Weber discusses causes of finance crisis in Europe

Visiting economics professor and former Deutsch Bundesbank president Axel Weber discussed the root cause of and recommended solution to Europe’s economic problems in “The Euro Crisis: Challenges and Opportunities,” the first pre-inaugural event for the Julis-Rabinowitz Center for Public Policy and Finance, in a crowded Dodd Auditorium on Tuesday afternoon.

Weber started by describing the current situation, “the start of what is by many viewed as the first year after the crisis,” as something he actually views “as year four of the crisis.”

As a former policy maker and current professor, Weber emphasized the importance of looking at the facts before making policy decisions.

“For designing policy, you need to read the underlying cause rather than just looking at the symptoms,” Weber said.

Weber spent the first part of his lecture showing exactly what those facts were, focusing on Greece and Ireland. As an example, he showed that Greece’s high debt-to-GDP ratio of 152 percent was bad, as it had hit triple digits, but it was also certainly comparable to Japan’s debt ratio of 229 percent and America’s 100 percent debt ratio.

In addition to high debt, Greece and other countries with dangerous figures also exhibited high deficits, Weber said.

“The countries that are there don’t just have debt problems, which are often legacies of past decisions, but deficit, which is the speed you’re adding to the debt,” Weber explained.

In addition to Portugal, Ireland, Greece and Spain, the United States and the United Kingdom also showed comparably high debt and deficit numbers. However, Weber explained that these statistics were part of the symptoms rather than the root cause of the problem.

“It’s an uncomfortable place to be but largely irrelevant,” Weber said. “The key structural issue in policy is how competitive a country is.”

While Germany gained competitiveness in the past 12 years compared to the European-area average, Greece lost competitiveness compared to the average by about 10 percent. Weber explained that Ireland should begin to regain competitiveness because of its wage cuts and similar programs.

Weber also emphasized the issue of sustainability and how the financial crisis certainly was not exclusive to Europe.

“Don’t say it’s a European problem,” Weber said. “It’s a global problem. Debt is a problem all over the world.”

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Policy problems began before the crisis, Weber explained, as overspending in both the public and private sectors resulted in deficits, even as countries experienced economic growth; the problem became apparent with the crisis.

Moving forward, Weber proposed taking all irrelevant policy options off the table to focus on actual possibilities. “You don’t focus on things that are nice when you know they won’t happen,” he said.

Weber dismissed options such as Eurobonds, blue bonds, increased or leveraged use of the European Financial Stability Fund and large-scale debt purchases by the European Central Bank as irrelevant options that either failed to address the problem or would never pass.

Instead, he proposed keeping banks liquid while downsizing them and making bondholders part of the work-out process while aiming for a full fiscal European union in the long term.

Weber’s lecture drew over 100 audience members, including many appreciative students.

“It was very realistic in the sense that it got the point of the problem and got to the solution,” Tony Xiao ’12 said.