Eurozone bank integration: EU versus non-EU banks
Vincent Bouvatier, Anne-Laure Delatte 14 December 2014
Eurozone financial integration is reversing, with 2013 cross-border capital flows at 40% of their 2007 level. This column discusses research showing that banking integration has in fact strengthened in the rest of the world.
In 2013, cross-border capital flows were 40% of their 2007 level (McKinsey Global Institute 2013). While the reversal was in all broad categories of flows (Forbes and Warnock 2012), the sharpest decline in activity was in international bank loans extended cross-border or by local affiliates (Milesi-Ferretti and Tilles 2011), a fact that has prominently driven contraction in the real economy (Cetorelli and Goldberg 2011, 2012).
Financial markets International finance
euro, eurozone, financial integration, capital flows, banking, cross-border capital flows
Why is euro inflation so low?
Jean-Pierre Landau 02 December 2014
Eurozone inflation has been persistently declining for almost a year, and constantly undershooting forecasts. Building on existing research, this column explores the conjecture that low inflation in the Eurozone results from an excess demand for safe assets. If true, this conjecture would have definite policy implications. Getting out of such a ‘safety trap’ would necessitate fiscal or non-conventional monetary policies tailored to temporarily take risk away from private balance sheets.
Inflation in the Eurozone stood at 0.4% (year on year) in November. It has been persistently declining for almost a year, and constantly undershooting forecasts. The Eurozone is now clearly diverging from many advanced economies, where inflation is either on the rise – albeit at moderate levels – as in the US, or, when falling, still remaining close to target, as the UK.
Macroeconomic policy Monetary policy
inflation, eurozone, safe assets, safety trap, risk aversion, disinflation, exchange rates, interest rates, liquidity trap, zero lower bound, monetary policy, public debt, Eurozone crisis, Central Banks, ECB, quantitative easing, long-term refinancing operations, unconventional monetary policy, liquidity, asset-backed securities, securitisation, debt sustainability, fiscal space, fiscal capacity, balance sheets
Time to scrap the Stability and Growth Pact
Paolo Manasse 01 December 2014
Today’s Eurozone fiscal discipline is the amalgamation of reforms implemented over ten years, with the latest and largest changes agreed in crisis settings. This column argues that the result fosters neither growth nor stability since actual fiscal policy has been powerfully procyclical. The focus on intermediate targets has distracted attention from the final objectives – debt sustainability and economic convergence. A drastic simplification of the current rules is proposed.
In recent years the European fiscal framework has undergone important reforms (see Frayne and Riso 2013). In 2005, the Stability and Growth Pact was amended in order to take country-specific considerations and economic conditions into account.
EU policies Macroeconomic policy
eurozone, Stability and Growth Pact, fiscal policy, fiscal rules, convergence, fiscal discipline, Fiscal Compact Treaty, debt sustainability
After AQR and stress tests – where next for banking in the Eurozone?
Thorsten Beck 10 November 2014
The ECB has published the results of its asset quality review and stress tests of Eurozone banks. This column argues that, while this process had clear shortcomings, it still constitutes a huge improvement over the three previous exercises in the EU. Nevertheless, the banking union is far from complete, and the biggest risk now is complacency. A long-term reform agenda awaits Europe.
The ECB has concluded and published the results of a year-long painstaking process to go through the books of the 130 largest and most important banks of the Eurozone, adjusting balance sheets and testing the sensitivity of their capital position to two different scenarios, one of which includes a severe economic downturn. This exercise constitutes the entry point to the Single Supervisory Mechanism (SSM), where the ECB has direct supervisory responsibility for most of these 130 banks and indirect responsibility for the rest of the banks in countries that are members of the SSM.
ECB, eurozone, banking union, stress tests, Asset Quality Review, forbearance, recapitalisation, balance sheets, leverage, bank resolution
How to climb a mountain with both hands tied
Jean Pisani-Ferry 07 November 2014
A triple-dip recession in the Eurozone is now a distinct possibility. This column argues that additional monetary stimulus is unlikely to be effective, that the scope for further fiscal stimulus is limited, and that some structural reforms may actually hurt growth in the short run by adding to disinflationary pressures in a liquidity trap. The author advocates using tax incentives and tighter regulations to encourage firms to replace environmentally inefficient capital.
Against the background of lacklustre global demand, economic growth in Europe has weakened again. In the Eurozone, a third recession in less than seven years is a distinct possibility. Yet economic policy looks powerless. On the monetary side, although the ECB may still embark on a genuine programme of quantitative easing, such action is unlikely to deliver a major boost because the benchmark 10-year government bonds already yield just 1%.
Environment EU policies Macroeconomic policy Microeconomic regulation
Europe, eurozone, recession, stimulus, monetary policy, quantitative easing, fiscal policy, structural reforms, labour market reforms, liquidity trap, investment, Cash for clunkers, scrapping subsidies, environment, regulation, emissions standards
Macroeconomic policy mix in the transatlantic economy
Moreno Bertoldi, Philip R. Lane, Valérie Rouxel-Laxton, Paolo Pesenti 24 October 2014
The reason for the divergent macroeconomic policies on the two sides of the Atlantic after the Crisis remains a hotly debated subject. The topic was also discussed at the recent “Macroeconomic Policy Mix in the Transatlantic Economy” workshop. This column summarises the main discussions at the workshop. Other covered topics included secular stagnation, the output effects of fiscal consolidation, cross-border banking (as a source and propagator of shocks), and the asset-market effects of unconventional monetary policies.
The reason why the macroeconomic policy mix has been different on the two sides of the Atlantic in recent years remains a hotly debated issue. Was it due to a different reading of the root causes of the Global Crisis and, therefore, of the type of policy response considered most appropriate?
Global crisis Macroeconomic policy
eurozone, US, macroeconomic policy, transatlantic economy, global crisis
What macroeconomic policies for the Eurozone?
Francesco Giavazzi, Guido Tabellini 25 September 2014
In a recent column, the authors suggested coordinating monetary and fiscal expansions in the Eurozone through a money-financed temporary tax cut. The effectiveness of their proposal, however, has been questioned. In this column, the authors address some of the criticisms. They argue that the counter-cyclical fiscal policies adopted by the US and the UK, together with monetary easing, had a stabilising effect on output. Moral hazard due to the more lax monetary and fiscal policies is avoidable, increasing the credibility of the future spending cuts.
In his recent article on Vox, Roberto Perotti takes issue with the proposal of coordinating a monetary and fiscal expansion in the Eurozone through a money-financed temporary tax cut, which we advocated in a column on 21 August (see Perotti 2014, Giavazzi and Tabellini 2014). He does not question the effectiveness of the proposal in stimulating aggregate demand.
Macroeconomic policy Monetary policy
eurozone, Eurozone economy, macroeconomic policy, Budget deficit, fiscal expansion
Eurozone recovery: there are no shortcuts
Roberto Perotti 13 September 2014
There is a growing consensus that austerity is contributing to the Eurozone’s macroeconomic malaise, but also that spending cuts are needed in the long run to achieve fiscal sustainability. Some commentators have advocated a temporary tax cut financed by unsterilised ECB purchases of long-term public debt, accompanied by a commitment to future spending cuts. This column argues that such commitments are simply not credible – especially given the moral hazard problem created by central bank monetisation of debts.
The consensus is increasing that austerity has not worked – Europe stands on the edge of deflation and suffers from a deficit of demand. A recent VoxEU proposal (Giavazzi and Tabellini 2014) offers a solution that is widely shared on both sides of the Atlantic – all Eurozone countries should cut taxes simultaneously by 5% of GDP, and the ECB should buy the extra debt without sterilisation. This should be accompanied by a credible plan to reduce government spending in the future.
Macroeconomic policy Monetary policy
austerity, eurozone, monetary policy, helicopter money, quantitative easing, QE, stimulus, fiscal consolidation, fiscal policy, spending cuts, fiscal sustainability, debt monetisation
Is the ECB doing QE?
Charles Wyplosz 12 September 2014
Last week, the ECB announced that it would begin purchasing securities backed by bank lending to households and firms. Whereas markets and the media have generally greeted this announcement with enthusiasm, this column identifies reasons for caution. Other central banks’ quantitative easing programmes have involved purchasing fixed amounts of securities according to a published schedule. In contrast, the ECB’s new policy is demand-driven, and will only be effective if it breaks the vicious circle of recession and negative credit growth.
The 4 September announcement by Chairman Mario Draghi has been greeted with enthusiasm by the markets and the media. It has been long awaited, and many believe that the ECB has finally delivered. This is not sure. The ECB intends to buy large amounts of securities backed by bank lending to households (mortgages) and to firms.
Exchange rates Financial markets Monetary policy
quantitative easing, QE, monetary policy, unconventional monetary policy, ECB, securitisation, bank lending, Europe, eurozone, Subprime, stress tests, deleveraging, recapitalisation, depreciation, exchange rates, euro, central banking
To exit the Great Recession, central banks must adapt their policies and models
Marcus Miller, Lei Zhang 10 September 2014
During the Great Moderation, inflation targeting with some form of Taylor rule became the norm at central banks. This column argues that the Global Crisis called for a new approach, and that the divergence in macroeconomic performance since then between the US and the UK on the one hand, and the Eurozone on the other, is partly attributable to monetary policy differences. The ECB’s model of the economy worked well during the Great Moderation, but is ill suited to understanding the Great Recession.
“Practical men…are usually the slaves…[of] some academic scribbler of a few years back” – John Maynard Keynes.
For monetary policy to be most effective, Michael Woodford emphasised the crucial importance of managing expectations. For this purpose, he advocated that central banks adopt explicit rules for setting interest rates to check inflation and recession, and went on to note that:
Global crisis Macroeconomic policy Monetary policy
Taylor rule, forward guidance, great moderation, global crisis, Great Recession, quantitative easing, DSGE models, expectations, tapering, US, UK, Europe, eurozone, ECB, Bank of England, central banking, IMF, unconventional monetary policy