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Policy Contribution

From climate change to cyber attacks: Incipient financial-stability risks for the euro area

The European Central Bank’s November 2019 Financial Stability Review highlighted the risks to growth in an environment of global uncertainty. On the whole, the ECB report is comprehensive and covers the main risks to euro-area financial stability, we highlight issues that deserve more attention.

By: , and Date: February 6, 2020 Topic: Banking and capital markets

This Policy Contribution was prepared for the European Parliament’s Committee on Economic and Monetary Affairs (ECON) as an input to the Monetary Dialogue of 6 February 2020 between ECON and the President of the European Central Bank. The original paper is available on the European Parliament’s webpage (here).
Copyright remains with the European Parliament at all times.

• First, the assessment of risks in the housing market should be more nuanced. Current housing markets relative to those pre-crisis seem to be far less driven by mortgage credit, and the size of the construction sector has not increased. This is possibly good news for financial stability because a house price correction would transmit less into mortgage defaults and corrections to economic activity.

• Second, there should be greater emphasis on changes in market expectations of interest rates, which can have substantial effects on asset prices. This could be particularly relevant if interest rate changes are not driven by real-economy developments.

• Third, the financial system relies on a safe asset as a reference. We show that the supply of safe sovereign assets in the euro area has fallen dramatically, driven by deteriorating sovereign credit ratings and reduced supplies of bonds from the safest countries. More safe assets would support financial stability.

• Fourth, though climate risks to financial stability must be taken seriously, risk weights on green assets should not be reduced since they still contain normal financial stability risks. Instead, risk weights for brown assets should be increased.

• Fifth, the ECB does not consider cybersecurity and hybrid threats in its assessment. These threats are significant risks for financial institutions and at the more systemic level.

• Policies to address financial-stability concerns include macroprudential measures. In this respect, we discover discrepancies between EU countries: countries with the same levels
of house-price overvaluation have adopted very different macroprudential measures. Some countries might thus have done too much, while others have done too little.

• When it comes to preventing the next recession or reducing its impact, we argue that EU policymakers need to be better prepared to use discretionary fiscal policy earlier and more forcefully, in particular because the ability of monetary authorities to react to the next cyclical downturn is very limited.

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Blog Post

The implications for public debt of high inflation and monetary tightening

Expected increases in interest rates and reductions in real GDP growth rates will result in relatively small increases in public debt-to-GDP ratios, but inflation will reduce debt ratios very substantially

By: Zsolt Darvas Topic: Macroeconomic policy Date: June 29, 2022
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Blog Post

A new European tool to deal with unjustified rising spreads

The European Central Bank needs a new tool to prevent the current rise in spreads, triggered by monetary policy tightening, from escalating into a new euro-area crisis.

By: Grégory Claeys and Maria Demertzis Topic: Banking and capital markets Date: June 20, 2022
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External Publication

European governanceEuropean Parliament

Fragmentation risk in the euro area: no easy way out for the European Central Bank

The ECB should design a specific tool that will accompany interest rate hikes to neutralise the risk of fragmentation directly for countries facing it, staying within the bounds of the EU treaties and ensuring political legitimacy. We also advocate structural changes to the ECB’s collateral framework to avoid unnecessary uncertainty surrounding the safe asset status of European sovereign bonds.

By: Maria Demertzis, Grégory Claeys and Lionel Guetta-Jeanrenaud Topic: European governance, European Parliament, Testimonies Date: June 8, 2022
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Opinion

European governance

Three headaches for the European Central Bank

Even though inflation in the euro area is lower than in the US, three issues make it a lot more difficult for the ECB to control inflation and preserve financial stability. Once again, the limits of EMU architecture are visible and will require a rethink.

By: Maria Demertzis Topic: European governance, Macroeconomic policy Date: May 31, 2022
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Podcast

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Taming inflation?

What are the implications of prolonged inflation?

By: The Sound of Economics Topic: Macroeconomic policy Date: May 25, 2022
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Past Event

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How are crises changing central bank doctrines?

How is monetary policy evolving in the face of recent crises? With central banks taking on new roles, how accountable are they to democratic institutions?

Speakers: Maria Demertzis, Benoît Coeuré, Pervenche Berès, Hans-Helmut Kotz and Athanasios Orphanides Topic: Macroeconomic policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: May 11, 2022
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Past Event

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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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Policy Contribution

European governance

Fiscal support and monetary vigilance: economic policy implications of the Russia-Ukraine war for the European Union

Policymakers must think coherently about the joint implications of their actions, from sanctions on Russia to subsidies and transfers to their own citizens, and avoid taking measures that contradict each other. This is what we try to do in this Policy Contribution, focusing on the macroeconomic aspects of relevance for Europe.

By: Olivier Blanchard and Jean Pisani-Ferry Topic: European governance, Macroeconomic policy Date: April 29, 2022
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Past Event

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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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Macroeconomic and financial stability in changing times: conversation with Andrew Bailey

Guntram Wolff will be joined in conversation by Andrew Bailey, Governor of the Bank of England.

Speakers: Andrew Bailey and Guntram B. Wolff Topic: Macroeconomic policy Date: March 28, 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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