Fiscal dimensions of central banking: The fiscal vacuum at the heart of the Eurosystem and the fiscal abuse by and of the Fed: Part 2
Willem Buiter 24 March 2009
The second of this four-column series on fiscal aspects of central banking discusses the institutional constraints on quantitative easing. It argues that the ECB can and should engage in quantitative easing since its independence gives it a credible non-inflationary exit strategy. The Fed, however, seems heading for a bout of inflation stemming from Congressional pressure. Buiter argues that the Bank of England’s situation lies between.
Why has there not been quantitative easing in the Eurozone? Good question.
No treaty-based obstacle
There is no treaty-based obstacle to the ECB/Eurosystem buying Eurozone government securities in the secondary markets. Indeed, both the ECB and the 16 national central banks of the Eurosystem hold Eurozone government securities on their balance sheets. Article 101.1 of the Consolidated version of the Treaty Establishing the European Community reads as follows:
ECB, Fed, quantitative easing
Fiscal dimensions of central banking: The fiscal vacuum at the heart of the Eurosystem and the fiscal abuse by and of the Fed: Part 1
Willem Buiter 08 May 2010
First published on 24 March 2009, this column is more relevant than ever. In it Willem Buiter argues that the ECB’s lack of fiscal backing is both unusual among major central banks and a severe handicap – it is a factor in why the ECB is “fiddling while the Eurozone burns” by hesitating to undertake quantitative easing started by the Fed, Bank of England, and others.
Editors’ note: This is the first of a four-part series of Vox columns culled from Willem Buiter’s recent post on his FT-sponsored blog, Maverecon.
ECB, Eurosystem, quantitative easing
Was the euro a mistake?
Barry Eichengreen 20 January 2009
2008 was the year of asymmetric financial shocks for the Eurozone, but 2009 will be the year of the symmetric economic shock. All of Europe is slipping simultaneously towards recession and the threat of deflation. Here one of the world’s leading international economists explains that a common monetary policy response is optimal. Euro interest rates should be cut to zero and quantitative easing undertaken, all complemented by fiscal expansion by Eurozone nations that can afford it. What started as the euro’s greatest challenge could be its salvation, but only if policy makers act swiftly.
What started as the Subprime Crisis in 2007 and morphed in the Global Credit Crisis in 2008 has become the Euro Crisis in 2009. Sober people are now contemplating whether a euro area member such as Greece might default on its debt. In addition to directly damaging bank balance sheets, this would destroy confidence in its banking and financial system. Unable to borrow and facing horrific bank recapitalisation costs, the country would have to print money. To do so it would have to abandon the euro and reinstate its old national currency.
ECB, global crisis, Government default, Eurozone breakup
The euro at ten: Why do effects on trade between members appear smaller than historical estimates among smaller countries?
Jeffrey Frankel 24 December 2008
Trade among euro members has increased 10-15% since the introduction of the euro, a far smaller effect than estimated prior to the currency's introduction. What explains the discrepancy between the European experience and previous history? This column explores the difficulty of explaining the difference.
With the tenth anniversary of the launching of the euro, everyone is taking stock. The record of the euro shows both pluses and minuses. Looking back, the euro has in many ways been more successful than predicted by the sceptics – many of them American economists. The historic transition to a monetary union among 11 countries in 1999 went smoothly, the euro instantly became the world’s number two international currency, and the officials of the European Central Bank (ECB) have from the beginning worked as citizens of Europe rather than as representatives of home constituencies.
EU policies International finance
ECB, euro, EU trade, monetary unions, CFA franc
The first ten years of the euro
Marco Buti, Vitor Gaspar 24 December 2008
This column looks back at the first ten years of the euro, from the uncertainty surrounding its adoption to the one caused by the current crisis. In between, the euro proved a resounding success. It is worth remembering the magnitude of the original challenge in order to use the crisis as an opportunity to strengthen European governance.
“It is in the nature of beginning that something new is started which cannot be expected from what may have happened before. This character of startling unexpectedness is inherent in all beginnings.” – Hannah Arendt, The Human Condition, 1958.
EU institutions EU policies Monetary policy
ECB, euro, EMU
The folly of the central banks of Europe
John Muellbauer 27 October 2008
The current financial crisis will probably lead to an unnecessarily deep recession. This column suggests that European central banks, misguided by outdated econometric models, should have cut rates faster and deeper in a coordinated fashion. They should now scrap these models and agree on a large, coordinated cut of 2 percentage points.
When future economic historians look back to trace the triggers for the October 2008 financial panic and the unnecessarily severe recession of 2009, they will likely put their fingers on two.
ECB, subprime crisis, financial crisis, UK, rescue package, currency crisis
The beginning of the end game…
Daniel Gros, Stefano Micossi 20 September 2008
The radical moves in the US have direct implications for European banks and indirect implications for European governments. This column discusses the likely channels and notes that several European banks are both too big to fail and may be too big to be saved by their national governments alone.
The US financial system is being nationalised. The piecemeal approach which culminated with the AIG operation was clearly not working. The US government had taken control of its biggest insurance company just two weeks after it had to save Fannie and Freddie, by far the world’s largest mortgage underwriters. All this was not enough to restore orderly market conditions, hence the US political system is working over time to find a general solution whose outline is already apparent.
ECB, international financial crises, subprime crisis, bank failure
ECB credibility unprecedentedly low
Petra Geraats, Francesco Giavazzi, Charles Wyplosz 09 September 2008
Recent data suggest that the ECB’s credibility is worryingly low on the inflation-fighting front. This column explains how improved ECB transparency and communication could help it to regain credibility with markets and investors.
The European Central Bank (ECB) attaches great importance to the credibility that people have in its ability to achieve its primary objective of price stability in the medium term. In the ‘Introductory Statement’ to the monthly press conference the Governing Council has repeatedly expressed its “strong determination to keep medium and long-term inflation expectations firmly anchored in line with price stability”. However, ECB credibility has steadily eroded during the last years and has now reached worrisomely low levels.
ECB, monetary policy
Central bank independence and transparency: Not just cheap talk (Part 1)
Christopher Crowe, Ellen E. Meade 27 July 2008
The European Central Bank is under fire from Nicholas Sarkozy. This column introduces a new set of measures of central bank independence and transparency, which shows that the ECB is markedly more transparent than the Eurozone members’ central banks were in the 1990s.
In recent days, French President Nicolas Sarkozy has called for changes that would increase the accountability of the European Central Bank, including the publication of meeting minutes for its Governing Council.1 This and other types of accountability measures are generally seen as the counterpart to high levels of central bank independence.
ECB, transparency, Central Banks
How to prick local housing bubbles in a monetary union: regulation and countercyclical taxes
Alan Ahearne, Juan Delgado, Jakob von Weizsäcker 27 June 2008
Housing booms associated with credit booms are particularly damaging, but the ECB’s one-size-fits-all monetary policy is useless in pricking national bubbles. Euro area governments should use national banking regulations to dampen national bubbles and countercyclical housing taxes to prick bubbles that arise.
Academics and central bankers across the world are again engaged in an intensive debate about how central banks should react to substantial rises in asset prices in the wake of recent booms and busts in housing markets in many countries. Until recently, there seems to have been a consensus that monetary policy should not be aggressively tightened in an attempt to prick a house price bubble.
ECB, monetary union, housing bubbles, taxes, regulation