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School News

February 6, 2012

Faculty: Eurozone Crisis Brings Risks — and Opportunities

Four Columbia Business School faculty members shared their expertise as part of a special panel, “Understanding the Euro Crisis,” moderated by Dean Glenn Hubbard, on Thursday, February 2 at the School.


Four Columbia Business School faculty members shared their expertise as part of a special panel, “Understanding the Euro Crisis,” moderated by Dean Glenn Hubbard, on Thursday, February 2 at the School.

The panel, organized by the Jerome A. Chazen Institute of International Business, focused on the foundational issues surrounding the eurozone debt crisis and what the future may hold for the region. Panelists were David Beim, professor of professional practice; Michael Johannes, professor of finance and economics; Emi Nakamura, the David W. Zalaznick Associate Professor of Business; and Shang-Jin Wei, director of the Chazen Institute and N. T. Wang Professor of Chinese Business and Economy.

“This is a great opportunity to bring some of the research faculty are doing to practice,” Hubbard said. “It’s a great example of connecting the dots.”

Panelists first presented their takes on the crisis, starting with its origin. Beim pointed out that the project of unifying Europe has been going on for decades. The introduction of the euro in the 1990s was the latest step in that process — and a wrong choice, Beim said, adding that in order for a currency union to work, the member countries need to have similar inflation rates, fiscal and political integration, price and wage flexibility, and labor mobility.

In Europe, Germany has improved production growth over the last 10 years, while other countries, like Greece and Portugal, have not. “Currency unions never seem to last more than 10 to 15 years,” Beim said.

But Nakamura disagreed. “In times of crisis, we forget that there was a reason these countries entered this economic union in the first place,” she said, stating that the most troubled countries now also benefitted the most when the union was formed — the convergence of interest rates allowed Greece to borrow at Germany’s rates, for instance. Nakamura compared the euro issues to the history of United States becoming a fiscal union.

“The United States decided it was too hard to have a monetary union without a fiscal union and expanded powers of taxation,” she said. “So the question is, what will the EU do?”

Johannes said that almost all developed countries have had credit crises in the last 20 years, and that mispriced credit always plays a large role. “In this case, it’s caused by the EU’s dogmatic belief that sovereigns can’t default,” Johannes explained. “Countries are breaking social contracts with their people — not paying pensions, etc. — but they aren’t yet ready to break their contracts with the European Union.”

The panelists agreed that could soon change — starting with Greece’s exit.

“We will see Greece default,” Hubbard predicted. “There will be a banking problem in Europe, but then there will be huge opportunities for reorganizing assets.”

Johannes believes that once Greece leaves, taxes will increase throughout the EU, and the focus will then shift to other troubled euro countries — Ireland and Portugal, for example. Nakamura, on the other hand, anticipates the remaining countries would form a more formal fiscal union.

Meanwhile, Wei said there would be one major winner from the fallout: China. The country is always looking to invest, Wei noted, and it could lend resources through the International Monetary Fund (IMF) to the EU. Doing so would not only help the eurozone, but could also lead to new non-European leadership at the IMF

“China will come out better from all this,” Wei said, then added his main piece of advice for MBA students worried about how the euro crisis will affect their budding careers: “Move to Asia.”

See video and presentation slides from the event.