27.11.2017 Panel Discussion on "The Greek Crisis, Structural Reforms and Eurozone Convergence"
Dimitri Vayanos, Professor of Finance at the London School of Economics, and Nikolaos Vettas, Professor of Economics at Athens University, talked about the policy priorities for Greece with Lars Feld, member of the German Council of Economic Experts, and Vítor Constâncio, Vice-President of the European Central Bank. The discussion was moderated by Michael Haliassos, Professor of Macroeonomics at Goethe University.
The crisis in Greece has disappeared from the frontpages of the newspapers. However, it is far from being solved. The underlying reasons for the slump of the Greek economy, the reforms undertaken so far and measures that foster sustainable growth were in the center of a panel discussion at the IMFS with the Greek economists Dimitri Vayanos and Nikos Vettas. The discussion was moderated by Michael Haliassos of Goethe University.
According to Vavanos, who is a Professor of Finance at the London School of Economics, low long-term growth and low corporate and foreign direct investment were the fundamental causes. “This was exacerbated by flaws in the euro area architecture”, Vayanos said, referring to the lacking framework for sovereign default in the euro area and banking supervision, which had been established in the aftermath of the sovereign debt crisis. Nikos Vettas, Professor of Economics, at Athens University, sees Greece at a crossroads: “Currently, there are no new fiscal deficits but the current mix of tax revenue and expenditure doesn’t contribute to growth”.
For this reason, Vayanos and Vettas together with a number of Greek economists from institutions inside and outside Greece have analyzed the situation in Greece and have come up with concrete proposals and possible solutions in the new book “Beyond Austerity: Reforming the Greek Economy”.
According to the editors, some key improvement has already been made, such as deregulation on the labor market, pension cuts, deregulation on the product markets and the establishment of an independent tax collection. However, Vayanos and Vettas emphasized that the key problem still persists: “Uncertainty keeps investment out”. They criticized that the state was more important for the economy than before the crisis. Therefore, they pointed out that Greece needed a new growth model with investment and exports representing a larger part of the economy. The welfare system, where there is no support for jobless people after twelve months, the burden of the tax system on business activity and the obstacles for starting a business in Greece are only some of the areas for possible improvement, identified by Vettas.
Vítor Constâncio, Vice-President of the ECB, stressed the fact that in the euro area architecture no crisis management instruments had been foreseen and, therefore, had to be created in a rush. “Banking union was missing from the start in the design of the monetary union”, he said. The sharp decrease of the GDP per capita as well as the low level of Greek exports were the aspects that surprised the ECB Vice-President most in the course of the crisis: “The Greek economy was more closed that I thought”, Constâncio said.
Lars Feld, member of the German Council of Economic Experts (GCEE) and director of the Eucken Institute, showed himself in favor of a fourth program for Greece in order to allow reforms to go on for some time. “In three years, Greece could be finally over the cliffs”, Feld said. However, he recognized that a fourth program was not politically feasible in the euro area. Volker Wieland, also a member of the GCEE, proposed the editors of the book to apply their analysis to the economic development: “Why not form an independent group of Greek economists to monitor the reforms in the country?”
Danny Busch, Professor of Financial Law at Radboud University,
Pierre-Henri Conac, Professor of Commercial an an Company Law at the University of Luxembourg, and
Tobias Tröger, Professor of Private Law, Trade, and Business Law, Jurisprudence at Goethe University
Bank Resolution - Will it Work?
One year after its entry into force bank resolution in the euro area still has to pass its fire test. However, the pitfalls have already become obvious according to financial experts. During the IMFS Working Lunch, Danny Busch, Professor for Financial Law at the Radboud University, Pierre-Henri Conac, Professor of Commercial Law and Company Law at the University of Luxembiourg, and Tobias Tröger, Professor of Private Law, Trade, and Business Law, Jurisprudence at Goethe University and associated Professor at the IMFS, drew an interim balance.
"The concept of bail in is very tricky," Tröger criticized the instrument of creditor participation that incurs liability towards investors and creditors as well as outside creditors, covering a banks' losses. "It is very hard to predict the outcome of bank resolution". Referring to the Italian bank Monte de Paschi di Siena (MPS), Busch described how national governments tend to exploit the exceptions in regulation. "With the precautionary recapitalization national authorities remain in the driver seat," Busch said. One day before Christmas the Italian government allowed MPS to receive financial aid. According to bank resolution, precautionary recapitalization is reserved for viable banks whose resolution would endanger financial stability.
For Conac, who had been an advisor to the ESMA, the situation in Italy illustrates the political resistance against bank resolution. In his opinion, this should be eliminated."Mismanagement, political influence and bad governance are the reasons for banks going bust", he said. The political influence could lead to a mixture of bail in and bail out, which finally neutralizes bail in, Conac summarized.
Tröger pointed out that the request for higher equity in practice also presents many difficulties. Besides, due to the national differences in insolvency legislation cross-border resolution was very complicated. Tröger emphasized the need for a fiscal backstop. However, in his opinion the key message is clear: "Make bail in predictable".