Economic instability in Europe and its political risks

Nov
06
04:45 PM - 07:30 PM

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On November 6, 2014, the UBS Center had the great honor of hosting a speech by Prof. Dr. Horst Köhler, former President of Germany. Prof. Dr. Axel Weber, UBS chairman, and Prof. Dr. Hans-Joachim Voth, professor of economics at the University of Zurich and affiliated professor of the UBS Center, joined Prof. Köhler for a panel discussion. UBS Germany, represented by its CEO Axel Hörger, co-hosted the event at the Frankfurter Opernturm.

«I remain a staunch supporter of the euro»

Horst Köhler opened the event with a strong, 40-minute supporting speech for the common currency. He considers a unified Europe with a strong euro to be a central element in a functioning international monetary system. In his opinion, the euro itself is not the cause of economic instability in Europe. “In fact, the currency crisis exposes the actual problem of the European Union: the lack of convergence.”

According to Köhler, the national governments have failed to make important financial and economic policy decisions since the conclusion of the Treaty of Maastricht. Although a monetary union requires a political union, the necessary convergence was never realized. In particular, “breaking the rules got Europe into the current pickle, and not the alleged faulty design of the Treaty of Maastricht.”

Clear words about Europe’s problems

In Köhler’s opinion, several problematic areas overlap. First of all, he believes that the banking crisis has not been adequately worked through. On the contrary, the mutual dependency of states and banks has grown following the financial and debt crises. Köhler calls for a stronger link between risk and liability in the financial system. Moreover, he sees profound structural deficiencies, a lack of competitiveness in most nations in the economic and monetary union, and weaknesses in the regulations of European institutions as causes for the crisis. The present economic recovery is on an unsteady foundation: unemployment, and in particular youth unemployment, is high, and labor market reforms seem to lie in the distant future.

«Nothing hurts the European Union as much as the euro»

At the beginning of the podium discussion following Köhler’s talk, Hans-Joachim Voth made a comparison to the Great Depression of the 1930s. At that time, the separate banking system for commercial and investment banks was introduced in the USA. Governments regulated banks so closely that not a single bank crisis occurred in a western European nation from 1950 to 1970. Voth suggests being more courageous when considering whether a separate banking system would be sensible today. Voth is of the opinion that the euro hurts Europe. From a historical perspective, political instability always increases when spending is reduced. He justifies his assessment, which is rather pessimistic, with his area of expertise: “Anyone who spends his life studying history is usually not an optimist.”

«The banks made mistakes»

Axel Weber, too, is of the opinion that the financial crisis has not yet been adequately worked through. He sees one reason for this in the fact that lessons from crises are generally learned slowly. He admits that the banks made mistakes and assumes that their internal resolution within the banks will take a lot of time: “We see the light at the end of the tunnel, but there is a long distance until we get there.”

Appeal for convergence in Europe

Based on these skeptical opinions, Köhler reacted with a passionate appeal to Europe to take the path of consolidation and structural reforms in order to regain its competitiveness. He considers entrepreneurs who have a positive outlook on this continent to be key in this process. They do not just need a modern infrastructure and a well-educated labor force; they also require a competitive cost structure and economic policies that encourage investment. The alternative to convergence is a long-term social conflict within and between European nations, the decline of European economic prowess, the deterioration of the European legal system, and the fading of the idea of Europe as a project of liberty, peace, and prosperity.

On November 6, 2014, the UBS Center had the great honor of hosting a speech by Prof. Dr. Horst Köhler, former President of Germany. Prof. Dr. Axel Weber, UBS chairman, and Prof. Dr. Hans-Joachim Voth, professor of economics at the University of Zurich and affiliated professor of the UBS Center, joined Prof. Köhler for a panel discussion. UBS Germany, represented by its CEO Axel Hörger, co-hosted the event at the Frankfurter Opernturm.

«I remain a staunch supporter of the euro»

Horst Köhler opened the event with a strong, 40-minute supporting speech for the common currency. He considers a unified Europe with a strong euro to be a central element in a functioning international monetary system. In his opinion, the euro itself is not the cause of economic instability in Europe. “In fact, the currency crisis exposes the actual problem of the European Union: the lack of convergence.”

Prof. Horst Köhler speaks at the UBS Center Event in Frankfurt
Prof. Horst Köhler speaks at the UBS Center Event in Frankfurt
Panel discussion with Axel Weber, Horst Köhler, and Hans-Joachim Voth (from left)
Panel discussion with Axel Weber, Horst Köhler, and Hans-Joachim Voth (from left)

Quote

In fact, the currency crisis exposes the actual problem of the European Union: the lack of convergence.
Horst Köhler
Nothing hurts the European Union as much as the Euro.
Joachim Voth
The banks made mistakes.
Axel Weber

Speakers

Former Federal President of Germany and Managing Director of the International Monetary Fund
Prof. Dr. Horst Köhler

Horst Köhler was Federal President of Germany from 2004 to 2010. Köhler was elected by the Federal Assembly on 23 May 2004, and re-elected to a second term on 23 May 2009. He resigned from his office on 31 May 2010. Köhler was President of the European Bank for Reconstruction and Development from 1998 to 2000 and head of the International Monetary Fund (IMF) from 2000 to 2004. Köhler worked for many years at the Federal Ministry of Finance, since 1990 as State Secretary. In that capacity, he served as the primary German negotiator in the Maastricht Treaty negotiations and the German Monetary Union.

UBS Foundation Professor of Macroeconomics and Financial Markets, Research Fellow CEPR

Joachim Voth received his PhD from Oxford in 1996. He works on financial crises, long-run growth, as well as on the origins of political extremism. He has examined public debt dynamics and bank lending to the first serial defaulter in history, analysed risk-taking behaviour by lenders as a result of personal shocks, and the investor performance during speculative bubbles. Joachim has also examined the deep historical roots of anti-Semitism, showing that the same cities where pogroms occurred in the Middle Age also persecuted Jews more in the 1930s; he has analyzed the extent to which schooling can create radical racial stereotypes over the long run, and how dense social networks (“social capital”) facilitated the spread of the Nazi party. In his work on long-run growth, he has investigated the effects of fertility restriction, the role of warfare, and the importance of state capacity. Joachim has published more than 80 academic articles and 3 academic books, 5 trade books and more than 50 newspaper columns, op-eds and book reviews. His research has been highlighted in The Economist, the Financial Times, the Wall Street Journal, the Guardian, El Pais, Vanguardia, La Repubblica, the Frankfurter Allgemeine, NZZ, der Standard, der Spiegel, CNN, RTN, Swiss and German TV and radio.

Chairman UBS
Prof. Axel Weber

Axel A. Weber has been Chairman of UBS since May 2012. From 2004 to 2011, he was president of the German Bundesbank, during which time he also served as a member of the Governing Council of the European Central Bank, as a member of the Board of Directors of the Bank for International Settlements, as German governor of the International Monetary Fund, and as a member of the G7 and G20 Ministers and Governors.
From 2010 to 2011, Axel Weber was a member of the Steering Committee of the Financial Stability Board and in 2011 member of the Steering Committee of the European Systemic Risk Board. He is also a board member of the Institute of International Finance and a member of the Group of Thirty.

Former Federal President of Germany and Managing Director of the International Monetary Fund
Prof. Dr. Horst Köhler

Horst Köhler was Federal President of Germany from 2004 to 2010. Köhler was elected by the Federal Assembly on 23 May 2004, and re-elected to a second term on 23 May 2009. He resigned from his office on 31 May 2010. Köhler was President of the European Bank for Reconstruction and Development from 1998 to 2000 and head of the International Monetary Fund (IMF) from 2000 to 2004. Köhler worked for many years at the Federal Ministry of Finance, since 1990 as State Secretary. In that capacity, he served as the primary German negotiator in the Maastricht Treaty negotiations and the German Monetary Union.

UBS Foundation Professor of Macroeconomics and Financial Markets, Research Fellow CEPR

Joachim Voth received his PhD from Oxford in 1996. He works on financial crises, long-run growth, as well as on the origins of political extremism. He has examined public debt dynamics and bank lending to the first serial defaulter in history, analysed risk-taking behaviour by lenders as a result of personal shocks, and the investor performance during speculative bubbles. Joachim has also examined the deep historical roots of anti-Semitism, showing that the same cities where pogroms occurred in the Middle Age also persecuted Jews more in the 1930s; he has analyzed the extent to which schooling can create radical racial stereotypes over the long run, and how dense social networks (“social capital”) facilitated the spread of the Nazi party. In his work on long-run growth, he has investigated the effects of fertility restriction, the role of warfare, and the importance of state capacity. Joachim has published more than 80 academic articles and 3 academic books, 5 trade books and more than 50 newspaper columns, op-eds and book reviews. His research has been highlighted in The Economist, the Financial Times, the Wall Street Journal, the Guardian, El Pais, Vanguardia, La Repubblica, the Frankfurter Allgemeine, NZZ, der Standard, der Spiegel, CNN, RTN, Swiss and German TV and radio.

Chairman UBS
Prof. Axel Weber

Axel A. Weber has been Chairman of UBS since May 2012. From 2004 to 2011, he was president of the German Bundesbank, during which time he also served as a member of the Governing Council of the European Central Bank, as a member of the Board of Directors of the Bank for International Settlements, as German governor of the International Monetary Fund, and as a member of the G7 and G20 Ministers and Governors.
From 2010 to 2011, Axel Weber was a member of the Steering Committee of the Financial Stability Board and in 2011 member of the Steering Committee of the European Systemic Risk Board. He is also a board member of the Institute of International Finance and a member of the Group of Thirty.

Venue

OpernTurm

Bockenheimer Landstraße 2–4, D-60306 Frankfurt am Main
(Google Maps)