Read how did the second day of the Berlin conference go
Day two of the Institute for New Economic Thinking (INET) Berlin conference kicked off with a session called “The Challenge of Deleveraging and Overhangs of Debt I: Inflation and Austerity” moderated by David Smick. European Central Bank executive board member Jörg Asmussen opened the discussion by talking about the problems in Europe. “It’s more and more clear that we have a close linkage between the banking sector and sovereign debt,” Asmussen said.
Angel Gurria, secretary-general of the Organization for Economic Cooperation and Development, challenged Asmussen on the heavy reliance on austerity in Europe saying, “Austerity is not a policy it’s a tool – and must be part of a broader toolkit.” Gurria suggested that austerity policies have cost Europe when dealing with the crisis in Greece. “We could have bought the whole Greek debt initially for just pittance of the total losses we have now accrued,” he said. Gurria implored the conference not to forget that “deleveraging strategies and austerity measures have a direct impact on the lives of human beings.” He ended on a hopeful note, saying “Europe is rebuilding itself now…and when we take off the scaffolding I hope we will all be in awe.”
Axel Leijonhufvud echoed Gurria’s warnings on austerity, suggesting that economic policy faced “a problem…of robbing Peter to pay Paul. Policy choices are in effect about how to rob and who to pay. Who must pay? Who will not?” Leijonhufvud continued talking about monetary policy by invoking poet Sir Walter Scott: “Oh what a tangled web we weave, but first we practice to deceive.”
The second session of the day was titled “The Challenge of Deleveraging and Overhangs of Debt II: The Politics and Economics of Restructuring.” Michael Hudson declared, “Financial and fiscal reform need to go together.” He also suggested the possibility of a public option in banking. “Government banks wouldn’t make liars loans,” Hudson said, adding that governments already effectively owned many of the major banks anyway. He concluded that a “dysfunctional financial system is not lending to provide means to repay debt but is adding to the overhead.”
Moderator Thomas Ferguson followed Hudson’s comments on financial reform by noting that, “The first banker to make over $100 million a year was at Citigroup after the U.S. bailed it out.” Arturo O’Connell concluded the panel by discussing the role of the balance of payments crisis in the current debt troubles in Europe. “When we speak about debt problems, it’s also a debt problem,” O’Connell said. “And a debt crisis is a creditor’s crisis at the same time – it takes two to tango.”
Former Canadian Prime Minister Paul Martin delivered the lunch keynote address, discussing the problems of deficits and financial stability. On financial contagion, Martin said, “I don’t care if the smallest country in the world has a financial crisis, it’s going to effect you.” Turning to the U.S. deficit debate, Martin stated that “the so-called deficit debate in the US isn’t about the deficit at all – it’s about winners and losers.” He continued, “The debate in the US isn’t about whether or not there should be higher taxes. It’s about which generation will pay them.” He also warned about the overuse of austerity, saying that “Cutting spending and cutting deficits are not always synonymous.” In Martin’s mind “Europe has simply gone too hard on austerity.”
The third session of the day was titled “Is Mercantilism Doomed to Fail? China, Germany, and Japan and the Exhaustion of Debtor Countries” moderated by Peter Jungen. Heiner Flassbeck’s answer to the session’s title question was succinct and to the point: “Yes.” Flassbeck also talked about the problems with mercantilism in the Eurozone, with a particular focus on Germany. “The only country in the world that is still on the mercantilist path is not China – it’s Germany,” he said. Flassbeck then asked, “If Germany gets half of its growth from net exports all the time, then who are the losers?” Norbert Walter responded by noting that the costs of German reunification are important to remember when talking about Germany as a mercantilist country. He also pointed out that fairly recently during the early reunification period Germany ran an account deficit.
Joseph Stiglitz concluded the panel by exploring the balance of payment problems in the Eurozone and in the world economy. He noted that the debt to GDP ratio is only one part of the story – you also need to consider investment. “It’s remarkable that financial markets continue to function only on one side of the balance sheet – investment matters, not just deficits,” Stiglitz said. “If deficits and investments are both going up, a country is actually better off.” He noted the paradox at the heart of deficit debates, stating that it’s “simply impossible for all countries to have a surplus.”
The final panel of the day was titled “The Future of Europe” featuring moderator Wolfgang Munchau. Markus Brunnermeier suggested that Europe needs a safe harbor asset to deal with the “flight to safety” in bond markets and that a German bond alone would be too small to tackle the Eurozone’s debt problems. George Soros followed with the declaration that “the Euro has really broken down” and that “the political dynamic in Europe could destroy the Euro, common market, and E.U.” But Soros also offered a ray of hope. “Public opinion could persuade authorities to do the right thing in Europe,” he said.
The day also was significant for INET’s parallel event, the Young Scholar Initiative (YSI) Commons, where hundreds of students and young scholars have gathered to discuss pressing economic issues and view the conference on a live video feed. Several prominent members of the INET community paid a visit to the Commons, including George Soros, Andrew Sheng, James Heckman, Wendy Carlin, Joscha Fischer, and Antonio Damasio. The Commons crowd was particularly excited to see Joseph Stiglitz, mobbing the Nobel laureate as soon as he stepped off the elevator.
Day two concluded with a dinner keynote address by Lord Adair Turner, chairman of the U.K. Financial Services Authority. Turner joked that INET could be called, “the institute for reading old economic books,” noting the Institute’s focus on the ideas of Joseph Schumpeter, John Maynard Keynes, Friedrich Hayek, and Hyman Minsky. On a more serious note, Turner stated that beyond a certain point “further improvements of GDP per capita don’t have much potential to drive increases in happiness.” He also stated his belief that manufacturing jobs continue declining “because of our relentless ability to improve productivity” – and that this will not be a bad outcome. He continued by addressing problems of climate change and inequality. He saw both as problems that could only be addressed with strong political commitment – and as essentially ethical, not just economic, issues. “Climate change is not just about MPV or the discount rate but about the ethical issue of what we leave for future generations.”
INET encourages you to browse through the Berlin conference pages to read more about the conference and the conference Program to find the list of speakers with some of their papers and presentations linked next to their names.
