An inside look at Europe’s financial woes

European monetary policy leaders visit MIT Sloan to share news of the region’s complex economic challenges

October 15, 2014

National Bank of Austria Governor Ewald Nowotny

National Bank of Austria Governor Ewald Nowotny

It’s been seven years since the financial crisis began with the slowing of the housing market and the fall of Bear Stearns, the Wall Street investment bank. Yet central bankers around the world are still struggling to chart the best course in the face of the uneven recovery, none more so than those in the eurozone, where recent economic numbers still reflect widespread unemployment and slow to nonexistent growth.

In an Oct. 9 talk at MIT Sloan, Ewald Nowotny, governor of the National Bank of Austria and a member of the governing council of the European Central Bank, shared the latest on the eurozone monetary picture with students and faculty, including Deputy Dean S.P. Kothari, who served as host and moderator, and Simon Johnson, professor of entrepreneurship and former chief economist at the International Monetary Fund. Johnson joined Nowotny on a panel along with Hannes Androsch, Austria’s former minister of finance and former vice chancellor.

With inflation low and interest rates at record lows, the ECB finds itself “in uncharted territory,” said Nowotny as efforts continue to revive the eurozone economies. “We have to be aware that monetary policy has limitations. It has to be decided how Europe will find a balance between monetary policy, fiscal policy and fiscal discipline, and reforms.” He expressed hope that policymakers would see these areas as complementary, rather than as alternatives to each other.

The ECB has introduced a new program to begin buying assets, an approach that the U.S. Federal Reserve Bank has taken with its extensive bond purchasing effort since the financial crisis, but that is “something quite new” for the ECB, said Nowotny. The central bank will also begin supervising the largest European banks starting in November, taking responsibility for the oversight of some 80 percent of the region’s collective bank balance sheet.

“We are aware that taking up responsibility for supervision of the banks is a very risky affair for central banks … but somebody has to do it,” said Nowotny. The move will make the ECB one of the world’s largest bank supervisors. The objective, said the governor, is to provide a higher degree of trust in European banks.

As the panel discussion began, Johnson expressed confidence in the long-term future of the European monetary union and noted that the ECB had already taken many steps to address the region’s economic crisis. Androsch joined the conversation on a more pessimistic note, pointing out that the unstable geopolitical situations in Eastern Europe, the Middle East, and West Africa were likely hindering recovery globally. “It would be an understatement to say the world economy is not in the best shape,” he said. “We have not yet overcome the crisis that started in 2007 as a banking crisis and became an economic crisis.”

Like Nowotny, Androsch acknowledged that monetary policy can only do so much. “That things did not go worse [following the financial crisis] is thanks to the activity of central banks,” he said. “But they have come to the edge. Monetary policy is very important but can only be one ingredient in a reasonable economic policy cocktail.”

Nowotny and Androsch were visiting MIT Sloan en route to the International Monetary Fund’s annual meeting in Washington, D.C.