The key role played by cross-border finance in the development of the euro crisis was the focus of a lecture given by Professor Philip R Lane, Whately Professor of Political Economy, in Trinity College Dublin today.
In his inaugural lecture, entitled ‘Financial Globalisation and the Euro’, Professor Lane, of Trinity’s School of Social Sciences and Philosophy, explored the interconnections between the rapid growth in financial globalisation since the mid-1990s and the euro crisis. He also set out the reform agenda for policymakers to minimise the risk of similar crises re-emerging in the future.
“Financial globalisation was an important factor in the growth in banking-sector risks in the mid-2000s, which in turn were a central part of the crisis that took hold in 2008. The expanded ability of banks to raise cross-border debt allowed extraordinary credit booms to develop in some countries and external imbalances to grow to unprecedented levels. This phenomenon was evident across the developed world, with the securitisation boom in the US leading to the recycling of dollar-based funding into Europe. By 2007, high debt levels meant that the international financial system (and the euro area in particular) was extremely vulnerable to any reversal in investor sentiment.
“Financial globalisation also heavily influenced how the crisis was managed, given the conflicts of interest between domestic debtors and foreign investors (and their respective governments). These conflicts were especially strong inside the euro area, on account of the common currency and the distributional implications of ECB liquidity policies.”
In the lecture Professor Lane also highlighted the positive role that financial globalisation can play in resolving the crisis and will also outline the reform agenda for policymakers to minimise the risk of similar crises re-emerging in the future.
“Financial globalisation can play a positive role in the ultimate resolution of the crisis, with capital inflows into the European periphery an important driver of economic recovery. While the general reform agenda is by now well understood (European banking union, tighter regulation of banks, counter-cyclical fiscal policies), the completion of these reforms remains an important challenge, especially with the gradual exit from the acute phase of the crisis.”