When Hélène Rey sits down in her home office overlooking the modern, brightly-coloured living room, she often mulls over the big questions facing Europe. Could a new financial structure fix the European banks? What shape would it take? And could it also save the euro?
In March last year, colleagues recognised Rey’s talent for tackling tough economic puzzles by awarding her the Yrjö Jahnsson prize, which is handed out every other year to a European economist under 45 whose research is deemed to be significant to Europe. The prize was created in 1993, but Rey is the first woman to win it.
A professor of economics at the London Business School, Rey, 43, was awarded the prize for an influential body of work that offered a fresh way of estimating the external debt of the US and other countries.
“You have to look at the entire balance sheet of a country,” she says. “Before us, people were focusing on net flows of capital.”
Minutes before the interview begins at her house in central London, the French-born Rey is on the phone trying to secure a last-minute visa to a conference in Shanghai. “I’m sorry. I’m supposed to leave in two days,” says Rey, dressed simply in a button-down shirt and loafers, appearing friendly and calm under pressure. “I’m on the programme a couple of times. Time is getting tight.”
Rey leads through to a table in the open-plan dining/living room. It is an airy space designed from two separate town houses joined together. In 2007, Rey refurbished the house with her husband Richard Portes, a US-born economist and fellow LBS professor, who founded CEPR, the network of European economists. Five years later, they bought the adjoining structure, gutted it and knocked down walls, creating a contemporary look that seems more in keeping with Los Angeles than London.
“The first house was very small. I needed a home office,” says Rey, whose devotion to her students is well known. Six years ago, she made a detour on her way to hospital to give birth to her daughter, stopping off at the LBS to submit a report on a thesis.
The daughter of an engineer and a teacher, Rey grew up in Brioude, a market town in central France. “It’s a volcanic region, full of cows. It’s a cheese region,” she says.
Rey learnt to cope with intense academic pressure preparing for entrance exams to the notoriously selective Grandes Écoles. This involved a gruelling prep-programme – a two-year maths and physics boot camp. “We had to solve problems all day. There was a lot of pressure. It was a very male-dominated environment. Our maths teacher told us we were the worst class ever, that we’d never make it,” she says.
But she did make it and won a place at a Grande École, ENSAE, to study statistics and economics. Then she got a scholarship to Stanford University in California. “It was a shock to be in a university with a lot of international students, people studying lots of other subjects, and the American optimism. People were so nice. It was a contrast.” A PhD from the London School of Economics led to an eventual professorship at Princeton, where her ideas caught the attention of colleagues and department chairman Ben Bernanke, now chairman of the US Federal Reserve.
Rey, with fellow economist Pierre-Olivier Gourinchas, now at Berkeley, showed that usual methods of calculating the external debt of the US and other countries had completely missed key factors. “Instead of looking at net borrowing, we constructed the whole external balance sheet of the US going back to the postwar period. We factored in missing fluctuations in asset prices and exchange rates.”
She also showed why the US is the world’s banker. “We called it ‘the US’s exorbitant privilege’. The US earns more on external assets than it pays on external liabilities. It has an excess return on the order of 2 per cent … So it issues a lot of government bonds that are happily bought by the rest of the world.”
The house is filled with primary colours, with pop-art inspired lamps and furniture with interlocking parts that can be reassembled into different shapes. A stained-glass window, by artist Kate Baden Fuller, was once a door.
The centrepiece, however, is a spiral glass and steel staircase that winds between the floors. “I love it. I can light the staircase if you like,” says Rey, offering me a tour of the upper levels.
As she climbs the stairs, Rey gives her view on why there are so few women working in the upper levels of economics. “The drop-out rate is high,” she says. “It’s still very hard for a woman to become a full professor. There’s a lot of competitive pressure … You need confidence. And it’s important to live with someone who has flexibility,” adds Rey, who says that the publishing years are also the childbearing years. “Richard has been very helpful. When I was up for tenure at Princeton in 2006, I was expecting my daughter.”
Rey also cites her childhood playing football with her brother as good preparation for a career in economics. “I had practice competing with boys.”
Propped up next to a large multicoloured lamp by French designer Jean-Charles de Castelbajac is a smaller Lego-like lamp. Is it from the same designer? “It’s actually a little toy lamp that my daughter loves. You can build it into new shapes with all the coloured squares,” says Rey.
The lamp is an apt metaphor. When not teaching or lecturing, Rey spends her time proposing new building blocks for Europe as it grapples with its current crisis. The tour ends back at the table. Rey’s six-year-old daughter appears, hopping into Rey’s lap to read a story while Rey tries to sum up the 2008 financial crisis. “To understand how it was transmitted to Europe, it is important to look, again, at the whole balance sheet of countries. Europe had no net borrowing,” she says. “But some countries had significant exposure to toxic assets from the US. Also, housing bubbles in Ireland and Spain were fuelled by too much borrowing from home and other European banks.”
There is an irony, says Rey, to the squabbling today among Europe’s leaders. “Many of the ‘hard-working’ northern countries in Europe don’t want to lend to the crisis-stricken ‘lazy’ southern countries because it will encourage bad behaviour. But they forget that their own banks behaved badly and took big risks.”
So who’s paying the price? “In Ireland, taxpayers are bailing out the Irish banking system which borrowed excessively from UK and German banks in particular.”
Rey explains that the Irish banks were so large, that their failure bankrupted the Irish state. The same problem has now hit Spain and threatens other European countries. What’s the solution? “Build a strong European banking union,” says Rey, “with a common supervisor and pooled funds to deal with large bank failures. This would break the deadly link between state bankruptcy and the banking sector bankruptcy.”
But will it get done? There is a woman in a senior position, says Rey, who could still help clean up the mess and get building work restarted. “We need German leadership on this. Merkel can make it happen.”
“It was a present for his birthday,” says Rey, of a bronze bust of her husband displayed in the sitting room. “It is by Celia Scott, a friend of ours and also the architect who did the staircase and the first bit of the house. I knew he would enjoy sitting for it.” Scott came out of retirement to design the house but her focus is now on her busts. “As a sculptor, she is good at getting the characters of people. I think she’s got Richard totally.”