The Biggest Global Economic Concern

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    "Hans Timmer",
    "Uri Dadush"
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Other

The Biggest Global Economic Concern

While the global economic crisis runs deeper than the euro, the inadequate institutional set up of the European Monetary Union greatly complicates matters.

By Hans Timmer and Uri Dadush

Published on Dec 20, 2011

What is the biggest global economic concern today?

Hans Timmer

The biggest global economic concern today is the health of financial institutions. The health of the banking sector is incredibly difficult to control given the global nature of the sector and huge size of institutions. And we all know that the consequences for the real economy are enormous.

We don’t have the oversight and institutions to respond to these problems and to a certain extent we’ve made it worse over the last decade. Governments, to some degree, have reinforced the problem and are not strong enough to react, especially in Europe. This is a sign that there is not enough Europe, instead of a sign that there is too much Europe.

Uri Dadush

There is a lot more going on than the euro, of course, but the big difference now versus ten years ago is that major European countries at risk had more instruments at their disposal. They could devalue their currency and print money. These were important safety valves that countries in the eurozone no longer enjoy—and this greatly exacerbates the worries in the markets.

So while the problem runs deeper than the euro, the inadequate institutional set up of the European Monetary Union greatly complicates matters.

Hans Timmer

I don’t buy the argument that there wouldn’t have been a problem if European countries had flexible exchange rates and I also don’t buy the argument that a flexible exchange rate is needed to accommodate the structural differences across European countries. I agree more with the thinking that many of the countries were too small or the economies were too integrated to have independent currencies and monetary policies.

This would have been messy anyhow. The real problem is not that the countries don’t have the tools to react, but what happened in the boom period that led to this crisis. For all kinds of reasons, there was over-borrowing and an underpricing of risk. We are seeing the nasty consequences today. MORE►

————————
Hans Timmer is the director of the World Bank's development prospects group.

About the Authors

Hans Timmer

Uri Dadush

Former Senior Associate, International Economics Program

Dadush was a senior associate at the Carnegie Endowment for International Peace. He focuses on trends in the global economy and is currently tracking developments in the eurozone crisis.

Economy North America United States Western Europe

Carnegie does not take institutional positions on public policy issues; the views represented herein are those of the author(s) and do not necessarily reflect the views of Carnegie, its staff, or its trustees.

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