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The ECB: a reluctant leading character of the EMU play

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This paper assesses the performance of the European Central Bank (ECB) during the crisis that started in 2008. The ECB statute is consistent with a view of the economy that was predominant in the 1990s, that postulates a very limited role for discretional policies in managing the business cycle. The ECB had therefore to stretch its mandate in several occasions, during the crisis, to avoid severe outcomes. It was unable to avoid a slow but inexorable slide of the Eurozone towards deflation and a liquidity trap. To restore robust growth, fiscal policy should be used, and institutions should be redesigned away from the Berlin–Washington Consensus framework that shaped the Maastricht Treaty. Better rules for fiscal governance and a wider ECB mandate are proposed.

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  1. Wolfgang Munchau (2014) argued recently that the length of the crisis, and the incapacity of European policy makers to endow the Eurozone with a well-functioning governance endanger the single currency more today than at the height of the crisis.

  2. The five criteria, aimed at guaranteeing nominal convergence before the adoption of the single currency, where: (1) inflation close to the average between the lowest inflation rates in the zone; (2) long term interest rates close to the average between the lowest interest rates in the zone; (3) 2 years at least in the exchange rate mechanism, without realignments; (4) public deficit lower than 3 % of GDP; (5) public debt lower than 60 % of GDP, or approaching to that level at a sufficiently fast pace. By the decision date of June 1998, 11 countries fulfilled the criteria, with Greece joining shortly afterwards. As of January 2015, the Eurozone has 19 members.

  3. The fiscal impulse is computed as the negative of year on year changes in cyclically adjusted government net lending. It measures the discretionary fiscal stance of the country, a positive number denoting an expansionary period.

  4. The Eurozone banking union, that is taking shape as we write, was meant to provide a supranational backstop for financial institutions, and a common supervisory board. The banking union being implemented falls short especially on the first account (for details see Ubide 2013).

  5. Mario Draghi in fact forcefully denied that the ECB was stepping out of its mandate, arguing that a collapse of the euro, and the ensuing turmoil in financial markets, would have undermined the very price stability that the ECB is meant to pursue.

  6. To carry on the policy changes he had in mind, Mario Draghi had to twist some arms in the ECB Governing Council. This resulted in unprecedented tensions (see Reuters 2014). In the meantime, on the OMT program is pending a judgment of constitutionality at the European Court of Justice (ECJ), which has been solicited by the German Constitutional Court. The ECJ comforted Mario Draghi, declaring the OMT legal "in principle".

  7. An asset-backed security (ABS) is a corporate security (usually issued by a financial institution) whose value is derived from and collateralized (or "backed") by a specified pool of underlying assets, that typically are too illiquid to be sold separately.

  8. For more information see the references in Creel et al. (2009) and, for a critical view, Balassone and Franco (2000).


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Correspondence to Francesco Saraceno.

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This paper builds on a presentation at the July 2014 ILO workshop on “The Role of Central Banks in Meeting Development and Employment Challenges”, and on a subsequent paper (Saraceno 2015). Financial support from the ILO is gratefully acknowledged.

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Saraceno, F. The ECB: a reluctant leading character of the EMU play. Econ Polit 33, 129–151 (2016).

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