EURO IN CRISIS


behave strategically, this can lead to decisions that are ‘sub-optimal’ from a global perspective,” Friederike Niepmann and Tim Schmidt-Eisenlohr point out in the CEP CentrePiece article Bank bailouts in a global economy: the challenges for international cooperation. They studied different co-operation regimes and analysed which countries gain or lose from them. Looking at the European Systemic Risk Board (ESRB) – a recently established European Union institution which has the task (among other things) of issuing recommendations on how to deal with banks in distress – they found that so far the ESRB has only reputational power. This is because, their research suggests, “a central authority that can prescribe a bailout, which then has to be financed by one country alone, always makes that country worse off compared with a situation where decisions are taken unilaterally. They say: “Finding the right balance between the efficiency gains from financial globalisation, the preservation of national sovereignty and optimal co-operation when managing a crisis will remain a challenging task for policymakers worldwide.” What happens when a country defaults on


its debts? The ERSC research project Legal and Economic Aspects of Sovereign Debt Default: The Argentina Case examines the impact of the Argentine default in 2001 – looking at reputational incentives to repay debt, the relation between creditors and borrowers, sovereign debt restructuring and international regulation. In another CEP Discussion Paper, Currency Unions in Prospect and Retrospect, JMC Santos Silva and Silvana Tenreyro consider the costs


During 2011, Greek demonstrators took to the streets in protest against austerity measures to curb the country’s debt crisis


and benefits of joining a currency union such as the euro. Unlike estimates of the trade effect of other currency unions, they could not find “any statistically significant effects” on trade as a result of introducing the eurozone. They find that “in terms of financial integration, important changes in trends are observed with the introduction of the euro, particularly for cross-border holdings of bonds and equity”. As part of the World Economy and Finance (WEF) research programme Dr Andrew Scott, Professor Albert Marcet and Elisa Faraglia have examined the optimal ways of managing government debt. In their research project Risk Sharing and Contingent Debt they conclude that it is very difficult to insulate fiscal policy from shocks by using the ‘complete markets’ approach to debt management – where the composition of government debt is chosen so fluctuations in market value offset changes in future deficits. Another WEF project, Monetary Policy, Welfare and the Structure of International Financial Markets, looks at the issue of international assets. Today people in one country hold massive quantities of assets located in other countries, privately or through pension funds, insurance companies or government debts and assets. Professors Alan Sutherland and Michael Devereux have developed a new method of calculating optimal portfolios and analysing risk in an open economy model. But as recent research from the Centre for


Competitive Advantage in the Global Economy shows, an open economy can also provide some benefits. In the research project Openness, Protectionism and Britain’s Productivity Performance over the Long-run Professors Stephen Broadberry and Nicholas Crafts found that the open economy allowed 19th-century Britain to focus on the lucrative industrial and service sectors – and that protectionism introduced in the 1930s did not improve British industrial performance. n


At the time of publication George Papandreou had resigned as Prime Minister of Greece in part because of a confidence vote over his plans to hold a referendum for the acceptance of the terms of a eurozone bailout deal. Mario Monti had also replaced Silvio Berlusconi as Prime Minister of Italy.


Arild Foss is ESRC Senior Copy Editor i


cep.lse.ac.uk/pubs/download/dp0990.pdf cep.lse.ac.uk/pubs/download/cp335.pdf www.esrc.ac.uk/my-esrc/grants/RES-165-25-0006/read personal.lse.ac.uk/TENREYRO/cupaper.pdf


www.worldeconomyandfinance.org/project_descriptions/scott_risk _sharing_and_contingent_debt.html


www.worldeconomyandfinance.org/project_descriptions/ sutherland_monetary_policy_welfare%20_and_the_structure_of_ international_financial_markets.html


www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/ research/papers/36.2010_crafts.pdf


AUTUMN 2011 SOCIETY NOW 25


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