A Euro Area Government – A Dream Come True?

Viktor Beker — Thu, 01 Oct 2015 00:01:27 +0000

This paper studies three important problems that have led to or have aggravated the euro crisis: moral hazard in accumulating debt by sovereigns, lack of macroeconomic policy coordination and stabilization, and macroeconomic imbalances. We use both theoretical and empirical evidence to argue that these problems were largely caused by coordination problems. We will then investigate whether a supranational government, a layer of government above all euro member countries, can alleviate these problems. We will find that macroeconomic stabilization and macroeconomic imbalances can be improved by such a government, though moral hazard cannot be solved. The only, but certainly not insignificant, obstacle seems to be that politicians and voters may not be willing to transfer their authority to this government.

The Euro Area’s Experience with Unconventional Monetary Policy

Viktor Beker — Thu, 01 Oct 2015 00:01:13 +0000

This paper discusses the role of monetary policies implemented by the European Central Bank (ECB) after the 2008 financial crisis, with a special focus on unconventional measures, analyzing to what extent they influenced Euro area’s macroeconomic performance in the period. After the 2008 shock in the USA, several conventional and unconventional monetary actions were implemented by the ECB. Although the initial measures prevented a massive failure of banks, they didn’t avoid the escalation of the situation into a serious sovereign and banking crisis, which had roots deeply inserted in the Euro area itself. Some programs like the SMP received strong criticism, but other measures like the OMT avoided the more acute risks of contagion through the Euro area. Nonetheless, with persistent economic weakness and risk of deflation, the ECB extended its stimulus programs in September 2014 (TLTRO, CBPP3, ABSPP) and in March 2015, with a broad unsterilized public sector purchase program (PSPP). As they corrected some of the problems from previous programs, and conveyed a strong commitment to fight deflation, those programs initially lead to positive effects on several macroeconomic indicators (sovereign yields, euro exchange rate, credit, output, inflation), although with some volatility on yields and the euro later due to intra and extra-Euro area factors. Considering that medium and long-term expectations still remain in low levels, the ECB intends to continue the program until it gets to its inflation objective of below but close to 2%, and may even review the program if it happens an unwarranted tightening of financial conditions. Nevertheless, serious problems remain for households (high levels of indebtedness and unemployment), enterprises (challenges for investment, financial volatility) and governments (fiscal, political and institutional constraints). It is argued that the path for a sustained growth recovery in the Euro area not only goes through unconventional monetary policies. They should also be complemented by a coordinated fiscal policy, more flexible (and countercyclical) in periods of economic downturns, coupled with adequate institutional reforms that together foster credit markets, encourage private and public investments in the long term and reduce regional asymmetries. Additionally, it is believed that a more robust and integrated financial supervisory framework (not only on banking but also on capital, insurance and pension markets) would contribute to reduce negative spillovers from financial volatility episodes, break the sovereign-bank “doom loop” and bring more financial stability to the zone.

euro area – The European Crisis

A Euro Area Government – A Dream Come True?

The Euro Area’s Experience with Unconventional Monetary Policy