Waiting for the recovery: Europe’s financial crisis and the fragile recovery

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

Presentation: Jeffrey Frank, Director, IMF Offices in Paris and Brussels

Blogpost: Alexandra Zeitz, St. Antony’s College

The numbers are striking and disheartening. Seven years on from the onset of the global financial crisis, Europe’s recovery remains shallow and vulnerable. Real GDP is ten percentage points higher in the US than it was in 2008. In the UK it is five percentage points higher. In Europe, by contrast, it is three percentage points lower than in 2008.

Unemployment in Europe remains extremely high. In August 2015, the average unemployment rate for the Eurozone was 11%. In Spain it was over 22%, having come down slightly from a height of 26.3% in early 2013.  Estimated potential output growth, already lower in Europe than the US prior to the crisis, fell sharply during the crisis, from 1.3% in 2006-2007 to 0.6% in 2008-2010. It has remained low, sparking fears of a European slide into stagnation.

Why has the recovery in the Eurozone been so much more sluggish than in the neighboring UK and in the US? And what tools are available to policymakers to encourage a more robust recovery, improving the livelihoods of Europeans still afflicted by the aftermath of the crisis?

Learning from Confucius? Lessons from Chinese law for rebuilding trust in the global economy

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

Presentation: Nicholas Morris, Balliol College

Blogpost: Alexandra Zeitz, St. Antony’s College

What is the relationship between trust and law? And is it possible that some systems of law are better able to encourage trust than others? In a PEFM seminar in October, Nicholas Morris presented a research project investigating the role of Chinese legal traditions in cultivating trust, examining whether tenets of Chinese law can be adopted globally in order to rebuild trust in the economy, particularly in the financial sector.

Morris’ comparative work on Chinese legal traditions and trustworthy behavior is part of a larger research project, led by Morris together with David Vines, on rebuilding trust in the financial sector in the aftermath of the global financial crisis. Vines and Morris have presented their work at PEFM in the past (see discussions of their presentations in these two previous posts) and the circle of experts and academics linked to PEFM continue to engage with this promising interdisciplinary research endeavor.

In order to function equitably and effectively, financial markets require strong trust among participants. This was Morris’ starting point. Merely relying on individuals’ desire for approbation and maintaining their reputation is insufficient to ensure robust trust. Instead, he argued, moral and normative structures are necessary to set out accepted and approved patterns of behavior.

The Troika – Past and Future? A view from Washington

Alexandra Zeitz, St. Antony’s College, Oxford

Speaker: Russell Kincaid, PEFM Associate, Former senior IMF official
Chair: David Vines, Balliol College, Oxford

In late 2009, when the extent of Greece’s debt problems first became clear, there were no established rules for coordination between the IMF and the Eurozone institutions. While special mechanisms for surveillance of the Eurozone existed, there were no guidelines for lending to countries within the currency area, an event that was considered “extremely unlikely”.

And yet, over the course of the Eurozone crisis, four countries borrowed from the IMF (Cyprus, Greece, Ireland and Portugal). And with Greece’s future still uncertain, the Fund looks set to play a continued role in the Eurozone for the foreseeable future. In October 2015, Russell Kincaid, a former senior IMF official and current PEFM Associate, gave a rich and novel account of the cooperation and coordination among those three institutions that were at the forefront of stemming the crisis from 2009 onwards: the Troika.

Kincaid suggested that the groundwork for coordination among the IMF, the European Commission and the European Central Bank was laid during earlier programs in Hungary (2008), Latvia (2009) and Romania (2009). In these earlier programs, patterns appeared that would also characterize the later dynamics between the later institutions.

Bringing trust (back) into finance: a research agenda on trustworthiness in the financial sector

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

Presentation: Nicholas Morris and David Vines

Late last month a scandal was splashed across the pages of global newspapers: deliberate deception of consumers and regulators, with culpability running all the way up to senior management. For once, however, the scandal was not in the financial sector, but rather in the auto industry. The financial sector is not alone, clearly, in struggling with trustworthiness. And yet there are reasons that the financial sector should be singled out for concerns about trust: the string of scandals and revelations over the last decade speak to the potentials for abuse in opaque markets selling highly complex products.

In 2014, Nicholas Morris and David Vines published Capital Failure: Rebuilding Trust in Financial Services. The book brought together philosophers, economists, lawyers, historians, and financial practitioners to explain the massive violations of trust that had taken place in the financial industry and explore ways in which trust could be rebuilt. A year on, the next challenge has arisen: how to turn ideas about trustworthiness into plans for action? On October 12, Morris and Vines presented their current agenda for research, how they plan to build an evidence base for rebuilding trustworthiness.

How to measure financial integration?

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

Speaker: Professor Jennifer Corbett, Australian National University

Chair: Robin McConnachie, Oxford Analytica

Though we know financial integration is deepening, we still know woefully little about how to measure or observe financial integration. In a seminar at PEFM in June, Professor Jennifer Corbett introduced a new research project that uses network analysis to try to address this gap and reveal patterns of financial interconnection.

The motivation for Corbett’s research is clear, given her focus on the East Asian economy and financial system. In the aftermath of the 1997 Asian financial crisis, many regional analysts concluded that the risks had stemmed from dependence on foreign intermediation. The policy prescription was thus to increase regional financial integration, especially in local currencies, with deeper, more tightly integrated markets seen as a driver of stability.

But, as Corbett pointed out in her presentation, the repercussions of tighter integration remain understudied. In part, this is because existing models of financial integration remain simplistic.

Truths, partial truths and myths: Inside the Irish ‘bailout’

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

Speaker: Patrick Honohan, Governor, Central Bank of Ireland
Chair: David Vines, Balliol College, University of Oxford

For a second year in a row, Ireland will be the fastest growing economy in Europe in 2015. Unemployment remains in the double digits and public debt is high at 115% of GDP, but the country’s recovery from its banking-cum-sovereign debt crisis in 2008 has been remarkable.

It was an honor for PEFM to host Patrick Honohan, Governor of the Central Bank of Ireland in May to hear the story of both the crisis and the ‘bailout’ from the inside.

The recovery package Ireland received from its international creditors remains contentious, its legacy hotly debated in Ireland and across Europe, since Ireland offers possible lessons for the contemporary Greek experience. Governor Honohan waded directly into the debate, structuring his remarks around the truths, partial truths and myths of the Irish bailout.

Did the government’s decision to guarantee Ireland’s banks cripple the Irish economy and directly lead to austerity?

In September 2008, the Irish government issued a broad state guarantee for all Irish banks for a year. The decision remains controversial, with critics claiming that the blanket bank guarantee was responsible plunging the country into recession as sovereign borrowing costs soared, ultimately prompting the international recovery programme and a harsh period of austerity.

Culture as the basis for trust: Rebuilding trust in banks

Alexandra Zeitz (Global Economic Governance Programme, University of Oxford)

Speaker: Peter Montagnon, Associate Director, Institute of Business Ethics

Chair:  Adam Bennett, St. Antony’s College, University of Oxford

Scandals continue to wrack the finance industry. On May 20, six banks were fined $5.6 billion over rigging of the foreign exchange markets. The need to address corporate culture in the finance sector seems clear.

The PEFM series has tackled culture and finance repeatedly over the past year. And the industry itself hasn’t been silent on the question of culture. Barclays, for instance, launched the ‘Transform’ programme to restore trust in the bank and place its values at the centre of its operations. 

But are attempts to reform culture genuine? And can they have an impact? In early May, PEFM hosted Peter Montagnon, Associate Director of the Institute for Business Ethics to discuss rebuilding trust in banks on the basis of cultural change. 

Montagnon’s core point was a simple but important one: culture must be understood as belonging at the heart of business, not a peripheral PR gloss. Culture, in the Institute for Business Ethics framework, is made up of core values, the ethics they imply, and the conduct that follows from those ethics. The values of a company set the tone for the behavior of all employees.