1 10 Research and Policy 3 CFS Financial Center Index / 14 CFS Strategy 2010 3 Events 16 CFS Program of Research Visitors 4 CFS Colloquium 16 CFS Data Center 4 CFS Lectures 22 CFS-GSEFM Policy Research Network 5 Joint Lunchtime Seminars 24 Policy Platform 7 CFS Conferences 27 CFS Publications 11 News from CFS 29 The Macroeconomic Model Data Base 12 Supporters 32 Editorial The Meaning of Crisis in Greek Causes of the Crisis and Crisis Management While trying to recover from a financial crisis, Europe is hit by a major sovereign debt crisis, whose main causes are to be traced to structural problems, especially in the South. While contributing to the crisis, speculation in credit swap markets and government bond spreads were not its root causes. Drastic revisions in Greek deficit forecasts following the Greek elections late last year, coupled with a tainted reputa- tion for misreporting economic statistics, served to focus attention on Greece’s fiscal fundamentals, including the country’s ability to collect tax revenues – the very aspect that guarantees sovereign debt. This ability was doubted, because of massive tax evasion and considerable corruption in the tax collection mechanism; and because of low productivity and heavy reliance of the private sector on public sector projects and funds. Ironically, both the German and the Greek Source: Wikimedia Commons, Roccuz, Relief of the Mourning Athena, 460 B.C..jpg, Free Cultural Work governments were blamed for delayed ➾ Gesellschaft für Kapitalmarktforschung e.V.: Chairman Board of Trustees: Prof. Dr. Dr. h.c. mult. Otmar Issing; Chairman Managing Board: Dr. Rolf-E. Breuer Center for Financial Studies: President: Prof. Dr. Dr. h.c. mult. Otmar Issing; Directors: Prof. Michael Haliassos, Ph.D., Prof. Dr. Jan P. Krahnen, Prof. Dr. Uwe Walz. Editorial | The Meaning of Crisis in Greek reaction to the crisis, that significantly More is needed – Now the competitive economic game should be aggravated the crisis. Politically, this criti- simplified and harmonized, with emphasis cism does not seem justified: German tax- Emergency debt refinancing measures on providing equal opportunities, sound payers were particularly averse to dishing need to be combined with changes that incentives, and rewards for productive out funds for a country characterized by ensure longer-run fiscal viability and ability effort rather than political favors. Labor excessive spending, limited tax and pension to generate tax revenues, in order to meet market rigidities should be abolished, contributions, antiquated and generous debt obligations and achieve debt retire- including ‘closed professions’ and groups labor market and retirement rules. Greek ment. The alternative of a transfer union with preferential treatment based on voters, on the other hand, would not seems politically unworkable and economi- political power, in order to allow access have accepted the current harsh measures cally very costly, given the transfer union’s to outsiders and to improve flexibility and immediately following Greek elections detrimental effects on fiscal discipline and hence productivity in European economies. where unnecessarily huge pre-election reduced incentives of net payers. This is Clear incentives to invest financial and promises were made. especially so if transfers are not used to human capital in the private sector should smooth temporary imbalances in either be provided and bureaucratic procedures Economically, perhaps the unusually high direction. The other alternative, namely (e.g., for setting up a business) should be spreads in early May could have been default on sovereign debt, carries with it a drastically simplified. The pension system avoided through earlier concerted Euro- heavy stigma that could cut off European needs to be modernized and rationalized, pean action. Yet, at the time of writing, and countries (not only Greece) from impor- reducing implicit public debt (which is far despite available funds and apparent ECB tant sources of future financing and would larger than the official debt figures in many purchases of Greek bonds, spreads remain most likely also lead to the break-up of the European countries), an urgent task in quite high, reflecting market uncertainty Eurozone, the scenario the current crisis rapidly aging European societies. as to whether Greece will be able to management wanted to avoid. The stigma is repay loans even at a 5% interest rate. If especially pronounced when default cannot A big danger is that these structural the market is right, the current spreads be attributed to exogenous factors, such as reforms are seen as needed only ‘over the are induced by fundamentals and not by a world financial crisis, but to bad domestic longer run’. Contrary to Keynes’ famous inaction. The criticism could be valid, institutions and practices. dictum, Europe actually needs to make though, if the market’s current assessment sure it survives in the long run, and this is of sovereign risk is partly due to the erratic Massive reforms are needed to ensure a process that starts today. Europe needs to behavior of governments as they were future increases in productivity, growth, act not only as a tough lender but also as groping for an agreement. and competitiveness, so that European a coordination device that helps countries countries can generate the funds to meet to move towards sound fiscal behavior. If Timing issues aside, there is little doubt that future obligations, reduce debt levels, and all that happens today is the misery of tax the safety net and associated ECB purchases offer their people hope for the future. collection and wage reduction, a number of of sovereign bonds were unavoidable, given Without such reforms, the current cuts countries can be drawn into a deflationary the risk of contagion to other European in fiscal expenditures and nominal wages, spiral; and countries such as Greece may countries with similar but less pronounced as well as the increases in consumption exhibit a form of hysteresis, whereby they structural debt problems, and the threat taxes simply reduce disposable income, lose some of their most productive people to stability of the currency union. Indeed, raise unemployment, and create a deep and dynamic and internationally competi- buying government debt does not mean per recession with massive costs that jeopardize tive firms. In a crisis, such losses occur fairly se that the ECB has lost its independence. social cohesion. quickly as people re-optimize, but they are Independence is questioned if the ECB is difficult to reverse. In sum, Europe as a forced to accept higher inflation in viola- At the core is fiscal coordination that does whole needs to use this crisis in a way tion of its stated targets – a development it not prevent fiscal competition. Rules for consistent with the many positive meanings currently rules out. However, much more setting limits on government spending and of the word in the ancient Greek language is needed to ensure that debt gets repaid for designing methods of tax collection where it originated: test, judgment, choice, and such problems do not recur. should be harmonized with reference to competition, and resolution. best practices. Restraints on fiscal deficit and debt levels need to be monitored very Michael Haliassos and Uwe Walz closely and in a timely fashion. The rules of 2 CFS Strategy 2010| Research and Policy CFS Strategy 2010 CFS-GSEFM New Program Research Policy Program Network Visitors Data Research Networks Support Program Center Network CFS is in the process of redefining its Besides running lecture series, workshops CFS will also contribute considerably role within the House of Finance. More and conferences, CFS will extend its role to facilitating research by providing emphasis is being put on the cooperation in inducing and generating high-quality “logistic” support for the research with the different entities – institutes and research with an eye on policy relevance activities in the areas and their networks. departments – in the House. The aim is in key areas of financial and monetary With the Program Network Support to eventually create synergy effects for economics. Several initiatives will help initiative, CFS will assist in the submission all parties involved, thus contributing not to provide additional effective stimuli for process for research grants by writing only to research excellence, but also to research and dialogue. and subsequent monitoring of research research relevance. proposals. This central contact point will Our research facilities will be enhanced by work closely with the research networks CFS’ role remains anchored in its mission a CFS Research Visitors Program and and will look at the opportunities for statement, stressing its role as an inde- a CFS Data Center (more information network building and support. pendent research institution with a strong can be found on page 4). In addition to international orientation. CFS builds on that, the existing research programs will Not to forget, CFS is a co-founder of its experience as a forum for dialogue get a “remake”, with fewer research areas and an active participant in the recently between academia, policy-making institu- and stronger emphasis on cooperation established House of Finance Policy tions and the financial community. CFS’ among researchers and across disciplines. Platform, jointly run by researchers role is being recognized and valued in- The idea is that a network (both from the House of Finance with a strong and outside the academic community, in internationally and locally) of research experience in policy advisory. CFS’ role Germany and abroad. fellows and affiliates is built around each in fostering policy relevance is assisted research area. The networks, each headed by another new initiative which links Since its foundation, CFS has been by a Research Professor, will apply for its activities to the University’s Ph.D. active as an important bridge, not only projects and funding and will set up their programs in Economics, Finance and between the finance and money group research program.