Economic governance is in the eye of the beholder. The French want discretion, flexibility, and effective crisis management; the Germans want rules, discipline, and effective crisis avoidance. The euro as a single currency reflects both tendencies. There are aspects of Europe’s macroeconomic framework that are flexible and responsive (like the European Central Bank) and aspects that are more rigid and formulaic (like the ‘six pack’ and ‘two pack’ of policy coordination procedures that strengthen the ‘Stability and Growth Pact’). The challenge for Europeans is to find a sustainable balance. Too much of either tendency is not only unacceptable to one side or the other in the Franco-German partnership, it is also unlikely to work in stabilizing either the euro as a single currency or the European Union as a political project.
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 surprise victory of Donald J. Trump in the United States (US) presidential elections briefly pushed the euro, the Swiss franc, and the Danish kroner up against the dollar. It also pushed down the yields on high quality sovereign debt and it temporarily sent equity markets into the red. This was all to be expected. Like almost everyone, market participants thought Hilary Clinton would gain the White House alongside a predominantly Republican Congress. They placed their bets to take advantage of another four years of competent administration and legislative logjam. A Trump victory upset that calculation and so some of those market participants were trying to safeguard their capital until they could get a better sense of what is happening. The assumption they made was that Europe can act as a safe-haven. Unfortunately, that assumption is mistaken.
This is a talk I gave on 21 June at the European Political Strategy Center, which is the in-house think tank of the European Commission. The audience was very generous in listening to my presentation. The point I tried to make is that the capital markets union is an important project, but we should be careful to ensure that policymakers supplement the efforts to make capital markets more efficient with efforts to make them more resilient. This is an argument that I have made before and yet it is probably worth repeating. Given the dynamics behind Europe’s economic and financial crisis, there is simply too much at stake.
Thank you for giving me the opportunity to share some thoughts about the relevance of U.S. experience for Europe’s capital markets union. My argument is that U.S. experience is relevant both in terms of its successes and in terms of its mistakes. The most important lesson I draw from the United States is about the importance of managing or channeling the flight to quality when financial markets come under duress. In jargon, my specific concern is when a sudden increase in liquidity preference translates into a spontaneous return of home bias. In plainer language, what interests me is how we handle situations where investors decide to place priority on protecting the value of their assets.
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.
Professor Pepper D. Culpepper recently accepted a job in Oxford at the Blavatnik School of Government. This means he will leave the European University Institute, where he has been teaching since 2010. A group of his current and former PhD students decided to organize half-day event to celebrate Professor Culpepper’s time at the EUI. As part of that celebration, I offered to do a profile of Professor Culpepper’s research contribution. What follows is the text that I presented.
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’.