The Monetary Policy of the European Central Bank (2002-2015). CEPS Special Report No. 109/May 2015

This paper examines the policies pursued by the European Central Bank (ECB) since the inception of the euro. The ECB was originally set up to pursue price stability, with an eye also to economic growth and financial stability as subsidiary goals, once the primary goal was secured. The application of a single monetary policy to a diverse economic area has entailed a pronounced pro-cyclicality in its real economic effects on the eurozone periphery. Later, monetary policy became the main policy instrument to tackle financial instability elicited by the failure of Lehman Brothers and the sovereign debt crisis in the eurozone. In the process, the ECB emerged as the lender of last resort in the sovereign debt markets of participating countries. Persistent economic depression and deflation eventually brought the ECB into the uncharted waters of unconventional policies. That the ECB could legally perform all of these tasks bears witness to the flexibility of the TFEU and its Statute, but its tools and operating procedures were stretched to their limit. In the end, the place of the ECB amongst EU policy-making institutions has been greatly enhanced, but has entailed repeated intrusions into the broader domain of economic policies – not least because of its market intervention policies – whose consequences have yet to be ascertained.

The Monetary Policy of the European Central Bank (2002-2015). Bruges European Economic Policy Briefings (BEEP) 35/2015.

This paper examines the policies pursued by the European Central Bank (ECB) since the inception of the euro. The ECB was originally set up to pursue price stability, with an eye also to economic growth and financial stability as subsidiary goals, once the primary goal was secured. The application of a single monetary policy to a diverse economic area has entailed a pronounced pro-cyclicality in its real economic effects on the eurozone periphery. Later, monetary policy became the main policy instrument to tackle financial instability elicited by the failure of Lehman Brothers and the sovereign debt crisis in the eurozone. In the process, the ECB emerged as the lender of last resort in the sovereign debt markets of participating countries. Persistent economic depression and deflation eventually brought the ECB into the uncharted waters of unconventional policies. That the ECB could legally perform all of these tasks bears witness to the flexibility of the TFEU and its Statute, but its tools and operating procedures were stretched to their limit. In the end, the place of the ECB amongst EU policy-making institutions has been greatly enhanced, but has entailed repeated intrusions into the broader domain of economic policies – not least because of its market intervention policies – whose consequences have yet to be ascertained.

Firmer foundations for a stronger European Banking Union. Bruegel Working Paper 2015/13, November 2015

The move to European Banking Union involving the supervision and resolution of banks at euro-area level was stimulated by the sovereign debt crisis in the euro area in 2012. However, the long-term objective of Banking Union is dealing with intensified cross-border banking.The share of the assets of national banking systems that come from other EU countries was rising before the financial and economic crisis of 2007, but went into decline thereafter in the context of a general retrenchment of international banking. Most recent data, however, suggests the decline has been halted. About 14 percent of the assets of banks in Banking Union come from other EU countries, while about a quarter of the assets of the top 25 banks in the Banking Union are held in other EU countries.While a crisis-prevention framework for the euro area has largely been completed, the crisis-management framework remains incomplete, potentially creating instability. There is no governance mechanism to resolve disputes between different levels of crisis-management agencies, and incentives to promote optimum oversight are lacking. Most importantly, risk-sharing mechanisms do not adequately address the sovereign-bank loop, with a lack of clarity about the divide between bail-in and bail-out.To complete Banking Union, the lender-of-last-resort and deposit insurance functions should move to the euro-area level, breaking the sovereign-bank loop. A fully-fledged single deposit insurance (and resolution) fund should be favoured over a reinsurance scheme for reasons of cost and simplicity.

Maastricht 2.0 - Proposed reform of EU sovereign debt rules. Policy Brief #2012/05

The European Union’s regulations governing sovereign debt are based on the principle of equal treatment of all member states. The recommendations we make here concerning changes in European Union sovereign-debt reduction rules take account of national particularities, but are by no means arbitrary in nature. According to the calculations we present here, such reformed regulations would do far more to promote economic growth than would be the case under the Fiscal Compact’s European debt brake. By 2030, real gains in growth will amount to more than 450 billion euros more than the outcome that would presumably be obtained under the European debt brake.

Unholy compromise in the eurozone and how to right it. CEPS Policy Brief No. 277, 16 July 2012

This paper reviews the causes of the ongoing crisis in the eurozone and the policies needed to restore stability in financial markets and reassure a bewildered public. Its main message is that the EU will not overcome the crisis until it has a comprehensive and convincing set of policies in place; able to address simultaneously budgetary discipline and the sovereign debt crisis, the banking crisis, adequate liquidity provision by the ECB and dismal growth. The text updates and expands on his Policy Brief contributed in the run-up to the emergency European Council meeting at the end of June.

The Prize is more Peace: The EU should consolidate its enlargement process. CEPS Commentary, 8 November 2012

The sovereign debt crisis and the threat of financial collapse of some EU member states have triggered fierce debate about the economic, social and political finalité of the Union and curbed the appetite for further enlargement. The European Commission needs to find new ways to consolidate the enlargement agenda, gain full support of the member states for its implementation and assure a consistent application of the pre-accession requirements. Arguably, more time, more money and greater expertise are needed to pursue the vocation recognised by the Nobel Committee.

Reflections on the institutional balance, the Community Method and the interplay between jurisdictions after Lisbon. Research Papers in Law, 04/2012

[Introduction.] Over the last two years, not only inside but also outside the framework of the EU treaties, far reaching measures have been taken at the highest political level in order to address the financial and economic crisis in Europe and in particular the sovereign debt crisis in the Euro area. This has triggered debates forecasting the “renationalisation of European politics.” Herman Van Rompuy, the President of the European Council, countered the prediction that Europe is doomed because of such a renationalisation: “If national politics have a prominent place in our Union, why would this not strengthen it?” He took the view that not a renationalisation of European politics was at stake, but an Europeanization of national politics emphasising that post war Europe was never developed in contradiction with nation states.1 Indeed, the European project is based on a mobilisation of bundled, national forces which are of vital importance to a democratically structured and robust Union that is capable of acting in a globalised world. To that end, the Treaty of Lisbon created a legal basis. The new legal framework redefines the balance between the Union institutions and confirms the central role of the Community method in the EU legislative and judiciary process. This contribution critically discusses the development of the EU's institutional balance after the entry into force of the Treaty of Lisbon, with a particular emphasis on the use of the Community Method and the current interplay between national constitutional courts and the Court of Justice. This interplay has to date been characterised by suspicion and mistrust, rather than by a genuine dialogue between the pertinent judicial actors.

A macro-financial analysis of the euro area sovereign bond market. National Bank of Belgium Working Paper No. 259, June 2014

We estimate the 'fundamental' component of euro area sovereign bond yield spreads, i.e. the part of bond spreads that can be justified by country-specific economic factors, euro area economic fundamentals, and international influences. The yield spread decomposition is achieved using a multi-market, no-arbitrage affine term structure model with a unique pricing kernel. More specifically, we use the canonical representation proposed by Joslin, Singleton, and Zhu (2011) and introduce next to standard spanned factors a set of unspanned macro factors, as in Joslin, Priebsch, and Singleton (2013). The model is applied to yield curve data from Belgium, France, Germany, Italy, and Spain over the period 2005-2013. Overall, our results show that economic fundamentals are the dominant drivers behind sovereign bond spreads. Nevertheless, shocks unrelated to the fundamental component of the spread have played an important role in the dynamics of bond spreads since the intensification of the sovereign debt crisis in the summer of 2011

The Portuguese Economic Crisis: Policies and Outcomes. Bertelsmann Policy Brief, 19.02.2015

The financial and economic crisis in the aftermath of 2008 is unique for several reasons: its depth, its speed and its global entanglement. Simultaneous economic decline in many economies around the globe sent out political shockwaves. In Europe, the crisis served as a wake-up call. Policymakers responded to the social and political insecurity triggered by economically unsound practices with solidarity and with EU-scepticism. The recession confronted Euro zone countries with a number of similar problems, although each was embedded in its own set of country-specific challenges. The tools with which each began to counteract the financial and sovereign debt crisis differed. This policy brief examines the Portuguese path to recovery. It outlines some of the great recession’s main impacts on the country’s labour market, as well as analyses the path it has taken to restore sustainable jobs.

Geopolitical shifts in the Eastern Mediterranean. Security Policy Brief No. 43, February 2013

Three major geopolitical events are putting the stability of the Eastern Mediterranean at risk. Most of the region is in a deep monetary and economic crisis. The Arab Spring is causing turmoil in the Levant and the Maghreb. Gas and oil discoveries, if not well managed, could further destabilise the region. At the same time, Russia and Turkey are staging a comeback. In the face of these challenges, the EU approaches the Greek sovereign debt crisis nearly exclusively from a financial and economic viewpoint. This brief argues that the EU has to develop a comprehensive strategy for the region, complementing its existing multilateral regional framework with bilateral agreements in order to secure its interests in the Eastern Mediterranean.