about 8 percent now – still far too high to return to the markets but reflecting increasing confidence that Ireland will avoid default despite the chaos in the European crisis-resolution effort.   Whether or not you believe that Ireland’s debt is sustainable, a move by Ireland to default on its sovereign debt is likely to be badly received by the official funders.   There is no guarantee that official support would continue to be forthcoming.  Loss of that funding would require the deficit to be closed cold turkey, with the austerity having devastating effects on living standards and the economy.  Even it official funding continued, it is highly unlikely that the required austerity measures would be lessened.   My conclusion is that it is hard to see a short- to medium-term gain from defaulting, with huge downside risks.

Longer-term, a default would obviously enough lower the amount of money we have to pay back.   Against this would have to be weighed the cost of the loss of the asset of creditworthiness/reputation.   Defaults can sometimes be viewed as “forgivable” if undertaken (or forced) as a last resort.   The reason is that they don’t reveal that much about the country’s underlying willingness to honour its debts.   A default by a country that can pay is quite different, and would involve a huge reputational loss for a country that begins with a strong reputation.   Creditworthiness for a country with a large debt, a volatile economy and a large dependence on inward private investment is extremely valuable.   I find it hard to see how a cost-benefit analysis would support trying to voluntarily follow a Greek default precedent. 

Venue: ESRI, Whitaker Square, Sir John Rogerson’s Quay, Dublin 2.
Date: Thursday 27/10/2011.
Time: 4.00 pm.
Speaker: Petra Gerlach-Kristen, ESRI.
If a central bank’s promise to keep inflation stable is credible, long-run inflation expectations should not respond to economic news. This paper studies market participants’ inflation expectations in the euro area, the United Kingdom and the United States as implied by inflation swaps. We find that inflation expectations up to ten years out seem to respond to commodity prices and unemployment news and that some of these reactions have apparently become stronger and longer-lasting since the onset of the global financial crisis. This might be due to second-round effects and thus to a decrease in central banks’ credibility.

Zsolt Darvas and Jean Pisani-Ferry address this topic in this new Bruegel Policy Contribution, which is available here.