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Policy Contribution

A European perspective on overindebtedness

The sequence of crisis and policy responses after mid-2007 was a gradual recognition of the unsustainability of the euro-area policy framework. The bank-sovereign vicious circle was first observed in 2009 and became widely acknowledged in the course of 2011 and early 2012. The most impactful initiative has been the initiation of a banking union in mid-2012, but this remains incomplete and needs strengthening.

By: and Date: September 28, 2017 Topic: Macroeconomic policy

The euro-area crisis, which nearly destroyed Europe’s Economic and Monetary Union (EMU) in 2011-12, was a result of perverse incentives and inadequate institutions. The perverse incentives included excessive implicit national guarantees of domestic banks, and a lack of clarity on what would happen in case of sovereign debt distress, which was interpreted as an implicit guarantee of euro-area sovereigns by each other. Correspondingly, Europe had no institutions that could credibly declare a bank to be failing or likely to fail, manage a bank resolution process, or manage a sovereign debt restructuring. As a consequence, in the decade before the crisis, most countries’ banking systems accumulated excessive risk on their balance sheets, and several member states also became overindebted.

The sequence of crisis and policy responses after mid-2007 was one of gradual, and generally very slow, recognition of the unsustainability of the euro-area policy framework. The bank-sovereign vicious circle, which had not been specifically identified as a potential contagion mechanism before the crisis, was first observed in 2009 and became widely acknowledged in the course of 2011 and early 2012. This vicious circle is now accepted by most observers as the central driver of the crisis during its most acute phase in 2011-12.

The policy response has developed in accordance with this evolving analysis. The most impactful initiative has been the initiation of a banking union in mid-2012, but this remains incomplete and needs strengthening. While many features of the euro-area experience are unique, the role of incentives and the gradual introduction of market discipline into the policy framework hold useful lessons for other jurisdictions.

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Past Event

Past Event

What is in store for Euro area economies?

ECB Executive Board Member Philip Lane discusses the outlook for Euro area economies.

Speakers: Maria Demertzis and Philip Lane Topic: European governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 5, 2022
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Past Event

Past Event

Tackling future risks to banks

How to address vulnerabilities in banks in the coming years?

Speakers: Maria Demertzis and Elizabeth McCaul Topic: Banking and capital markets Date: March 29, 2022
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Policy Contribution

Inclusive growth

Better pensions for the European Union’s self-employed

What is the current state of pensions policy in Europe and how are independent workers treated compared with their traditionally employed counterparts?

By: Rebecca Christie, Monika Grzegorczyk and Diane Mulcahy Topic: Inclusive growth Date: March 24, 2022
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Opinion

European governance

How to reconcile increased green public investment needs with fiscal consolidation

The EU’s ambitious emissions reduction targets will require a major increase in green investments. This column considers options for increasing public green investment when major consolidations are needed after the fiscal support provided during the pandemic. The authors make the case for a green golden rule allowing green investment to be funded by deficits that would not count in the fiscal rules. Concerns about ‘greenwashing’ could be addressed through a narrow definition of green investments and strong institutional scrutiny, while countries with debt sustainability concerns could initially rely only on NGEU for their green investment.

By: Zsolt Darvas and Guntram B. Wolff Topic: European governance, Green economy, Macroeconomic policy Date: March 8, 2022
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Opinion

The week inflation became entrenched

The events that have unfolded since 24 February have solved one dispute: inflation is no longer temporary.

By: Maria Demertzis Topic: Macroeconomic policy Date: March 8, 2022
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External Publication

Book notes: Monetary policy in times of crisis

Review of 'Monetary policy in times of crisis: a tale of two decades of the European Central Bank' published in the Central Banking.

By: Francesco Papadia Topic: Macroeconomic policy Date: February 17, 2022
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External Publication

The Euro in 2022

An annual review of the euro published jointly by Fundación ICO and Fundación de Estudios Financieros to expand knowledge, raise awareness of the single currency, and suggest ideas and proposals for strengthening its acceptance and sustainability.

By: Grégory Claeys, Maria Demertzis and Fernando Fernández Topic: Macroeconomic policy Date: February 17, 2022
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Past Event

Past Event

A debate on fiscal rules and the new monetary strategy

Presentation of the Yearbook of the Euro 2022.

Speakers: Maria Demertzis, Fernando Fernández, Gonzalo García Andrés, José Carlos García de Quevedo, Pablo Hernández de Cos and Jorge Yzaguirre Topic: European governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: February 17, 2022
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Blog Post

European governance

A European climate fund or a green golden rule: not as different as they seem

Spending and borrowing via a non-redistributive EU climate fund or under a well-designed green golden rule would result in similar project implementation and be treated the same in the EU’s fiscal framework.

By: Zsolt Darvas Topic: European governance, Green economy Date: February 3, 2022
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Blog Post

Who is suffering most from rising inflation?

The lowest income households are suffering disproportionally from the current inflation increase, with rising energy prices the main culprit.

By: Grégory Claeys and Lionel Guetta-Jeanrenaud Topic: Macroeconomic policy Date: February 1, 2022
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Opinion

Non-fungible tokens (NFTs): the next chapter in crypto

As with any new technology, exciting opportunities are being created, but similarly there are risks.

By: Maria Demertzis Topic: Digital economy and innovation Date: January 25, 2022
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Opinion

European governance

The euro comes of age

A well-functioning euro reflects a degree of unity that allows the EU to credibly claim a position at the global table and therefore help shape the policies that will deal with global problems. That is a decisive success.

By: Maria Demertzis Topic: European governance, Macroeconomic policy Date: January 13, 2022
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