Europe’s banking problem through the lens of secular stagnation

Jan Willem van den End , Jakob de Haan 28 March 2014

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What is the economy’s new normal? Will it be secular stagnation as suggested by Summers (2013)? According to this view, the economy will be in a permanent state of recession because aggregate demand is below potential output. As the actual real interest rate exceeds the negative equilibrium real interest rate (the natural rate), investment activity is too low. In the secular stagnation view, the zero lower bound (ZLB) prevents an adjustment of the interest rate to the (negative) equilibrium rate. Consequently, the economy ends up in a liquidity trap (Krugman 2013).

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Topics:  Financial markets Monetary policy

Tags:  ECB, balance sheets, secular stagnation

Considering QE, Mario? Buy US bonds, not Eurobonds

Jeffrey Frankel 24 March 2014

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The ECB should further ease monetary policy. Inflation at 0.8% across the Eurozone is below the target of ‘close to 2%’, and unemployment in most countries is still high. Under the current conditions, it is hard for the periphery countries to bring their costs the rest of the way back down to internationally competitive levels as they need to do. If inflation is below 1% Eurozone-wide, then the periphery countries have to suffer painful deflation.

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Topics:  Macroeconomic policy Monetary policy

Tags:  ECB, euro, quantitative easing

TARGET balances, Bretton Woods, and the Great Depression

Michael Bordo 21 March 2014

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During the Eurozone crisis, an analogy was made between the events in Europe between 2007 and 2012 and the collapse of the Bretton Woods System between 1968 and 1971. There has been a build-up of TARGET liabilities since 2007 by some central banks (notably Greece, Ireland, Portugal, and Spain, or the ‘GIPS’), and of TARGET assets by Germany and others.

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Topics:  Economic history International finance

Tags:  ECB, eurozone, euro, global imbalances, Central Banks, financial crisis, Great Depression, Eurosystem, Eurozone crisis, Bretton Woods, TARGET

German Court decision: Legal authority and deep power implications

Katharina Pistor 26 February 2014

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Can the European Central Bank legally act as lender of last resort to ensure the survival of the euro?

This question is of fundamental importance for the sustainability of the monetary union. Recently, the German Constitutional Court ruled that it cannot. In the court’s view the ECB has the power to conduct monetary policy, but not to support member states in financial distress even if necessary to ensure the survival of the common currency.

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Topics:  EU institutions

Tags:  ECB, Eurozone reform

The unpleasant legacy of the crisis: public debt and low trend growth in the Eurozone

Nicholas Crafts interviewed by Viv Davies,

Date Published

Tue, 01/21/2014

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See Also

Crafts, N (2013b), “Saving the Euro: a Pyrrhic Victory?”, CAGE-Chatham House Policy Briefing Paper No. 11.

Buiter, W and E Rahbari (2013), “Why Do Governments Default and Why Don’t They Default More Often?”, CEPR Discussion Paper 9492.

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Topics

Economic history Macroeconomic policy
Tags
ECB, eurozone, fiscal consolidation, public debt, gold standard, financial repression, debt monetisation

Date Weighting

-1

Related Article(s)

The Eurozone: If only it were the 1930s Escaping liquidity traps: Lessons from the UK’s 1930s escape To end the Eurozone crisis, bury the debt forever A consistent trinity for the Eurozone Why fiscal sustainability matters
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Single supervision and resolution rules: Is ECB independence at risk?

Donato Masciandaro, Francesco Passarelli 21 December 2013

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A successful transition to a European Banking Union requires robust and credible ‘Chinese walls’ between the ECB’s role as monetary authority and any responsibility in the Single Supervisory Mechanism or in the resolution rules. Otherwise, the ECB’s independence would be at risk, given that monetary policy would likely have larger distributional effects.

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Topics:  EU institutions Financial markets

Tags:  ECB, Central Banks, central bank independence, global financial crisis, banking regulation, bank resolution, banking union

The Eurozone: If only it were the 1930s

Nicholas Crafts 13 December 2013

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The 1930s deservedly have a bad name. It is hard to imagine that a decade that included the Great Depression and a major de-globalisation of the world economy, and culminated in WWII could be other than notorious. And yet, compared with struggling Eurozone economies today, the economic situation in Europe in the later 1930s was in many ways more promising. This is particularly true of the aftermath of public debt and the difficulty of dealing with it.

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Topics:  Economic history Macroeconomic policy

Tags:  ECB, eurozone, fiscal consolidation, public debt, gold standard, financial repression, debt monetisation

Currency wars and the euro

Jens Nordvig 25 November 2013

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A new battle for the ECB to fight

Last year, the ECB entered an existential battle for the euro. By promising to do ‘whatever it takes’ to safeguard the euro, the ECB managed to calm sovereign debt markets and engineer a much-needed easing of overall credit conditions in the Eurozone.

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Topics:  EU institutions Exchange rates Monetary policy

Tags:  ECB, eurozone, euro, unemployment, Bundesbank, Currency wars

Banking union for Europe – where do we stand?

Thorsten Beck 23 October 2013

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In a few days, pending some last-minute diplomatic conflict between the UK and the European Commission, the ECB will begin an asset-quality review of European banks. This is supposed to be the entry point to the supervisory role of the ECB in the context of the Single Supervisory Mechanism (SSM), the first of three pillars of the planned banking union. Little political progress has been made on the other two pillars, bank resolution and deposit insurance, in spite of proposals by the EU Commission.

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Topics:  EU institutions Global crisis

Tags:  ECB, eurozone, monetary union

Should the ECB publish its minutes?

Hans Gersbach, Volker Hahn 07 October 2013

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Mario Draghi has voiced his support for the quick release of minutes and has confirmed that the ECB is to take a decision on this issue in the near future (Reuters 2013). Joerg Asmussen, a member of the ECB's Executive Board, recently proposed that the ECB should publish the minutes of the ECB council meetings immediately and demanded that the members’ individual positions be revealed (Bloomberg 2013). There is no doubt that the current tendency towards more transparency in monetary policy1 enhances central banks' accountability towards the public.

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Topics:  EU institutions Institutions and economics

Tags:  ECB

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