LSE Perspectives on the Sovereign Debt Crisis

On Wednesday 02 November 2011 LSE played host to the public lecture 'LSE Perspectives on the Sovereign Debt Crisis'.Organised jointly by the Department of Finance, Financial Markets Group (FMG) and European Institute, the lecture brought together a panel of experts whose complementary expertise placed them in an ideal position to debate the current Eurozone crisis, the future of the European Union and its common currency.

The panel was chaired by Charles Goodhart, FMG and LSE Emeritus Professor, and comprised Professor Dimitri Vayanos and Dr Jon Danielsson of the Department of Finance and FMG and Dr Vassilis Monastiriotis and Dr Bob Hancke of the European Institute.

The evening was opened by Goodhart, who gave a short overview of how the current Eurozone situation was unfolding, highlighting his surprise at Greek Prime Minister George Papandreou's calling of a referendum to determine his countries future, "I think it surprised everybody," he said in conclusion. "And it surprised the hell out of the markets."  

Dr Hancke then discussed the effect of a common currency on inflation and real interest rates, arguing that the current account deficit in Southern Europe could not help but explode. He then highlighted his analysis of how different labour markets in northern and southern Europe have contributed to the south and the north drifting apart, which has contributing to the crisis.

Dr Monastiriotis went on to criticise 'politics' following markets', asserting that European leaders and voters were adherents of a disproved ideology and that the hands of governments were being negatively forced by the financial markets. He echoed Keynes's oft-quoted assertion that "practical men...are usually the slaves of some defunct economist".  

Professor Vayanos opened by discussing the positive steps needed for Europe and for Greece to move forward. He emphasized that many of both the problems and solutions lay inside the financial system, pointing to the important role that finance scholarship can play in reshaping the political and social world.  He employed simple but precise economic analysis to explain a number of issues, from the failures of the European Central Bank to the manifestation of incentive problems that led to the gross overexposure of German and French banks to peripheral Eurozone debt; thereby he linked analyses of politics and macroeconomics with the finance of private credit. In conclusion, he drew attention to the weakness of Greek institutions, insisting that to regain prosperity the country must remain in the Eurozone and offered a forewarning that, should it depart, new capital would cease to flow in.

Dr Danielsson spoke last. He also mixed discussions of government and banking, opening with the assertion that the sovereign debt crisis is not about Greece in the same way that the 2007 financial crisis was not about subprime mortgage lending—they are both systemic crises and the current one comprises two sub-crises, one in banking and another in Eurozone bonds. Next he turned Dr Monastiriotis' script on its head, saying that throughout the history of financial crises "governments tend to be the worst culprits" so "governmental reform is much more important than financial reform" and that he hopes "that Europe will find a way to keep the European Union alive without the Euro."

Professor Goodhart's closing words suggested that any such solution will no doubt be difficult to implement. "I find it difficult to see how this crisis is going to get resolved without a lot of crockery getting broken." He concluded.

Please click here for a Podcast of this event.