Thursday, 30 May 2019
Wednesday, 13 March 2019
Tuesday, 12 February 2019
The Sword and the Marketplace: Europe needs a defence union to support its economic integration
Valerie Herzberg (Central Bank of Ireland) presented the case for a European defence union (based on joint work with Edouard Vidon, both in their personal capacity), provoking an impassioned discussion in her PEFM audience.
Why a defence union?
The Arguments For are both security and economic. On the security side, the EU is facing considerable risks on its Eastern and southern flanks, while the Trump presidency and Brexit have cast new doubts on NATO solidarity. On the economic side, countries’ unilateral capacity to scale up their own national defence spending is limited by fiscal rules and in some cases high debt—the same constraints that restricted their capacity to stabilize in the face of the euro area crisis.
Hence—and this was the main point of the presentation—it makes sense to bring the two conversations together: a common defence policy is a needed public good which could contribute to EMU deepening.
Defence spending as an economic stabilizer
Valerie pointed out that the reforms pursued since the crisis to strengthen euro area architecture may not be enough to deliver the stability needed to preempt future crises. (i) Banking union will be an important new safeguard, but the large relative size of European banks and difficulties in closing them will limit how big a role banking union can ultimately play in smoothing shocks. (ii) And, while the European Stability Mechanism has shown itself to be an effective provider of liquidity, by its nature as a crisis response mechanism it comes into play only late in recession, rather than offering a permanent shock absorber. The implication is that fiscal stabilization will still be needed, and in Herzberg-Vidon’s view, defence spending could provide a more effective and acceptable stabilizer than other proposed schemes (for instance, common unemployment insurance or a stabilization fund); ‘military bases do not close down during a recession’.
Why a defence union?
The Arguments For are both security and economic. On the security side, the EU is facing considerable risks on its Eastern and southern flanks, while the Trump presidency and Brexit have cast new doubts on NATO solidarity. On the economic side, countries’ unilateral capacity to scale up their own national defence spending is limited by fiscal rules and in some cases high debt—the same constraints that restricted their capacity to stabilize in the face of the euro area crisis.
Hence—and this was the main point of the presentation—it makes sense to bring the two conversations together: a common defence policy is a needed public good which could contribute to EMU deepening.
Defence spending as an economic stabilizer
Valerie pointed out that the reforms pursued since the crisis to strengthen euro area architecture may not be enough to deliver the stability needed to preempt future crises. (i) Banking union will be an important new safeguard, but the large relative size of European banks and difficulties in closing them will limit how big a role banking union can ultimately play in smoothing shocks. (ii) And, while the European Stability Mechanism has shown itself to be an effective provider of liquidity, by its nature as a crisis response mechanism it comes into play only late in recession, rather than offering a permanent shock absorber. The implication is that fiscal stabilization will still be needed, and in Herzberg-Vidon’s view, defence spending could provide a more effective and acceptable stabilizer than other proposed schemes (for instance, common unemployment insurance or a stabilization fund); ‘military bases do not close down during a recession’.
Friday, 25 January 2019
Wednesday, 2 January 2019
Wednesday, 7 November 2018
Tuesday, 6 November 2018
Friday, 15 June 2018
Demise of doctrine: Policy-making in the real world
Caroline Atkinson, 12 June 2018
In her talk, Caroline Atkinson discusses the development of the post-war doctrine of cooperation, the implications of shifting political and economic power, and policy-makers’ rigid response to the 2008 financial crisis.
After WW2, the world adopted a more rules-based system designed to foster cooperation and openness. Domestically, under the influence of John Maynard Keynes, economic doctrine began to play a significant role in political decisions. The Marshall Plan, IMF, and World Bank fostered global economic cooperation--with national governments ceding a degree of sovereignty to these institutions to ensure international cooperation.
In her talk, Caroline Atkinson discusses the development of the post-war doctrine of cooperation, the implications of shifting political and economic power, and policy-makers’ rigid response to the 2008 financial crisis.
After WW2, the world adopted a more rules-based system designed to foster cooperation and openness. Domestically, under the influence of John Maynard Keynes, economic doctrine began to play a significant role in political decisions. The Marshall Plan, IMF, and World Bank fostered global economic cooperation--with national governments ceding a degree of sovereignty to these institutions to ensure international cooperation.
Friday, 1 June 2018
Fragmentation in banking markets: The crisis legacy and the Brexit challenge
Andrea Enria (European Banking Authority) 28 May 2018
The post-crisis period has seen the disintegration of European finance. There has been a marked decrease in both cross-border banking and cross border mergers and acquisitions. This seems to be a problem particular to Europe, as, internationally, globalisation continues as usual. By comparing the American reaction to the crisis with that of Europe we are able to determine some causal factors of this disintegration.
The financial collapse can be taken as an indication that there was excessive financial infrastructure. This infrastructure would have grown during the boom phase of the boom-bust cycle, the bust then ought to result in the failure and therefore elimination of the excess infrastructure, allowing for a restructuring of the financial sector. In the US, many banks exited the market entirely, investment in these entities was highly spread across the states so the burden of these failures were able to be absorbed. In the EU there were many bailouts of institutions which, in the US, would have been allowed to fail. With all these government bailouts there is an expectation from the government that said bank will use its bailout to restructure its business model in order to support the local economy. Indeed, a UK study showed that banks which received government money reduced cross-border exposures by 15% on average. In addition to this vague nationalization of investment government support also came with a new set of macroprudential controls. As international investment is now often seen as a risk, it is common for governments to impose harsher regulations on banks investing internationally. This regulation all has the effect of creating a less connected EU economy, a trend which is intensified by the prospect of Brexit.
Friday, 11 May 2018
Formalisation through taxation: Paraguay's approach and its implications
Jonas Richter, 7 May 2018
The informal economy encompasses all transactions of legal goods which are not reported to the government. It is estimated that, globally, one third of the non-agricultural workforce makes their living from the informal economy. In Latin America, sub-Saharan Africa, and Central Asia, 40% of GDP is informal.
The benefits of formalizing the informal sectors of a given economy are clear. Most obviously the government would see an increase in revenue from taxes, and such economies would be given access to credit and the ability to legally enforce contracts. It has also been shown that there is correlation between a broad tax base and successful democracy. This is quite logical as citizens who pay tax will be much more likely to take interest in how the government spends their money. While it is obvious that it is desirable to formalize an economy, convincing a large segment of a given population to start paying taxes is a difficult proposition.
The informal economy encompasses all transactions of legal goods which are not reported to the government. It is estimated that, globally, one third of the non-agricultural workforce makes their living from the informal economy. In Latin America, sub-Saharan Africa, and Central Asia, 40% of GDP is informal.
The benefits of formalizing the informal sectors of a given economy are clear. Most obviously the government would see an increase in revenue from taxes, and such economies would be given access to credit and the ability to legally enforce contracts. It has also been shown that there is correlation between a broad tax base and successful democracy. This is quite logical as citizens who pay tax will be much more likely to take interest in how the government spends their money. While it is obvious that it is desirable to formalize an economy, convincing a large segment of a given population to start paying taxes is a difficult proposition.
A feminist analysis of women’s work experiences in finance
Kristina Keampfer, 7 May 2018
Kristina Kaempfer began her talk with a description of an ad recently run by Commerzbank. In it a woman is shown travelling while the history of the bank is described; the ad has the twist ending of the woman entering Commerzbank showing that she is an employee there. This symbolic depiction of Commerzbank’s commitment to gender equality seems contradicted by the reality that only 1 in 7 of the bank’s executive board members are women. In the advisory board things are slightly more equal, with 6 women out of a total of 22, as it is required by German law that 30% of advisory board members must be women.
In the wake of the 2008 financial crisis many have lamented that, had the financial sector had a higher proportion of women, this crisis could have been avoided. These comments come from an assumption that women are naturally more thoughtful and less willing to take risks. While such statements about women may have been positively intentioned, Kaempfer suggests that depictions of women as saviours have the effect of disempowering women.
Friday, 27 April 2018
Finance in Africa: Banks, debt and development
Conference, 25 April 2018
On 25 April PEFM hosted a conference on finance in Africa.Several strands of thinking led us to focus on Africa. First, having looked at the impact of the global financial crisis on developed country economies, particularly the UK and Europe more broadly, it was a natural step to look at the impact on other regions. The impact on Africa has been significant, through several channels, resulting on the banking side for instance in disintermediation from the global banking system as weakened banks from developed countries, including the United Kingdom, retrenched towards their homelands, and because the low interest rates that have prevailed have driven investors to “search for yield” and enabled more borrowing by governments and companies in the continent, with results good and bad: infrastructure investment on the one hand, but also the accumulation of debt on the other.
And there are other strands that have led this conference to be particularly timely. Earlier this year a breakthrough agreement was signed in Addis Ababa in which 41 countries committed to establishing a regional free trade agreement amongst themselves. Meanwhile, finance in Africa has been highly innovative in recent years. In mobile banking, for instance, the countries of East Africa lead the world.
On 25 April PEFM hosted a conference on finance in Africa.Several strands of thinking led us to focus on Africa. First, having looked at the impact of the global financial crisis on developed country economies, particularly the UK and Europe more broadly, it was a natural step to look at the impact on other regions. The impact on Africa has been significant, through several channels, resulting on the banking side for instance in disintermediation from the global banking system as weakened banks from developed countries, including the United Kingdom, retrenched towards their homelands, and because the low interest rates that have prevailed have driven investors to “search for yield” and enabled more borrowing by governments and companies in the continent, with results good and bad: infrastructure investment on the one hand, but also the accumulation of debt on the other.
And there are other strands that have led this conference to be particularly timely. Earlier this year a breakthrough agreement was signed in Addis Ababa in which 41 countries committed to establishing a regional free trade agreement amongst themselves. Meanwhile, finance in Africa has been highly innovative in recent years. In mobile banking, for instance, the countries of East Africa lead the world.
Friday, 2 March 2018
The digital revolution and the State
William Janeway, 26 February 2018
William Janeway began his talk by claiming that the relationship between the US Government and technical innovation has reversed with the advent of digital technology. In the cold war days, and even before that, during World War II, the U.S. Department of Defense was the largest funder of scientific research and technological development. In fact it was the patronage of the US military which allowed the formation of what we would call “research universities.” In addition to funding R&D the Department of Defense was the “lead purchaser” of early computing equipment. Having the government as a customer is inherently different from producing for the wider population of consumers, as the government is interested in maximum effectiveness over the long term rather than short-term affordability.
Along with funding technological innovation, the government controlled the environment in which it would occur. Entities funded by The Department of Defense had to license any patents they produced to all competitors, and all technology being produced had to have at least two manufacturers to maintain competition and to ensure supply in case one producer went bankrupt. This weak intellectual property environment almost certainly allowed for accelerated innovation, however as digital technology progressed, it outgrew its fertile but limiting origins.
Friday, 16 February 2018
Financial resilience and bank size – are we forgetting what is most important?
Piroska Nagy-Mohasci, 12 Feb 2018
Starting off with a bit of scolding of financial sector regulators and professionals, Piroska Nagy-Mohacsi asserted that, in the wake of the financial crisis, financial institutions and individuals who manage them have been prone to congratulate themselves on their success on returning the market to its pre-2008 levels, rather than taking responsibility for the crisis which they, in fact, caused. To be fair, there have been significant advances in regulation during the crisis and post-crisis period. A new layer of micro-prudential policies, affecting individual banks, was instituted, along with macro-prudential policies, and the identification of international and domestic banks whose central place in a given economy necessitated higher capital requirements.
Overall, studies show that post-crisis banks are both better capitalized and more liquid than before. The benefit of this achievement should not be underestimated. Domestically, macro-prudential policy has arguably avert crises in the cases of Iceland, Croatia, and Spain. Additionally, in 2013, with the economic shock created by the US’s “taper tantrum” it was the countries with the strongest macro-prudential policy which were least affected. Notwithstanding this success on the part of financial regulators, Nagy-Mohacsi points to several “elephants in the room” which are not being properly addressed by the financial community.
Starting off with a bit of scolding of financial sector regulators and professionals, Piroska Nagy-Mohacsi asserted that, in the wake of the financial crisis, financial institutions and individuals who manage them have been prone to congratulate themselves on their success on returning the market to its pre-2008 levels, rather than taking responsibility for the crisis which they, in fact, caused. To be fair, there have been significant advances in regulation during the crisis and post-crisis period. A new layer of micro-prudential policies, affecting individual banks, was instituted, along with macro-prudential policies, and the identification of international and domestic banks whose central place in a given economy necessitated higher capital requirements.
Overall, studies show that post-crisis banks are both better capitalized and more liquid than before. The benefit of this achievement should not be underestimated. Domestically, macro-prudential policy has arguably avert crises in the cases of Iceland, Croatia, and Spain. Additionally, in 2013, with the economic shock created by the US’s “taper tantrum” it was the countries with the strongest macro-prudential policy which were least affected. Notwithstanding this success on the part of financial regulators, Nagy-Mohacsi points to several “elephants in the room” which are not being properly addressed by the financial community.
Friday, 9 February 2018
A monetary history of the euro area
Christopher Marsh, 5 Feb 2018
Chris Marsh begins his talk by looking at the US Great Depression in order to draw parallels to the economic crisis in Europe. The Depression began with a massive movement of capital from independent, country banks, to large, central, city banks. This mass movement was sparked by the inability of banks to provide cash to all those who wished to withdraw. The panic of insufficient currency created an unfavorable balance of payments as loss of money supply in country areas encouraged debt holders to liquidate debt held and to cease to invest in these areas. It is not hard to see that this behavior is self-reinforcing; this is just the sort of economic behavior that monetary policy was created to prevent.
The EU saw a similar decrease in currency levels during 2010. Marsh focusses on Latvia and Greece to tell the story of the crisis. Prior to the crisis Latvian banks had borrowed heavily from abroad and lent domestically, so when the crisis hit it saw a great contraction in its currency supply. Domestic demand and real GDP fell sharply in 2009, prompting the IMF to step in. The IMF decreased reserve requirements in order to allow Latvia to begin to pay off debt.
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