Helmut Schmidt’s European vision as Germany’s chancellor during the Cold War, and his subsequent contributions, helped shape the continent and promote European integration. With his passing in 2015, Europe lost a great leader. Germany’s Schmidt and France’s Valéry Giscard d’Estaing were the grandfathers of the euro, a project finalised by their successors in Germany and France, Helmut Kohl and François Mitterrand. Franco-German cooperation and leadership for Europe has been crucial to the advancement of the European project. Similarly, leadership voids have been at the crux of Europe’s failings.
Schmidt’s insights are especially missed at a time when the future of Europe is in question, not least due to the mismanagement of the Eurozone Crisis, where his advice went unheeded. Six years after the Crisis began, it remains unresolved. And worse yet, Europe’s elite disputes its true causes.
Understanding the EZ Crisis
Understanding why the Crisis occurred is critical for a consensus on remedies, which is a prerequisite for salvaging the European project. Recent analysis has identified key economic factors that contributed to the Crisis (Baldwin et al. 2015). Establishment of the euro fuelled current account imbalances and made a number of Eurozone member states vulnerable to a sudden stop. Greece became the first victim in early 2010. Economic analysis also explains the risks of fiscal profligacy, which was an important aspect of the problem in Greece but—contrary to a narrative prevalent among the European elite—was not the main cause of the Crisis overall. Although these points are important, economic analysis alone cannot explain the gross mismanagement of the Crisis in the six years since early 2010. It also cannot explain the actions taken by European governments and institutions that caused a small initial shock to turn into an existential crisis for the Eurozone. This requires understanding the political dimension.
The crash in the price of oil — from $108 a barrel in June 2014 to below $27 earlier this year — has rattled the stock market, triggered layoffs across the energy sector, and plunged many oil producing countries into crisis.
Oil has since rebounded significantly from its lows, to above $40 a barrel, but the price plunge since 2014 has put much pressure on oil companies. Reports have pointed to an increase in debt among oil producers, raising the specter of default on bankruptcy and default on debt, withfollow-on effects beyond oil producers.
Looking at the numbers, the mortgage-debt crisis dwarfs what is currently happening in oil. According to a report in the Financial Times, the global oil and gas industry’s debts rose to $3 trillion from $1.1 trillion between 2006 and 2014. Compare that to the $10 trillion of housing debt weighing on Americans in 2008.
MIT Sloan Senior Lecturer and Visiting Scientist Barbara Dyer
Let’s say you have offers for two different jobs that interest you. The first one pays more, but comes from a company you don’t know that much about. The second offer is a bit lower, but that company has a long history that you know well. How do you decide between the two?
By taking the higher offer, you guarantee yourself a bigger salary, but you also open yourself up to more unknowns down the road. The lower offer means you’d work for a firm you admire and while your initial paycheck would be smaller, you might realize other benefits such as professional development and career advancement down the road.
In a sense, this is the same dilemma facing Starwood Hotels & Resorts Worldwide, the Connecticut-based owner of such brands as Sheraton, Westin and St. Regis. Since agreeing to an initial $12.2 billion takeover offer from Marriott International MAR-5.45%, Inc. in November, Starwood HOT-4.61% has become the object of a mad-lover’s pursuit between Marriott and a consortium led by China’s Anbang Insurance Group. Following a round of counteroffers, Maryland-based Marriott’s latest proposal values Starwood at $13.6 billion while Anbang Insurance Group came in with an all-cash bid of $14 billion.
After nearly a decade of crisis, bailout and reform in the United States and the European Union, the financial system — both in those countries and globally — is remarkably similar to the one we had in 2006. Many financial reforms have been attempted since 2010, but the overall effects have been limited. Some big banks have struggled, but others have risen to take their place. Both before the 2008 global financial crisis and today, just over a dozen big banks dominate the world’s financial landscape. And yet the ground is shifting beneath the financial sector, and big banks could soon become a thing of the past.
Few officials privately express satisfaction with the progress of financial reform. In public, most of them are more polite, but the president of the Federal Reserve Bank of Minneapolis, Neel Kashkari, struck a chord recently when he called for a reevaluation of how much progress has been made on addressing the problem of financial institutions that are “too big to fail” (TBTF).
Doug Criscitello, Executive Director of MIT’s Center for Finance and Policy
High rates of debt growth by local governments are a cause for concern in any country. In China, where recent turmoil in the equity and foreign-exchange markets has put a spotlight on that country’s economy and growth prospects, increasing levels of borrowing by provincial and other lower levels of government has resulted in local indebtedness rising nearly four-fold since 2008, reaching about 40% of GDP.
Debt growth of that magnitude raises concerns about fiscal sustainability, debt affordability, transparency and accountability. Cautionary tales abound. From New York City in the ‘70s, emerging market countries in the ‘80s, Russia in the ‘90s, and Detroit, Greece and Puerto Rico more recently, there is a long list of governments that have experienced the painful economic repercussions of taking on debt they could not afford.
While the massive debt buildup in China presents challenges, the situation is not as dire as a full-blown debt crisis, a new policy brief from the MIT Center for Finance and Policy by Xun Wu, a visiting scholar, suggests.