Economic Policy and Political Power in European Crises

Viktor Beker — Thu, 01 Oct 2015 00:01:17 +0000

This paper analyses the European Union crisis assuming that the economy is commanded by a veiled political power linked to the financial market. This connection is important for a financial crisis is consequence of financial capital supply excess, especially money supply excess, leading to risky operations and financial capital losses internally and abroad. A critical appreciation of the monetary policy reveals that it cannot deliver the promised price stability for the interest rent on public debt is mainly paid with new money printed by the central banks when buying Treasury bonds in open market operations. Inverse operations do not withdraw this liquidity for bond sales comprise interests. An experiment with US data is quoted to support the idea that the origin of the past and future American financial crises is the money printed to pay interest on the US public debt. Next it is demonstrated that the stock of money issued by government to make fiscal policy converges to a theoretical point of equilibrium. It is also observed that fiscal policy does not cause inflation for it is not always expansive and higher prices in this case are indication that people’s wealth increased; so, they are climbing the Maslow’s Pyramid and buying dearer stuffs. The European union are said to have two crises, the general one touching almost all countries where monetary policy prevails and its particular crisis, the risk of dismantling due to potential state members bankrupts. Collecting arguments, the conclusion is that there are evidences to support the Hellinger’s proposal of a parallel currency emission by state-members to make local fiscal policy. It is finally stated that even if this proposal is attractive to decision makers it must be, as any other economic policy, interesting to the political power and preserve democracy.

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.

monetary policy – The European Crisis

Economic Policy and Political Power in European Crises

The Euro Area’s Experience with Unconventional Monetary Policy