Policy Seminar on the European sovereign debt crisis

Thursday, December 8, 2011
George Shultz Conference Room, Herbert Hoover Memorial Building


Axel Weber, Michael Boskin, John Cochrane, Andrew Crockett, Darrell Duffie, John Gunn, Bob Hall, Monika Piazzesi, Ken Scott, George Shultz, Johannes Stroebel, John Taylor, Ian Wright


Axel Weber, former Bundesbank president and future UBS Chairman, discussed the European sovereign debt crisis.

Weber began by stating the Greek debt crisis is affecting other countries’ debt and that this effect would not stop in Europe. Rather, he argued it will become more costly for many other countries to issue debt and that we’ll see a general re-pricing of sovereign debt worldwide. Further, he claimed banks retreating and selling assets paves the way for the crisis to become global and conjectured it may spread to the U.S.

Weber discussed how effective action is difficult due to fiscal and political policies not always being aligned. He claimed that for the crisis to be resolved there must be high quality issuance from the European level, and some parties have to be willing to break their own interest and do what is rational for the entire system. He stated that a failure to increase capital soon may bring down credit ratings for a long period of time. As countries like Greece have deep structural problems, Weber proposed a new large funding plan in which countries use capital for growth rather than consumption, as not doing this has led to the current problems. In general, more capital is needed in banks until a restructuring of the system can occur.

Weber concluded by discussing how the crisis will play out and how Europe will evolve. He expects the ECB to commit to a very active strategy in markets and initiate some type of outright purchase program. With regard to the Eurozone, Weber believes it does not have so far to go to reach fiscal union, but feels it will remain a currency union on the way to fiscal union. He thinks they will not have countries pushing to have members leave, but also that others will not join.

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