Jump-starting infrastructure investment in Germany: what role for public private partnerships?

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

Speaker: Jeromin Zettelmeyer, Director-General, Economic Policy, Ministry of Economic Affairs and Energy, Germany

Chair: David Vines, Department of Economics, University of Oxford

Germany is considering restructuring how it finances domestic infrastructure. This is of interest to non-Germans too, since infrastructure spending could eat into some of Germany’s 8% current account surplus, helping to correct the macroeconomic imbalances currently plaguing Europe.

But while that might be a pleasant side effect, that’s not the German motivation for this investigation. Instead, Germany wants to rejuvenate its domestic infrastructure, some of which is languishing after municipalities’ spending on construction and maintenance dropped to an all-time low.

In May, Jeromin Zettelmeyer, currently Director-General of the Economic Policy unit at the Ministry of Economic Affairs and Energy in Germany, delivered an excellent PEFM seminar on strategies for fuelling infrastructure investment in Germany.

In the World Economic Forum’s 2014-2015 competitiveness rankings, Germany’s infrastructure ranks 7^th globally, ahead of France (8), the UK (10), the USA (12) and Canada (15). But a gap has accumulated between the desired and actual infrastructure stocks: the German infrastructure is in some cases not meeting the public or the economy’s needs.

Lessons from Ireland’s financial crisis

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

What lessons can be learned from the Irish financial crisis? The question is particularly pressing as negotiations continue over the terms of the Greek bailout. Speaking at PEFM in early March, Ajai Chopra offered an insider’s perspective on the crisis and rescue, and shared words of caution about treating the Irish experience as a model that can be replicated elsewhere. Chopra, now with the Peterson Institute for International Economics, was head of the IMF’s mission in Ireland and had a front seat to the crisis and negotiations over policies for recovery.

Linking corporate governance to financial crisis?

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

Popular accounts of the 2008-2009 financial crisis have squarely blamed the crisis on shoddy corporate governance; newspaper headlines targeted greedy bankers and sloppy executives. Academic analysts have sought to investigatethe relationship between management and financial stability in a more nuanced fashion, studying how corporate governance structures might affect risk-taking, short-sightedness, and other behaviours contributory to crisis. In Kevin James and Dimitrios Tsomocos’ February 26 PEFM presentation and the subsequent discussion, it became clear that economists have yet to settle on an empirical account of exactly how governance matters. While most in the room agreed that corporate governance matters for financial stability and growth, the challenge appears to be how to measure and encourage good corporate governance.

Has financial globalization changed the context for US international policy?

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

That financial globalization presents constraints as well as opportunities has been frequently
demonstrated with regard to smaller states. Consider, for example, Greece’s current predicament. But what about consequences of financial integration for the most powerful state in the international system, the United States? On Thursday, February 12, Caroline Atkinson, Deputy Assistant to President Obama and Deputy National Security Advisor for International Economics, presented the view from United States of the globalized financial system. The lecture was dedicated to the memory of former PEFM Director Max Watson, a long-time colleague of Atkinson’s during their time at the IMF, who sadly passed away in December 2014.

What does financial globalization mean for US foreign policy? It means, in large part, that US policy has itself become global. Or, in former Fed Chairman Alan Greenspan’s words, that the US can no longer be ‘an oasis of prosperity’. Drawing on her lengthy previous experience at the IMF, Atkinson offered many historical examples to illustrate the effect of close international financial links on American policy.

Coordinating macroprudential and macroeconomic policies: Issues facing Europe in the decade ahead

Democritus writes:

Financial stability is a critical new policy objective for the European Union, especially the euro area, requiring a careful rethink of policy assignments and institutional arrangements. This proposition was put forward by Russell Kincaid (Senior Member, St Antony’s College) and Valerie Herzberg (Member, Cabinet of Vice President Kataninen, EC) and debated at Chatham House on November 5, 2014.

Their presentations summarized two separate, but complementary, PEFM discussion drafts (see http://www.sant.ox.ac.uk/pefm/publications.html) that were both coauthored with Max Watson.

Structural macroprudential measures (e.g., capital/liquidity buffers, SIFI surcharges) were viewed as new instruments to be assigned unambiguously to the objective of financial stability. Meanwhile time-varying macroprudential tools (e.g., counter cyclical capital buffers/risk weights, loan-to-value/debt-to-income limits) at the national level would seek to avoid boom/bust cycles as witnessed in Ireland and Spain for example. Such time-varying macroprudential policy by tailoring the ‘one-size-fits-all’ common monetary policy of the euro area to fit national conditions would thus also tackle the Walters critique—the inability of the common monetary policy to tackle country-specific shocks. This objective/policy tasking would accord with the well-established principles for policy assignments laid down by Tinbergen and Mundell and the prevailing frameworks for monetary and fiscal policies.

Public and private ethics at a time of crisis – the Irish experience

Robin McConnachie (Former Senior Adviser, Bank of England)

Members of the PEFM Group ended the term at St Antony's in fine style with a presentation and roundtable discussion led by Kevin Cardiff, a senior official in the Irish Finance Ministry at the time of the 2008/9 financial crisis. Currently member of the European Court of Auditors for Ireland he led the response to the crisis from 2010 to 2012 as Secretary General of the Irish MOF; and impressed all present with the perceptive frankness of his post crisis reflections. Kevin emphasised that he was talking about personal behaviour in a time of crisis, not giving a retrospective assessment of the economic and financial rights and wrongs of the eventual resolution.

Kevin's analogy was with the wartime situation. There were heroes and villains in both public and private sectors but fortunately more of the former, many of whom shouldered their added responsibilities at considerable personal cost. One abiding difficulty was of the uninvited third party – perhaps a big hedge fund – who periodically attempted to insert themselves into the crisis in order to make money. There were two business models here – one manipulative, the other more transparent – and much time was wasted in seeing them off; as officials handling the crisis were public servants they had to behave with visible equity. Obviously what is needed for the future are better detection and regulatory systems for earlier anticipation of future financial crises but so too are more robust processes for selecting and training those with public and private responsibility for the big financial decisions. Of course well intentioned people may make the wrong decision and the less principled may happen upon the right one. But Plato's essential question remains: what is it in a person's character and training that will influence him or her to take the best decision in a time of crisis? And can you ever guarantee that this will be the morally correct choice, either short term or longer term?

Can the tightening of financial regulation be made consistent with a resumption in sustainable growth?

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

A recurring theme in PEFM’s seminars over the last term has been the notion that regulatory responses to the financial crisis of 2008 have not been tied into a coherent, overarching framework. So too in Cyrus Ardalan’s presentation on December 1, when the Barclay's Vice Chairman and Head for UK and EU Public Policy and Government Relations gave a vast and informative overview of financial regulation since the crisis, analyzing the consequences of this regulation for sustainable growth.

In the absence of a coherent framework that adequately emphasizes sustainable growth, Ardalan suggested, regulation could have adverse consequences. He argued that new regulation was urgently needed in the aftermath of a crisis that revealed widespread weaknesses, especially in flawed risk models and exceptionally high leverage. However, he also contended that the spate of post-crisis regulation, particularly capitalization and liquidity requirements, placed burdens on banks that make it increasingly difficult for them to play their critically important inter-mediation role.