The Interplay of Economic Reforms and Monetary Policy: The Case of the Eurozone*

Abstract

The world has been struck by a mutating systemic financial crisis that is unprecedented in terms of financial losses and fiscal costs, geographic reach, and speed and synchronization. The crisis from August 2007 to date can be divided into three main phases: the financial turmoil from August 2007 to the collapse of Lehman Brothers; the global financial crisis from September 2008 until spring 2010; and the eurozone sovereign debt crisis from spring 2010 to the current period. While each phase has brought significant challenges, the current sovereign debt crisis has been the most critical stage for the eurozone. It has brought unprecedented challenges for the monetary union and triggered extraordinary adjustments in both monetary policy and institutional arrangements at the eurozone level. The purpose of this article is to outline the features of each crisis phase, to describe the actions taken by the European Central Bank (ECB) during each phase and to explain the rationale for such measures. It also discusses the need to strengthen further the economic union in order to guarantee the sustainability of the monetary union of the eurozone. In this respect, it is argued that the recent institutional adjustments made at the European Union level would have been necessary independently of the financial crisis.

Political leadership of the European Central Bank

“…In the first stage, in 2007, when the financial crisis took hold of Europe, when there was insufficient money to go around, the ECB made overnight lending easily available. This support was necessary because as the money dried up banks were increasingly reluctant to lend to one another and these measures facilitated them to park their funds with the ECB (Drudi, Durré, and Mongelli 2012). This step was a bold and innovative step, on the part of the ECB, that few expected it was prepared to do.…”

“…At the time of writing, OMT has not been used, but the mere fact that the ECB President, Draghi, said he was willing to use such measures, calmed the markets. The ECB announced that it would only make these funds available to those countries that have applied for assistance from the ESM and agreed to the economic conditionality (see Drudi, Durré, and Mongelli 2012). In this way the ECB took numerous bold steps to act during the euro debt crisis.…”

Basic Indicators of Systemic Risk in the EU Banking Sector. Implications for Banking Regulation

“…Since our focus is to provide recommendations for banking regulation counteracting systemic risk, we include the 2007-2008 liquidity crisis and the period of global contagion, followed by the sovereign debt crisis which emerged in 2010 [Drudi et al, 2012]. Figure 1 shows the changes in distance to default series and the STOXX Europe 600 during the period September, 2009-July, 2013 According to Figure 1, the portfolio distance to default exceeds the average distance to default during almost the entire period.…”

Non-Standard Monetary Policies Implemented By The European Central Bank After The Financial Crisis

“…They were adopted for a temporary period to realize this goal (Trichet, 2013:238). These monetary measures introduced by the ECB against the crisis were analyzed under three periods following Cassola, et al (2010), Lane (2012), Trichet (2013) and Drudi, et al (2012). Financial Turmoil (2007August -2008 During the period between August 2007 and September 2008, the first phase of the financial crisis, the central banks of developed countries supported the markets by changing not the size but the compositions of their balance sheets (Lenza, et al, 2010:302).…”

“…This paper, though, adopts an analysis of three categories since the policies which were abolished or which authorities decided to abolish were adopted again with the emergence of the sovereign debt crisis. Following Cassola, et al (2010), Lane (2012), Trichet (2013) and Drudi, et al (2012), this paper firstly analyzes the measures taken between August 2007and September 2008, and between September 2008and May 2010. Then it focuses on the policies adopted by the ECB to solve the public debt problem of some countries.…”