Download publication

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: European Macroeconomics & Governance

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.

Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: The macroeconomic policy response to the COVID-19 crisis

Which macroeconomic policy response is the best option to deal with the crisis currently unfolding and will ensure that the recovery will be as quick as possible?

Speakers: Grégory Claeys, Giuseppe Porcaro, Lucrezia Reichlin and Guntram B. Wolff Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 31, 2020
Read about event
 

Past Event

Past Event

CANCELLED: How adequate is the European toolbox to deal with financial stability risks in a low rate environment?

Bruegel is delighted to welcome the governor of the Central Bank of Ireland, Gabriel Makhlouf. He will deliver a keynote address about how adequate the European toolbox is to tackle financial stability risks in a low rate environment. Following his speech, a panel of experts will further discuss the topic.

Speakers: Gabriel Makhlouf, Guntram B. Wolff and Agnès Bénassy-Quéré Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 31, 2020
Read article More on this topic More by this author
 

Blog Post

The fiscal consequences of the pandemic

The likely economic depression triggered by coronavirus will pose a serious fiscal challenge to some euro-area countries. Given the special circumstances of the pandemic, a European solution is needed, involving more European Central Bank purchases, a significantly increased European Stability Mechanism and some degree of mutualisation of the pandemic-related economic costs.

By: Zsolt Darvas Topic: European Macroeconomics & Governance Date: March 30, 2020
Read article Download PDF More on this topic
 

External Publication

Facing the lower bound: what will the ECB do in the next recession?

In responding to the global financial crisis, the ECB has pushed its monetary policy into unchartered territories . Today, it appears increasingly constrained by persistently low interest rates. This paper seeks to understand this challenge and assess whether its toolkit would allow the ECB to weather a European recession.

By: Aliénor Cameron, Grégory Claeys and Maria Demertzis Topic: European Macroeconomics & Governance Date: March 27, 2020
Read article
 

Blog Post

COVID-19 Fiscal response: What are the options for the EU Council?

It is time for the EU Council to make quick progress on the fiscal front and announce something as soon as possible to show that it taken full measure of the severity of the situation.

By: Grégory Claeys and Guntram B. Wolff Topic: European Macroeconomics & Governance Date: March 26, 2020
Read about event More on this topic
 

Past Event

Past Event

The Sound of Economics Live: Banks and Loan Losses in the Pandemic Turmoil

At this online event we will record an episode of the Sound of Economics, Bruegel's podcast series. In this episode, we discuss the implications of the coronavirus crisis on financial stability and credit availability.

Speakers: Giuseppe Porcaro, Nicolas Véron and Guntram B. Wolff Topic: Finance & Financial Regulation Date: March 25, 2020
Read article More on this topic
 

Blog Post

Coronavirus and the politics of a common fiscal instrument

Coronavirus means many European Union countries will soon face major increases in their sovereign debt burdens, exacerbated by the sudden collapse of economic activity. What should the European Union do to address these debt problems?

By: Mark Hallerberg and Stavros Zenios Topic: European Macroeconomics & Governance Date: March 25, 2020
Read article More on this topic More by this author
 

Blog Post

Banks in pandemic turmoil

The banking system is critical to society and requires attention and support. In doing so, however, tough love is preferable to complacency.

By: Nicolas Véron Topic: Finance & Financial Regulation Date: March 24, 2020
Read article More on this topic More by this author
 

Blog Post

What should be done to reduce euro-area spreads?

Spreads are rising again in the euro-area at the worst possible time, when fiscal policy is needed to fight the coronavirus pandemic and the related economic shock. This blog post reviews the main options available to European policymakers, their feasibility and potential effectiveness to deal with this issue.

By: Grégory Claeys Topic: European Macroeconomics & Governance Date: March 18, 2020
Read article More on this topic More by this author
 

Podcast

Podcast

How can the EU prevent our economies from shutting down?

From flights cancelled and restaurants closed to companies either slowing or stopping their production, COVID-19 is shutting our economies down. How can the EU reboot them? What should be our fiscal and monetary response to the pandemic? Will our economic system ever be the same once everything is over? This week, Guntram Wolff is joined by Jean Pisani-Ferry and Maria Demertzis to discuss the EU's response to the coronavirus.

By: The Sound of Economics Topic: European Macroeconomics & Governance Date: March 18, 2020
Read article More on this topic More by this author
 

Opinion

The European coronavirus response must be a solution, not more stigma

Lagarde needs a different bazooka in responding to a natural disaster like COVID-19.

By: Rebecca Christie Topic: European Macroeconomics & Governance Date: March 18, 2020
Read about event More on this topic
 

Past Event

Past Event

CANCELLED: The new age of old age? Laying out the Non-Financial Defined Contribution scheme

Are Non-Financial Defined Contribution (NDC) schemes the best approach to reforming pension systems?

Speakers: Robert Holzmann and Maria Demertzis Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: March 18, 2020
Load more posts