The Eurozone lacks a safe asset that is provided by the region as a whole. This column highlights why and how European Safe Bonds, a union-wide safe asset without joint liability, would resolve this problem, and outlines steps to put them into practice. For given sovereign default probabilities, these bonds would be as safe as German bunds and would approximately double the supply of euro safe assets. Moreover, owing to general equilibrium effects, they would weaken the diabolic loop between sovereign risk and bank risk.
Markus K Brunnermeier, Sam Langfield, Marco Pagano, Ricardo Reis, Stijn Van Nieuwerburgh, Dimitri Vayanos, 20 September 2016
Charles Calomiris, Marc Flandreau, Luc Laeven, 19 September 2016
The Global Crisis has raised concerns over how far ‘lender of last resort’ policies by central banks should go. This column examines the history of the development of these policies throughout the world. Last resort lending is a locus of political power, and as such, its creation should be viewed as the outcome of a political bargain. It is therefore not surprising that countries differed in their propensity to create such policies, and in the powers with which they chose to endow them.
Sylvester Eijffinger, 31 August 2016
The ECB is under fire from all sides for its inability to stimulate Europe's economies. This column puts the case for an informal European ‘praesidium’ within the Eurogroup to coordinate wider stimulus and reform measures. This will inevitably lead to the appointment of a European finance minister – the Eurozone's equivalent of Alexander Hamilton, the first Treasury Secretary in the history of the US.
Stefano Ugolini, 30 August 2016
When Mario Draghi famously declared that the ECB was “ready to do whatever it takes to preserve the euro”, he also specified “within our mandate”. This column examines the institutional limitations to central bankers’ actions. It argues that institutional constraints are essential in determining the sustainability of monetary policies, and hence central banks’ ability to pursue their targets. The weakness of the Bank of England in the heyday of the gold standard is a case in point.
Vítor Constâncio, Philipp Hartmann, 01 September 2016
The ECB’s 2016 Sintra Forum on Central Banking focused on the international monetary and financial system. In this column, the organisers of the forum highlight some of the main points from the discussions, including concerns that the world economy may be suffering from a shortage of safe assets and proposals for which areas international regulatory reforms should be further developed.
Stefano Micossi, 20 August 2016
Some economists are approaching a consensus that the Eurozone’s financial architecture is now resilient enough to withstand another shock similar to that of 2010-11. This column argues that such a view may be overly optimistic. Economic and financial instability persists in member states and the banking sector, and institutions to tackle a shock remain incomplete. While the Eurozone remains vulnerable to a bad shock, the blanket application of burden sharing without consideration of current economic and financial conditions is unwise.
Giacomo Calzolari, Jean-Edouard Colliard, Gyöngyi Lóránth, 30 July 2016
The presence of multiple national authorities in the EU poses substantial coordination problems for the supervision of multinational banks. The Single Supervisory Mechanism aims to solve the resulting coordination failures. This column explores how banks could strategically react to the introduction of a supranational supervisor. The banking system is likely to endogenously react by reverting to an organisational form for which supranational supervision is actually less essential.
Maria Demertzis, Nicola Viegi, 28 June 2016
Both the Fed and the ECB have managed to remain credible since the Global Crisis, but their credibility levels have evolved differently. This column argues that since inflation in the US and the Eurozone has been similar in the past eight years, the difference in the way that credibility has evolved is the result of the different macroeconomic policy mixes applied.
Daniel Gros, 27 June 2016
The business of central banks used to be profitable – they issued cash and could invest the proceeds in the assets they liked. This column argues that the ECB has turned the old business model of central banks around. Today, it earns a stream of income on its liabilities, while the returns of an increasing part of its assets go to the national central banks. This cannot be a stable arrangement.
John Muellbauer, 10 June 2016
The Eurozone faces a lost decade or worse under current fiscal policy and restrictions on monetary policy. The ECB now faces a fundamental contradiction in its mandate between the Lisbon Treaty’s Article 127 (price stability, plus the ECB target of under but close to 2% inflation) and Article 123 (no overt monetary finance of governments). This article discusses three options – two ways in which the fiscal rules could be improved; and the temporary abeyance of Article 123, making it ‘state-dependent’. It also explains why recent arguments against the effectiveness of ‘helicopter money’ are mistaken.
Paul De Grauwe, 13 May 2016
Greece may be about to get some debt relief, although there is still resistance to the idea. This column argues that the ECB has been providing other Eurozone countries with debt relief since early 2015 through its programme of quantitative easing. The reason given for excluding Greece from the QE programme – the ‘quality’ of its government bonds – can easily be overcome if the political will exists to do so. It is time to start treating a country struggling under the burden of immense debt in the same way as the other Eurozone countries are treated.
Matthias Morys, 10 May 2016
The first century of modern Greek monetary history has striking parallels to the country’s current crisis, from repeated cycles of entry and exit from the dominant fixed exchange rate system, to government debt built-up and default, to financial supervision by West European countries. This column compares these two episodes in Greece’s monetary history and concludes that lasting monetary union membership can only be achieved if both monetary and fiscal policies are effectively delegated abroad. Understandable public resentment against ‘foreign intrusion’ might need to be weighed against their potential to secure the long-term political and economic objective of exchange rate stabilisation.
Vítor Constâncio, 25 April 2016
Since the Crisis, macroprudential policy has become a necessary complement to monetary policy. The ECB is striving to be a major contributor to the growing body of thought about the role and instruments of this new policy area. In this column, Vice-President Vítor Constâncio introduces the new bi-annual ECB Macroprudential Bulletin aimed at widening awareness about the Bank's macroprudential policy mandate, enhancing transparency, and informing about current ECB discussions and approaches in the field.
Nick Ligthart, Ashoka Mody, 14 April 2016
Many claim that monetary policy has hit diminishing returns. They use that as an explanation for the slower economic growth and low inflation in the Eurozone. This column argues that the main problem is that the ECB acted late and with half-measures to the Global Crisis, which was seen as falling short of its promises. The real problem is thus not a lack of ammunition, but a lack of credibility.
Peter Sands, 19 February 2016
A move is afoot to eliminate high denomination bills such as the €500 note. This column argues that the elimination would not, on its own, stem the flow of funds to support terrorism, but it is a necessary step on the road to restricting terrorist finance. While there are counter-arguments, they tend to argue for activities that involve breaking the law – in one way or another.
Tommaso Monacelli, 12 February 2016
The boom-bust cycle in the Eurozone between 2000 and 2008 is essentially a story of cyclical asymmetries between the Core and the Periphery. While stressing the importance of addressing these asymmetries – especially via fiscal policy – the ECB has failed to take them explicitly into account in its own policy-setting. This essay argues that these asymmetries may persist precisely because they are not a central target of stabilisation policy – both fiscal and monetary.
Máximo Camacho, Danilo Leiva-Leon, Gabriel Pérez-Quirós, 01 December 2015
Today's monetary policy effectiveness depends on expectations of future monetary policy. Shocks affect such expectations, but the nature of the shock matters. This column presents evidence that negative demand shocks lead markets to expect looser policy in the short run. Negative supply shocks lead to expectations of looser policy in the medium to long run. Unexpected expansions – from either the supply or demand side – have no significant influence on markets' expectations of future monetary policy.
Dirk Schoenmaker, Guntram Wolff, 30 October 2015
The European Banking Union – in all likelihood – is going to involve a European deposit insurance scheme. This column clarifies the different options for organising European deposit insurance and explains what the different options can achieve.
Angus Armstrong, Francesco Caselli, Jagjit Chadha, Wouter den Haan, 23 October 2015
Will the risk-sharing arrangements within the ECB’s quantitative easing programme reduce its effectiveness? The views of leading UK-based macroeconomists are exactly evenly divided on this question, according to the latest survey by the Centre for Macroeconomics. The responses reported in this column suggest that this divergence reflects differences in views about the channels through which quantitative easing operates.
Charles Wyplosz, 07 September 2015
What have we learned from the Eurozone crisis? This column argues that, very much unfortunately, we haven’t learned that much. In desperate need of a way out of the current impasse, economists and policymakers are imagining a menu of solutions. A grand panacea seems implausible, at present. So the way to proceed should follow the time-honoured European method – ‘functionalism’. The EU and the ECB must focus on modest tasks, dealing with them one by one, if we are to find our way out of the current mess.