Press release
22.02.2013

The three cardinal errors in the fight against financial crises

Governance Report analyses worldwide crisis management.

Berlin, 22 February 2013 – In the fight against financial crises, political stakeholders make three cardinal errors. This is the conclusion that Prof. Mark Hallerberg, PhD, Professor of Public Management and Political Economy, and his colleagues come to in the new “Governance Report” that was launched today at the Hertie School, with Jörg Asmussen, member of the executive board of the European Central Bank, as keynote speaker. 

Financial crises extend across borders faster and stronger than before, while at the same time decisions that national policy-makers take have stronger external effects than in the past. As a result, the existing institutional structure is overextended. Indeed, although this problem is recognized, crisis strategists regularly run into conflicting goals in the search for solutions:  

Conflicting Goal 1 “Liquidity vs. moral hazard”: In the particular case of crisis lending, a `bailout` directly benefits a country by providing it with the financing (liquidity) needed to service its debts, while at the same time creates moral hazard i.e. incentives for borrowers and lenders to assume additional risk in the expectation of future bailouts.

Hallerberg: “The conflict leads to a situation where in the end bailouts are purely decided on out of political opportunity. That is a mistake.”


Conflicting Goal 2 “Accountability vs. effectiveness”: While the creation of powerful new international organisations or the delegation of further authority to existing ones might strengthen the effectiveness of financial regulation and supervision, they would also present a direct challenge to national sovereignty (as conventionally understood) and democratic accountability. Hallerberg: ”The international crisis strategists are facing a real dilemma that is currently emerging in the discourse regarding the Eurozone banking union: In times of crisis, the focus is on battling the crisis - questions of legitimacy and democratic responsibility are neglected. This will backfire in the long term and cannot lead to a stable system.” 


Conflicting Goal 3 ”Domestic politics vs. international commitments”: The trade, monetary and financial policies maximizing a government´s domestic political support are not necessarily those most conducive to international economic stability. Hallerberg: ”The reflex reactions of focusing on national interests in times of crisis is understandable, but this behaviour does not lead to solutions in a world determined by close interdependencies – in fact, it provokes the next crisis.”

Considering the severe inadequacies of international financial systems, Hallerberg and his colleagues assess the European crisis management as being quite successful.

The next deciding step would be a comprehensive banking union – the decisions that have been taken up until now will not suffice.    

“The Governance Report 2013“, edited by the Hertie School with a foreword by former federal president of Germany Prof. Dr. Horst Köhler, is available from the Oxford University Press as well as in book shops. The accompanying volume, “Governance Challenges and Innovations: Financial and Fiscal Governance” with extensive contributions on all themes of the Report will appear in August 2013.