LSE has a formal partnership with Swiss Re, one of the world’s largest reinsurers, to support a research programme on monetary policy and long-term investment.

The project is led by Simeon Djankov, Executive Director of LSE’s Financial Markets Group, who is the former Deputy Prime Minister and Minister of Finance of Bulgaria. Jerome Haegeli, Swiss Re’s Head of Investment Strategy at Group Asset Management, is collaborating on the project with the aim to support a resilient financial market system.

The LSE Financial Markets Group (FMG) is a leading centre in Europe for policy research into financial markets, working alongside the LSE Department of Finance to understand problems in financial markets and in the decision-making processes of corporations, banks and regulators.

The programme examines two key questions:

The structure of central bank balance sheets in the future and the corresponding implications regarding their contribution to a well-functioning financial market

The structure of central bank balance sheet has changed substantially since the Global Financial Crisis, both in terms of the composition and the size of assets and liabilities.

During the crisis, many major central banks expanded their asset holdings in efforts to supply monetary accommodation and support economic activity. Some central banks continue in this direction. Looking ahead, population trends and low levels of productivity growth are raising questions as to whether the equilibrium, or natural, real interest rate is lower. In a persistently low interest rate environment, central banks may turn more frequently to their balance sheet as an instrument of policy, raising questions both about the type of assets to hold and structure of liabilities.

“Central banks’ dominant role in financial markets is not sustainable. The costs are outweighing the benefits. Low interest rates are a “tax” on savers and long-term investors alike.” Jerome Haegeli, Swiss Re Head of Investment Strategy

The effect of loose monetary policy on structural reforms across Europe

The Eurozone crisis has shown significant vulnerabilities in the European social model. Europe is home to only 8% of the world’s population, yet it produces 50% of all social payments (public pensions, healthcare benefits, maternity leave and associated benefits, public education) globally. These social benefits come at a large cost, typically covered by high taxation and chronic budget deficits. The latter have increased public debt in some Southern and Western European countries to dangerously high levels, even prior to the Eurozone crisis. The resulting fiscal tightening has gone along with pursuing structural reforms in public finances and social sectors across Europe.

More recently, loose monetary policy has allowed government to borrow at essentially no cost, reducing their incentive to modernise the social sectors. There are some differences across Europe, especially among Eurozone and non-Eurozone countries. These differences can be exploited to conduct comparative analysis on the effects of loose monetary policy on structural reforms.

Simeon Djankov commented: “The preliminary research clearly shows that governments opt for the easy path out when offered a choice between structural reforms and cheap additional debt. This result holds both in advanced and in developing economies. Europe after 2012 is a striking example of how loose monetary policy can slow down reforms.”


This article first appeared in the 2018 State of the Relationship report, commissioned by Research England and compiled and published by NCUB.