Podcast Summary

Podcast: LSE: Public lectures and events
Episode: Towards a sustainable financial system – 10:30 Session
Date: March 21, 2014
Host: LSE Film and Audio Team
Session Chair: Paul De Grauwe (Head, European Institute, LSE)

Overview

This session, “Roadmap to Recovery, Sustained Growth and a Stable Financial System,” brings together prominent economists to debate the steps needed to promote sustainable economic growth and create a resilient financial system in Europe. Panelists address why recovery in the Eurozone has been weak, the structural and systemic deficiencies in Europe’s policy frameworks, and bold institutional reforms needed for future stability. Drawing on both economic analysis and proposals for structural and governance reforms, the conversation also takes a global perspective, discussing governance mismatches and the need for international coordination.

Key Discussion Points & Insights

1. Riccardo Barbieri Hermitte: Europe's Slow Recovery & Macroeconomic Deficiency

[01:23–15:08]

• Current State of Recovery

  • Recovery in the Eurozone is “very slow.” Forecasts barely exceed 1% GDP growth in 2014; potential growth is estimated even lower, “0.5% and 0.7% in 2015.”
  • Average pre-crisis Eurozone growth (1999–2007): 2.3%. Since crisis: –0.3% has become the norm. U.S. growth contrasts sharply with continued 2.3% average growth.

• Structural Reform Limitations

  • “What I call the Brussels Consensus is that the main way to resolve this problem is to continue with structural reforms. And I couldn't agree more.”
  • However, “there is a deficiency in the macroeconomic framework” undermining these reforms’ effectiveness.

• Inadequacy of Coordination & Policy Asymmetry

  • Eurozone policy is “country specific and do not promote coordination... and they are asymmetrical.”
  • Fiscal policy: Surplus and deficit countries treated differently—no mechanism for Germany to stimulate domestic demand and reduce imbalances, while deficit countries are pressured to repress demand.

• Critique of Fiscal Framework & Output Gap Calculations

  • Reliance on “structural budget balance” is problematic because it “gives countries more restrictive fiscal targets” even when they've made reforms.
  • Example: “The output gap helps you very little explain” Spain's ongoing fiscal deficit—if more realistic potential output estimates were used, Spain’s policy requirements would be less contractionary.
  • Barbieri proposes “better defin[ing] the concept of potential growth and output gaps so that we give these countries more sensible fiscal targets.”

• ECB Monetary Policy: Too Cautious

  • “The ECB... could have provided more accommodation to the economy.” Even when forecasts undershoot inflation targets, it does little.
  • “ECB’s primary objective is price stability. But... DCB should contribute to the goals of the European Union. And one of the goals... is full employment.” Argues for something “closer to the dual mandate” of the U.S. Fed.

• Geopolitical Risks

  • External shocks, e.g., Ukraine crisis, could easily stall or reverse already feeble Eurozone recovery.

Notable Quote:

“The mechanisms... used within the Eurozone are essentially country specific and do not promote coordination of economic policy. And in addition, they are asymmetrical.” — Riccardo Barbieri, [04:17]

2. Professor Luca Fantacci: Imbalances and Incomplete Monetary Union

[15:10–32:10]

• From National to European Problems

  • The crisis response has focused too much on “country specific issues,” missing “the peculiarly European character of this crisis.”
  • The euro crisis represents a failure of the monetary union’s institutional setup—producing “increasing divergence.”

• The ‘Original Sin’ of the Euro: Ignoring Balance of Payments

  • “None of these [convergence criteria] mentioned the balance of payments. And this did not occur by chance. This was deliberate. On the basis of the assumption that financial markets would take care of the imbalances.”
  • Result: Persistent surpluses (Germany) and deficits (periphery); reabsorption of imbalances has occurred mainly through depression, not structural correction.

• Target2 as Europe’s ‘Clearing System that Doesn’t Clear’

  • The ECB’s interbank system (Target2) has financed imbalances rather than facilitating their resolution.
  • “Target 2 imbalances are a particular type of money... a sort of official bank money.” It does not function as a true clearing system.

• Proposal: Reform Target2 Inspired by Keynes’ Clearing Union

  • Drawing from Keynes’ original Bretton Woods plans, Fantacci suggests:
    • Symmetrical charges: both debtor and creditor countries pay for persistent imbalances, incentivizing adjustment on both sides.
    • Differentiated refinancing: favorable conditions for financing trade imbalances versus speculative capital flows.
    • No absolute limits, but increasing charges for departing from equilibrium, and funding channeled for productive investment.

• Potential Benefits

  • Stimulate money circulation, reduce imbalances, unburden deficit countries from deflation, and reward surplus countries proportional to system benefits.

Notable Quote:

“Creditors would pay in proportion to the benefits that the system provides to them. Trade and real investments would have a cheap and stable source of funding, independent from fluctuations of the conditions of liquidity on international markets.” — Luca Fantacci, [30:40]

3. Dr. Ulf Dahlsten: Systemic Stability & Global Governance

[33:24–47:58]

• Have We Done Enough for Financial Stability?

  • Danger of complacency: “The financial system is inherently unstable... booms and busts cannot be avoided... but we can reduce the risks that those busts develop into systemic crisis.”
  • Ongoing issues: procyclicality, complexity, interconnectedness, “too big to fail,” lack of transparency, misaligned incentives, and unresolved global imbalances.

• Reform Proposals

  • Suggests a wide range of reforms, highlights three:
    1. Bank Resolution: Instead of merging failed banks and creating larger entities, “split it up... to create a more diverse system.”
    2. Mark-to-Market Accounting: Criticizes rules that drive fire sales and systemic risk during downturns.
    3. Return to Investment Bank Partnerships: Echoes Greenspan’s view that removing partnerships increased systemic risk.

• Governance in a Globalized World

  • Capitalism needs checks—“A marriage with many names... liberal democracy, embedded capitalism, the Nordic way”—but globalization is undermining the nation-state’s power to regulate.
  • “The glue that is keeping this marriage together is the rule of law. And that rule of law is withering away” as economics globalize but governance remains national.

• A Dream of a ‘World Market Charter’

  • Calls for an international assembly proportionate to economic strength, with a legislative council incorporating NGOs for transparency, and an international judicial arm—but not a “world government.”
  • The research community should play a key role in evidence-building and transparent global governance.

Notable Quote:

“There is a growing mismatch in territoriality between a global market economy and mainly national public orders.” — Ulf Dahlsten, [41:50]

Audience Q&A Highlights

1. Eric Lonergan (M&G) – Ideological Rigidity in European Policymaking

[48:20–50:32]
Lonergan challenges the panel as to why evidence in favor of looser monetary/fiscal policy and the success of American counter-crisis strategy is “ignored in the policy debate in Europe.”

“To me, it’s over. Blindingly obvious now... Italy’s problems were caused by the ECB because the ECB didn’t do QE... The beauty of American policy... is the net debt of the government is actually unchanged by the financial crisis. Growth has resumed...” — Eric Lonergan, [49:03]

Panel Response (Barbieri):

• German resistance to QE is central—“it’s thought as something that will only happen in a worst-case scenario.”
• Imbalance between reform-applied countries and the need for broader, coordinated fiscal and monetary action.
• “Someone will have to break the news to [Germany] that this is not going to work.” — Riccardo Barbieri, [53:41]

2. Howard Stewer (European Commission) – Institutional Lessons from History

[54:27–58:17]
Stewer connects the current crisis to lessons from the 1970s, arguing for greater appreciation of Europe’s crisis management and reflecting on the historical absence of adequate international institutions.

3. Paul Van Denorth (Autonomy Capital/Chatham House) – Euro Survival & Political Risks

[61:54–62:50]
Why wouldn’t the eurozone survive another recession?

“...in the event of a triple dip of a serious recession, there is a severe risk of breakup of the euro. Not only the economic dimension... but also the political dimension...” — Riccardo Barbieri, [62:54]
Barbieri emphasizes the fragility of both economic and political systems, especially in high-debt countries.

Memorable Quotes & Moments (by Timestamp)

• On Asymmetry in Eurozone Policy:
  “No one discusses what should be the overall fiscal stance of the Eurozone... the driver is still at the country specific level.” — Riccardo Barbieri, [05:10]

• Fantacci on Imbalances:
  “If we look at more recent years, we see that these imbalances within the Eurozone have been... reabsorbed on the side of the deficit countries. But this is mainly a consequence of the depression and not a step towards recovery.” — Luca Fantacci, [18:40]

• Dahlsten on Fundamental Reform:
  “If a bank fails, we’re actually going to split it up following the business logic and the territoriality... that would create strong incentives for bank managers to keep their business under control.” — Ulf Dahlsten, [36:18]

• On Global Governance:
  “There is a dream of a global government, but very few, very few want it... What I propose... is a World Market Charter to be discussed and developed by the main countries...” — Ulf Dahlsten, [45:20]

Timestamps for Key Segments

• Opening/Chair introduction — [00:00–01:19]
• Riccardo Barbieri Hermitte presentation — [01:19–15:08]
• Luca Fantacci presentation — [15:10–32:10]
• Ulf Dahlsten presentation — [33:24–47:58]
• Q&A — [48:20–66:15]

Conclusion / Tone

The discussion is frank, analytical, and reform-minded—at times candidly critical of Europe’s current policy framework and institutional architecture. All panelists advocate, to varying degrees, the need for both structural reforms and bold macroeconomic/monetary intervention, as well as deeper coordination at the European and, eventually, international level. Concrete proposals surface alongside “dreams” of better governance, with warnings about the political consequences of another European recession and practical lessons from economic history. The tone is academic yet passionate, encouraging not only analysis but also a willingness to imagine significant institutional innovation.