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2017 | OriginalPaper | Buchkapitel

6. The EU’s Policy Response: Too Little Too Late

verfasst von : Enrico Marelli, Marcello Signorelli

Erschienen in: Europe and the Euro

Verlag: Springer International Publishing

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Abstract

The chapter first illustrates the initial policy response following the sovereign debt crisis: despite the creation of the ‘save-State’ funds (European Financial Stability Facility, EFSF, and European Stability Mechanism, ESM), executed through the ‘troika’, the EU’s reaction was delayed and inadequate. The lack of effective crisis-management mechanisms (e.g. ‘Eurobonds’) is also emphasised. In regard to monetary policy, a complete account is provided of the ‘unconventional measures’ introduced by the ECB, including the Outright Monetary Transactions (OMT) plan, which has been crucial for ‘saving the euro’, and the quantitative easing (QE) adopted chiefly to fight deflation and reinforce economic recovery. The effectiveness of such measures has been limited also because the banking union is not yet complete. Finally, the EU’s structural policies (Lisbon agenda and ‘Europe 2020’ plans) are evaluated.

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Vorheriges Kapitel The Double Crisis in the Eurozone: Recession, Stagnation and High Unemployment

Nächstes Kapitel The Need for Innovative Policies and Further Integration: A Real ‘Economic and Monetary’ Union Leading to a Future Political Union?

As experienced, in a different institutional context, in the US, thanks to both fiscal and monetary expansions.

After the 2012 restructuring, already mentioned in the previous chapter, a new restructuring (as also suggested by IMF) or ‘re-profiling’, that is, an extension of the maturities, is still likely, notwithstanding the new agreement reached after tough talks (with a concrete risk of ‘Grexit’) in July 2015, an agreement that led to the third financial help package (worth about 85 billion euros).

Of course, in a more integrated Europe some vices of Southern countries – corruption, tax evasion, limited efficiency and/or quality of public expenditure, etc. – should be stemmed.

Outside the euro area, in this period the IMF provided financial help also to Hungary, Romania, Ukraine and – to a lesser extent – Iceland, Latvia, Georgia, Belarus.

Initially the two countries preferred not to request financial assistance through the fund, but when the spread on their bonds reached very high levels, they applied for the EFSF’s help. Ireland received 85 billion euros and Portugal 78 billion euros.

This commonly used name for the three institutions was changed in 2015 upon request by the Greek government.

According to Baldwin and Giavazzi (2016), two major design failures were responsible for the crisis: (i) the absence of control mechanisms that could have stopped the build-up of large imbalances within the Eurozone (current accounts, public debts, excessive bank leverage) and (ii) the absence of institutions able to deal with the ‘sudden stop’.

The Green Book prepared in 2011 for the proposed ‘stability bonds’ included three alternatives: (i) complete substitution of national sovereign debt with these new bonds; (ii) partial substitution of national sovereigns with the new bonds, but allowing for some collateral and (iii) as in the previous case but without collateral. The first version is the most ambitious one, but it requires a change of the Treaties and should overcome the ‘moral hazard’ criticism.

The aims of the Project Eurobonds will be discussed in Chap. 7.

A similar increase, also criticised, was previously decided in the summer 2008, when the sub-prime crisis had already started.

For a comparison between FED and ECB, see Fig. 3.3.

When the QE was implemented in the US there were some fears that such operations could lead to high rates of inflation (as well as increasing risks of new financial bubbles). On the contrary, inflation did not increase, neither in the US nor in the Eurozone (when the QE was later introduced). The apparent contradiction between expansionary monetary policies and decreasing inflation has also been discussed in theoretical research; see, for example, Cukierman (2013). Masera (2016) discusses the link between money and price dynamics as one of the six paradoxes for Eurozone economic policies.

For a quantitative assessment, see Eser and Schwab (2016).

The precise wording was: ‘Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough’.

Authors such as De Grauwe and Ji (2016) argue that the OMT plan would be more effective in dealing with liquidity problems than solvency problems; as a result, the credibility of OMTs is limited. Fortunately, however, the markets have regarded the plan as credible (at least so far).

For the long-term interest rates (and spreads) in selected countries, see Fig. 5.1. Note that, in the most recent period, also as a consequence of the new unconventional measures (such as the QE), the interest rates reached historically low levels in the entire Eurozone. In Germany, they attained negative values for most of the maturities and even zero on 10-year bonds. This, together with the reduced spreads, allowed countries such as Italy and Spain to pay interest rates around or lower than 1.5% on 10-year bonds (historically low levels also for these countries).

Even more worrying was the fact that, from the end of 2014 onwards, the inflation expectations themselves (in the horizon of 1–2 years) were much below the announced target.

This is the result of possible risk on the financial instruments of the supranational agencies (equal to 12% of the monthly purchases) and a maximum of 8% of mutualised risk on the sovereign bonds.

At the end of February 2016, sovereign bonds in the balance sheet of the ECB were worth about 600 billion euros, corresponding to 25% of the Eurozone’s GDP (27% is the corresponding figure reached by the FED in the US).

In fact, in countries most hit by the double crisis, the demand for loans by private firms is mainly for liquidity reasons (cash flow management) rather than real investment. However, in some countries private banks still have a high share of badly performing loans, and this induces them to lend mainly prime rate loans, that is, there is rationing notwithstanding the low demand for credit.

Such as the incentive to create speculative bubbles. Also in this case, German economists and policymakers are especially sceptical about these incessant unconventional measures. One reason is also the diffusion of negative interest rates on various financial instruments that damages banks’ profitability.

The latter decisions imply that the banks which borrow from the ECB are paid by the central bank an interest rate up to an annual 0.40% of the loan received, as long as they use the liquidity to lend to firms and families.

However, despite many requests, it is almost impossible that ECB will completely change its strategy to become a ‘lender of last resort’ also for governments, that is, providing money financing of public deficits. Regarding a different proposal, even at the ECB Milton Friedman’s old and well known proposal of ‘helicopter money’, rediscovered by many experts in current times, is given a certain attention (we shall return to this issue in Chap. 7).

Jackson Hole speech (ECB 2014). This view was reiterated on several occasions in the following months.

The situation was even more complicated because in some countries of the Eurozone the responsibility for supervision tasks was with the central banks, in other countries with the governments, and in still others with independent authorities.

The EU Commission established some ‘study groups’: the proposals of the ‘De Laroisière group’ were approved by the European Council in 2010.

So far, however, macroprudential supervision has been extensively delegated to the national authorities (Baglioni 2016).

The banking union was previously proposed by many economists and institutions: see for instance Goodhart (2014).

The interconnections between sovereign default risk and the European banks’ systemic risk have been investigated in some studies (e.g. Black et al. 2016).

Before the start of the SSM, the ECB carried out a comprehensive assessment of the European banking system, including an ‘asset quality review’ focused on the quality of assets of individual banks (based on indicators such as the Core-Tier 1 and similar ratios), as well as ‘stress tests’, in order to assess the resilience of banks to adverse macroeconomic shocks (lower economic growth, higher interest rates, etc.).

The problematic links between monetary policy and supervision tasks are widely studied in the literature; see for instance Dabrowski (2016).

It was, in particular, Germany’s position contrary to extending the direct ECB supervision also to smaller banks.

It is widely recognised that the cost of the adjustment after the recent shocks fell mainly on labour (Pasimeni 2014).

The most important were the following: employment rate (on working age population 15–64 years) 70%, female employment rate 60%, old-age employment rate 50%. Concerning the other pillars, it is important to recall the target of 3% on GDP for R&D expenditure.

The remaining key targets are the following: share of young people (30–34 years) with tertiary education 40%, school dropouts (18–24 years) 10%, R&D expenditure on GDP 3%, poverty or social exclusion to be cut by 20 million, energy efficiency to be increased by 20%, renewable energies to reach 20% of total energy consumption, greenhouse gases to be reduced by 20%. Also for these indicators, the variation across member countries is very large.

The spread of populist and anti-Europe movements is particularly pervasive in the areas most hurt by the crises, where social discontent has been mounting (the result of the Brexit referendum in the UK is an example of trends that are clear in other countries as well).

The specific actions financed directly by the EU include: youth guarantee schemes, apprenticeship and traineeship programmes, support schemes for young business starters and social entrepreneurs, volunteering opportunities, continuous support for Erasmus and Leonardo da Vinci programmes (see Eurofund 2012).

Moreover, education systems should be reformed and innovative school-to-work transition systems should be introduced (see Quintini and Manfredi 2009; Pastore 2015). As for education, many studies suggest that a ‘dual educational system’, characterised by a key role of apprenticeship (young people are provided training while at school and not after school) and widely diffused in Germany, is probably the most effective way for ensuring a smooth transition from schools and universities to the labour market.

Baglioni, A. (2016). The European banking union. A critical assessment. London & New York: Palgrave MacMillan.CrossRef

Baldwin, R., & Giavazzi, F. (Eds.) (2016). How to fix Europe’s monetary union: views of leading economists. VoxEU eBook. London: CEPR Press.

Black, L., Correa, R., Huang, X., Zhou, H. (2016). The systemic risk of European banks during the financial and sovereign debt crises. Journal of Banking & Finance, 63, 107–125.CrossRef

Cukierman, A. (2013). Monetary policy and institutions before, during, and after the global financial crisis. Journal of Financial Stability, 9(3), 373–384CrossRef

Dabrowski, M. (2016). Interaction between monetary policy and bank regulation: lessons for the ECB. CASE Networks Studies & Analyses, 480, 1–30.

De Grauwe, P., & Ji, Y. (2016). How to reboot the Eurozone and ensure its long-term survival. In R. Baldwin & F. Giavazzi (Eds.). How to fix Europe’s monetary union: views of leading economists. VoxEU eBook. London: CEPR Press.

ECB, European Central Bank. (2014, August 22). Unemployment in the Euro area. Speech by Mario Draghi, President of the ECB, Annual central bank symposium in Jackson Hole.

Eser, F., & Schwaab, B. (2016). Evaluating the impact of unconventional monetary policy measures: empirical evidence from the ECB׳s Securities Markets Programme. Journal of Financial Economics, 119(1), 147–167.CrossRef

ESM (2015). 2014 annual report.

Fisher, P. (2012, September 25). Developments in financial markets. Monetary and macroprudential policy. Richmond University London.

Goodhart, C. (2014). Lessons for monetary policy from the euro-area crisis. Journal of Macroeconomics, 39(Part B), 378–382.CrossRef

Masera, R. (2016, June 23–24). Six paradoxes of Eurozone economic policies: the case for a rethink of the political economy of the EMU. Paper presented at Villa Mondragone International Seminar.

Pasimeni, P. (2014). An optimum currency crisis. The European Journal of Comparative Economics, 11(2), 173–204.

Pastore, F. (2015). The youth experience gap. Explaining national differences in the school-to-work transition. Heidelberg: Springer.

Quintini, G., & Manfredi, T. (2009). Going separate ways? School-to-work transitions in the United States and Europe. OECD Social, Employment and Migration Working Paper, 90.

Tabellini, G. (2016a). Which fiscal union?. VoxEU.org, February 2016.

EC, European Commission. (2010). Youth on the move. Brussel: EC.

Titel: The EU’s Policy Response: Too Little Too Late
verfasst von: Enrico Marelli
Marcello Signorelli
Verlag: Springer International Publishing
Buch: Europe and the Euro
Print ISBN: 978-3-319-45728-4

Electronic ISBN: 978-3-319-45729-1

Copyright-Jahr: 2017
DOI: https://doi.org/10.1007/978-3-319-45729-1_6