Watson Institute for International and Public Affairs

President Lagos: Greek Crisis Calls for Strong and Long Response by European Central Bank

September 28, 2011

Former Chilean President Ricardo Lagos is no stranger to financial crisis. Drawing on past crises in his own country and across Latin America, he sees a clear path for Europe to take as Greece teeters toward defaulting on its national debt and destabilizing world markets.

In this video and in a public lecture at the Watson Institute, where he is in residence as a Brown professor at large, Lagos called for the European Central Bank to assume Greece’s debt and give the beleaguered country a long horizon of some 40 years to repay. He pointed to Chile’s economic collapse in 1982, which was solved in this way (as also recalled in a 2008 Wall Street Journal article, “What We Can Learn from Chile’s Financial Crisis”).

As an economist as well as a political leader, Lagos knows that his approach would require dramatic structural changes in the European Union – for instance, it would require deeper integration and a more unified fiscal policy across member nations. Still, it beats the alternatives, he said. Proponents of austerity policies, for instance, will only succeed in decreasing Greece’s GDP in the end, he said.

A central bank's role is traditionally to be the lender of last resort, Lagos said, and Europe needs to transform its central bank into just that.