Survival of the Eurozone: Stiglitz, Wade and Werner

539718_45832735The next speakers picked up the themes-Professor Robert Wade, LSE ; Professor Richard Werner, Southampton University and the aforementioned Nobel Laureate, Joseph Stiglitz, Columbia University. While soft spoken, and perhaps easily underestimated, Wade nonetheless speaks a powerful message. He sees the microeconomic issues as promoted by Germany and France as mere distractions from the real issues at hand.  Regulation of hedge funds, control of bankers’ pay etc. are not solutions but sops to the masses to get votes. The macroeconomic issues of sufficiency of bank capital and the fiscal centralization of the Eurozone are the issues that must be dealt with.  His view, in many ways remarkably similar to Jacques Attali, is not to let the current crisis go to waste!

Subsequent to his remarks, I am sure that he was appalled at Germany’s irritating unilateral moves of banning short positions in financial stocks (naked or not) and naked positions in CDSs on sovereign bonds and large German banks.  The Germans just do not seem to get it.  Predictably rather than reducing volatility, the measure enhanced it just as their actions did in 2009. And it is these short-sighted and largely uninformed regulators who are leading the charge on taxing financial transactions rather than simply raising bank reserve requirements.

Richard Werner waded in with a controversial message.  He reminded us that it is not central banks that create capital but the banking system itself. As such, a very simple solution to the serial bank-created bubbles is to limit the means whereby commercial banks create capital. Rather than let banks lend however they wish, controls should be placed on the credit creation process with respect to financial transactions. In a way this is similar to Volker’s proposal of banning banks from engaging in proprietary trading and other risky activities, which are at the heart of what Werner is talking about.

It became controversial when Werner accused the ECB of not wanting to control bank capital because they indeed wished to precipitate crises to meet their longer term objective of a centralized fiscal agency. Further, it has purposefully created every crisis to date!  Its goal is to create the United States of Europe. Professor Wade, while supporting further integration of Europe economically, did not see events heretofore as the product of a conspiracy.

Professor Stiglitz was mindful of these themes and added further colour to them. But his view is that Europe will muddle through again and patch the system through compromise as it always has. He sees no hope for the southern European nations other than default, but they are a sidebar to the main action. In fact the UK, Japan and the US are in worse fiscal shape than any of these countries and this is the problem. Further, countries which create large trade surpluses without letting their currencies adjust are creating deadly imbalances in the global economic order.

Clearly all the speakers were very concerned about the events unfolding in Europe but none could clearly articulate a solution or even see a way out of it that was politically feasible.