If there is one theme that unites European responses to the global financial crisis, it is national responsibility and not European solidarity. There have been moments of solidarity to be sure. The creation of first temporary and then permanent bailout funds was the most obvious; the unconventional monetary policies of the European Central Bank (ECB) and ECB President Mario Draghi’s ‘whatever it takes speech’ count as well. Nevertheless, with the exception of the European Stability Mechanism (ESM), these moments of solidarity have been exceptional, temporary and transitional. They bought time for governments to restructure their banks, consolidate their finances, reform their market institutions, and prepare for an uncertain future so that another round of crisis summits and rushed institution-building will no longer be required. Once this transition period is over, cross-border redistribution and burden-sharing can be kept to a minimum. That is the objective.
The United States is not the only country where the consensus on central bank independence is in trouble; central bankers across the formerly communist world are facing sustained political challenge as well. The difference in the formerly communist world is that central bank norms, practices and policies never fit as well in the institutional context of regimes in transition and the consensus spread only weakly outward from the central banks themselves. This is the argument Juliet Johnson makes in her brilliant book on the role that central bankers played in the transformation of the post-communist world.
Italians head to the polls on Sunday, December 4, to approve or reject a series of constitutional reforms that will redirect policy competence from the regions to the state, that will transform the Senate into a council of regions, and that will concentrate power in the Chamber of Deputies and the national government. Italian Prime Minister Matteo Renzi argues that these reforms are necessary to equip Italy with the flexibility needed to compete in the global economy of the 21st Century. His opponents counter that changing the constitution this way will eliminate critical checks and balances and so make the country vulnerable to authoritarianism if not dictatorship.
The European Central Bank (ECB) made no changes to its policy stance when the Governing Council met in Vienna on 2 June. Price inflation in the euro area remains well below the ECB’s definition of price stability and the prospects for inflation to move upward remain unchanged. Nevertheless, ECB President Mario Draghi argued in response to questions during his press conference, ‘we have to see the full impact of the measures that we’ve decided in March.’ Some of those, like the targeted long-term refinancing operations that offer to subsidize bank lending and the inclusion of corporate bonds in the ECB’s large-scale asset purchases will only start over the coming weeks. It takes time for such measures to work their way through to the consumption and investment that drives the real economy. And for those who complain that the ECB seems slow in meeting its policy target, Draghi made it clear that: ‘the medium term for a return to inflation to our objective of an inflation rate of close to but below 2 percent is pretty long.’ In other words, the ‘medium term’ from the ECB’s perspective is essentially as long as it takes.
Free trade is welfare enhancing. Interdependence requires cooperation. Central banks should be politically independent. And the United States is the indispensable world leader. These are the certainties we used to offer graduate students in international relations. Now they are all aflame.
When the Council of Economics and Finance Ministers (ECOFIN) meets informally on Friday, 22 April, one issue on the table will be the reduction of bank exposure to the sovereign debt of their home governments. This issue was laid out in a note from the Dutch Presidency that was leaked on Wednesday. The response of the Italian government in particular was immediate and strongly negative. Italian banks are heavily exposed to Italian sovereign debt and any attempt to reduce that exposure would impose unacceptable costs on an already fragile Italian financial system. To some degree this is the case for other peripheral countries as well. The Dutch Presidency note argues that Europe’s banking union needs to be strengthened with some kind of European Deposit Insurance Scheme (EDIS) and ‘a common backstop for the Single Resolution Fund (SRF)’. Before the Dutch Presidency can flesh out its position on these key support mechanisms, however, it needs to tackle the ‘bank-sovereign nexus’ so that ‘risk sharing and risk reduction go together’. Intellectually, this is a coherent argument.
The European Central Bank (ECB) announced a raft of policy measures on Thursday, March 10, intended to give a further boost to euro area economic performance. Most of these measures were unconventional and yet still precedented. The ECB lowered its main policy rates, accelerated the pace of its asset purchases, and widened the pool of assets eligible to be included in its purchasing program. It also renewed its program for targeted loans to banks that extend credit to the non-financial sector. The only new element was the rate of interest that the banks would pay to access credit that they could lend for investment. The question is whether that new wrinkle will make much of a difference. As is often the case, the answer depends less on the mechanics of monetary policy than on the magic of market ‘confidence’.