The European Central Bank as a lender of last resort
Paul De Grauwe, 18 August 2011
With the Eurozone crisis casting doubt over the solvency of Spain and Italy, the ECB has once again intervened to provide liquidity in the government bond markets. This column asks the question: Is there such a role for the ECB as a lender of last resort?
In October 2008 the ECB discovered that there is more to central banking than price stability. This discovery occurred when it was forced to massively increase liquidity to save the banking system. The ECB did not hesitate to serve as lender of last resort to the banking system, despite fears of moral hazard, inflation, and the fiscal implications of its lending.
Topics: EU policies
Tags: ECB, Eurozone crisis, lender of last resort
August 2011: The euro crisis reaches the core
Daniel Gros, 11 August 2011
Investors are anticipating the unravelling of the 21 July 2011 “solution” and a breakdown of the interbank-market that would throw the economy into an “immediate recession” like the one experienced after the Lehman bankruptcy. This column argues that this will happen without quick and bold action. The EFSF can’t work as designed but if it were registered as a bank – which would give it access to unlimited ECB re-financing – governments could stop the generalised breakdown of confidence while leaving the management of public debt in the hand of the finance ministers.
Canaries were kept in coal mines because they die faster than humans when exposed to dangerous gases. When the birds stopped singing, wise miners knew that it was time to gear up the emergency procedures.
Topics: Global crisis
Tags: ECB, EFSF, Eurozone Debt Crisis
They still don’t get it
Charles Wyplosz, 25 October 2011
UPDATED: EZ leaders are working on a plan to save the euro. This column updates the column posted on 22 August 2011 by evaluating the steps EZ leaders took this weekend. Things don’t look good. By rejecting any major role for the ECB, leaders have guaranteed that any package will be too little too late. After all, imagine what the US crisis package in 2008 would have looked like if the Fed had refused to use its massive firepower to stabilise markets.
Editor's note: This column updates the column originally posted on 8 August 2011.
Topics: EU institutions
Tags: ECB, Eurozone crisis, sovereign default
A balance sheet view on TARGET – and why restrictions on TARGET would have hit Germany first
Clemens Jobst, 19 July 2011
The debate over TARGET balances and whether there is an ongoing stealth bailout in the Eurozone has attracted attention from top economists and journalists in the past month. This column argues that the reason why the arguments keep dragging on is the lack of a clear framework for the discussion, something this column aims to provide.
By now most readers of European financial newspapers and blogs will have come across Hans-Werner Sinn’s repeated assertions (see Sinn 2011a and 2011b on this site and his latest
Topics: EU policies, Europe's nations and regions, International finance
Tags: Bundesbank, Central Banks, ECB, Eurozone crisis, Germany, TARGET
ECB Reaction Functions and the Crisis of 2008
Stefan Gerlach, John Lewis, 4 July 2011
Did the ECB respond quickly enough when the global economy melted down in 2008? The authors of CEPR DP8472 argue that the ECB's forward-looking conduct of monetary policy prior to the crisis, with an eye constantly on the zero lower bound, allowed it to react with rapid and deep interest rate cuts after the crisis without bottoming out at the ZLB.
Vox users can download CEPR Discussion Paper 8472 for free here.
Journalists are entitled to free DP downloads on request; please contact firstname.lastname@example.org. To learn more about subscribing to CEPR's Discussion Paper Series, please visit the CEPR website.
Topics: EU institutions, Monetary policy
Tags: ECB, reaction functions, smooth transition and Zero Lower Bound
Should the ECB use core inflation as a signal for medium-term inflation?
Michele Lenza, Lucrezia Reichlin, 24 June 2011
Should central banks use the headline or the core measure measure of inflation to track medium-term inflationary pressures? Lorenzo Bini Smaghi, board member of the ECB, recently argued in favour of using headline inflation. This provoked strong opposition from Paul Krugman, amongst others. This column assesses the two sides of the debate.
In the last few weeks the press and several blogs have been engaged in a debate on the classic question of whether central banks should rely on headline inflation or core inflation (defined as headline inflation excluding energy and food) to obtain a signal for medium-term inflationary pressures.
Topics: EU policies, Monetary policy
Tags: core inflation, ECB, headline inflation
The ECB’s three mistakes in the Greek crisis and how to get sovereign debt right in the future
Jeffrey Frankel, 16 May 2011
It is a year since Greece was bailed out by EU and IMF and there are many who label it a failure. This column says that while there is plenty of blame to go around, there were three big mistakes made by the European Central Bank. Number one: Letting Greece join the euro in the first place
By now just about everybody agrees that the European bailout of Greece has failed (see for example Darvas et al. 2011). The debt will have to be restructured.
Topics: EU policies, Europe's nations and regions
Tags: ECB, Eurozone crisis, Fiscal crisis, Greece
The troika should target the trade and the income balance deficits
Ricardo Cabral, 15 May 2011
Greece, Ireland, and more recently Portugal have applied for EU and IMF financial aid. This column argues the accompanying adjustment programmes should be modified to reflect the balance of payments and external debt crises these countries face. It suggests that these countries’ public and private debt should be restructured and their tax structure should be rebalanced to replicate the effect of currency devaluation and so improve these countries’ external competitiveness.
Greece, then Ireland, and more recently Portugal have applied for EU and IMF financial aid. A troika of European Commission, ECB, and IMF officials have negotiated accords for ambitious adjustment programmes with either two or three main components, as mandated by the Eurogroup and the Ecofin Ministers (2010a; 2010b; 2011):
Topics: EU policies, Europe's nations and regions
Tags: ECB, Eurozone crisis, financial aid, IMF
Vox’s annual break and some holiday reading tips
Richard Baldwin, 25 December 2010
Vox takes its annual break between 25 December 2010 and 2 January 2011. This column documents the coevolution of VoxEU and the global economic crisis since June 2007. It also highlights a few columns that readers should read (or re-read) in preparation for the Eurozone’s next crisis.
After months of preparatory work, Vox was launched in June 2007. The first weeks were going well – and then the subprime crisis struck.
Topics: Frontiers of economic research
Tags: ECB, Eurozone crisis, global crisis, subprime crisis
The European debt crisis: Worrisome delusions
Charles Wyplosz, 19 December 2010
Lorenzo Bini-Smaghi – Member of the ECB's Executive Board – has produced a brilliant defence of the no-default strategy currently pursued by the Eurozone authorities. This column argues that instead of ruling out highly plausible outcomes, the ECB should explain how it will react if defaults happen. By not making adequate preparations, it may be raising the odds of a very bad scenario.
Lorenzo Bini-Smaghi – Member of the ECB's Executive Board – has produced a brilliant defence of the no-default strategy currently pursued by the Eurozone authorities (Financial Times 2010).
His arguments are straightforward.
Topics: EU institutions
Tags: Debt crisis, ECB, eurozone