Is Europe On The Right Track To Get Its Debt Under Control?

�I think it�s a soluble problem, but they are solving it inch-by-inch instead [of] a general dramatic solution,� says the former head of the US Federal Reserve Paul Volcker. Volcker spoke with INSEAD Knowledge in Singapore at the Lee Kuan Yew School of Public Policy.

The recent ousters of the Greek and Italian prime ministers have not eased pressures as bond yields in Italy and other Euro-zone countries continue to rise and threaten some countries� ability to repay their debt. Still, Volcker commends European leaders on their first debt-reduction measures: recapitalizing banks, providing funds to insure Spanish and Italian financing, debt relief for Greece. �But whether they are enough and being implemented forcefully enough is the question, and, in the long run they are going to have to find [some] means for maintaining better discipline within Europe which requires more integration and policy making. I don�t think they can escape that, and they understand that, but you can�t do that overnight.�

On the issue of banking reform, Volcker says he believes there is still unfinished business with the U.S. mortgage market, the role and structure of credit rating agencies, and U.S. money market mutual funds regulation. However, the most important issue of all, he says, is how to deal with failures or incipient failures of large financial institutions. �There is an approach incorporated in law in the United States, parallel thinking in Europe and other countries, but those ideas have not yet been tested and there�s a lot of scepticism until we get it tested as to how effectively it will operate.�

The need for the proposed Volcker Rule, meant to prevent American banks from making big bets on markets with their own money or from backing private equity and hedge funds, was reinforced recently by the collapse of U.S. brokerage firm MF Global. �We�ve survived it but it�s a relatively small firm. The question is whether we can do that with a really big firm.�

Paul Volcker was Chairman of President Barack Obama�s Economic Recovery Advisory Board from February 2009 until January 2011. His views and more analysis on the situations in Europe and the United States will feature in the next edition of INSEAD Knowledge around November 23. Volcker delivered a comprehensive commentary on financial reform during a recent speech that was part of The William Taylor Memorial Lecture Series. A transcript is available here.