Oxford 2015

Oxford Professor urges urgent European reform

The University of Oxford’s distinguished Professor of Economics David Vines predicted the ongoing crisis in Europe will turn into a “train wreck with implications for investors” unless governments undertake significant reforms.

He urges for large write downs of the sovereign debt of southern European countries, a loosening of austerity in those countries and a significant increase in inflation in Germany and fiscal expansion in northern Europe. “Europe has a choice,” he says speaking at the Fiduciary Investors Symposium at Rhodes House, Oxford University.

Vines argues that essential reforms are still strongly resisted in Germany which is “not coming to terms” with the scale of the problem. However he is hopeful that, ultimately, Europe’s indebted countries will have their debt written down. “In 15 years time debt will have been forgiven but how this will happen is difficult to see,” he says.

In policy failures that are easy to see in retrospect, Vines traces Europe’s problems to wildly divergent labour costs.

Southern European economies became uncompetitive and over-borrowed with “undisciplined lending”, leaving banks exposed in “a system not fit for pursose.” Since then European countries have been unable to devalue their currencies and embark on export led growth. “EU banks won’t be fixed by growth,” he says in the same way that Asian banks were able to recover after the economic crisis in that region.

Vines argues that unless policy steps are taken there is a real possibility of “Grexident,” whereby Greece accidentally exits the European Union without a fresh injection of bail out cash. Contagion will spread to other vulnerable economies including Spain, Italy and Ireland, he predicts.

“It will go beyond Greece. I am not persuaded by stress tests,” he says, in response to efforts to make Europe’s banking sector more robust. Northern banks are just as exposed since they are holding southern European debt, he says. Vines also references the growing risk to “the political economy of this project” in light of more vocal criticism Germany is facing from member states.

For signs of hope Vines casts his mind back to the Latin American crisis which, “in the end involved forgiveness.” He urges Europe to do as Latin America did, writing down sovereign debt in a process that took “four years of hard work.”

Adding: “Banks earned their way out of difficulty and write downs were possible when they had strong enough balance sheets.” A new regime is urgently needed in Europe in the face of today’s difficulties, he concludes.



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