Responding to the crisis: Paths to stability

Policy makers seeking guidance in the current financial crisis may wish to consult the findings of the PEGGED research project. Analysis and advice on vital aspects of the crisis, such as sovereign debt and the banking system, has been produced by the team of researchers from seven European institutions, led by David Vines from The University of Oxford.

An interesting crisis-relevant example is the policy report titled ‘The Future of Banking’1. Issued in the form of an eBook, this publication includes thirteen essays from leading European and American economists who discuss immediate solutions to the on-going financial crisis and propose bold regulatory reforms. The eBook was edited by project participant, Thorsten Beck, whose introductory chapter explores options for addressing the current banking crisis while anticipating long-term challenges.

Reviving an idea which he admits “has not really been popular among policy makers these past years”, Thorsten Beck says there are compelling reasons to force financial institutions to privatise their losses as well as their profits. This counterargument to those who advocate maintaining the status quo or nationalising bank profits is progressing. The current situation may be untenable because - as the crisis has shown - banks have come to expect public bailouts when things go wrong but keep the benefits when things go right. They are accustomed to externalising their losses, imposing enormous costs on the rest of the economy through their risk-taking and failure.

Not that banks alone are to blame for this situation. Policy makers failed to apply the lessons of the previous crisis of 2008. Noting that politicians “did not use the last crisis sufficiently for the necessary reforms”, Beck suggests that forced privatisation of bank profits and losses may now be “an idea whose time has finally come”.

Issuing a “Call for Action”, the PEGGED policy report urges policy makers to undertake the following:

  • Resolve the Eurozone crisis forcefully and swiftly using a two-pronged approach with separate policy tools to address the sovereign debt and banking crises.
  • Focus on the endgame - Create a credible resolution regime that forces risk decision takers to bear the losses of their decisions. (This is needed to correct the misguided practice of providing bailouts to banks upon failure, a policy that has encouraged excessive risk-taking.)

The eBook also offers carefully argued reflections on other key aspects of the Eurozone crisis including the much-debated financial transaction tax, Eurobonds and the policy of ‘ring-fencing’ (separating the commercial and trading activities of banks).

PEGGED has explored these and many other hotly discussed policy instruments in several conferences and papers over the past two-and-a-half years. As one might expect, some of the project’s research-based output is rather technical in nature. (Readers with a strong interest in economics or finance may appreciate the PEGGED discussion paper ‘Sovereign CDS and Bond Pricing Dynamics in the Euro Area’.2) However, many of the main policy-relevant publications produced by PEGGED have been written in a highly accessible way, providing valuable insights into key aspects of the crisis that are relevant to us all. One may not agree with all the policy positions taken by the researchers, but confronting their arguments and evidence is definitely a worthwhile exercise.

PEGGED was conceived with the express aim of helping Europe construct a “vision of how the global economic system should evolve”. To achieve this goal, the project concentrated on four key policy areas:

  • International macroeconomic governance.
  • Globalisation and financial stability.
  • Integration of markets for trade in goods and services.
  • Migration and the mobility of labour.


1 See:

2 See:

PEGGED - Politics, economics and global governance: the European dimensions (duration: 1/7/2008 - 30/6/2012). FP7 Socio-economic Sciences and Humanities, Activity 4 “Europe and the world”, Research area 4.1 “Interactions and interdependences between world regions and their implications”. Collaborative project (large-scale integrating project).


Contact: David Vines,