Download publication

Policy Contribution

A European perspective on overindebtedness

The sequence of crisis and policy responses after mid-2007 was a gradual recognition of the unsustainability of the euro-area policy framework. The bank-sovereign vicious circle was first observed in 2009 and became widely acknowledged in the course of 2011 and early 2012. The most impactful initiative has been the initiation of a banking union in mid-2012, but this remains incomplete and needs strengthening.

By: and Date: September 28, 2017 Topic: European Macroeconomics & Governance

The euro-area crisis, which nearly destroyed Europe’s Economic and Monetary Union (EMU) in 2011-12, was a result of perverse incentives and inadequate institutions. The perverse incentives included excessive implicit national guarantees of domestic banks, and a lack of clarity on what would happen in case of sovereign debt distress, which was interpreted as an implicit guarantee of euro-area sovereigns by each other. Correspondingly, Europe had no institutions that could credibly declare a bank to be failing or likely to fail, manage a bank resolution process, or manage a sovereign debt restructuring. As a consequence, in the decade before the crisis, most countries’ banking systems accumulated excessive risk on their balance sheets, and several member states also became overindebted.

The sequence of crisis and policy responses after mid-2007 was one of gradual, and generally very slow, recognition of the unsustainability of the euro-area policy framework. The bank-sovereign vicious circle, which had not been specifically identified as a potential contagion mechanism before the crisis, was first observed in 2009 and became widely acknowledged in the course of 2011 and early 2012. This vicious circle is now accepted by most observers as the central driver of the crisis during its most acute phase in 2011-12.

The policy response has developed in accordance with this evolving analysis. The most impactful initiative has been the initiation of a banking union in mid-2012, but this remains incomplete and needs strengthening. While many features of the euro-area experience are unique, the role of incentives and the gradual introduction of market discipline into the policy framework hold useful lessons for other jurisdictions.

View comments
Read article More by this author

Blog Post

Latest data shows developing trends in the European Central Bank’s refinancing operations

The stock of liquidity supplied through the ECB’s open market operations has remained relatively stable, though there is a clearer change in the country composition.

By: Konstantinos Efstathiou Topic: European Macroeconomics & Governance, Finance & Financial Regulation Date: December 12, 2017
Read article More on this topic More by this author

Blog Post

Sovereign Concentration Charges are the Key to Completing Europe’s Banking Union

The past crisis revealed that most euro-area banks have disproportionate sovereign exposure in their home country. Charging banks for sovereign concentration is one solution to this issue, and would help advance the discussion on banking union.

By: Nicolas Véron Topic: European Macroeconomics & Governance Date: December 7, 2017
Read article More on this topic More by this author

Blog Post

The eurozone medley: a collection of recent papers on the future of euro-area governance

Our scholars Grégory Claeys, André Sapir, Dirk Schoenmaker, Nicolas Veron and Guntram B. Wolff, explore the next steps needed to create a more functional and coherent economic governance framework.

By: Bruegel Topic: European Macroeconomics & Governance Date: December 6, 2017
Read about event

Past Event

Past Event

Zombie firms and weak productivity: what role for policy?

At this event, we will have the chance to discuss the final findings of OECD's project on Exit Policies and Productivity Growth, which started at the end of 2015.

Speakers: Carlo Altomonte, Dan Andrews, Giuseppe Nicoletti and Reinhilde Veugelers Topic: Finance & Financial Regulation, Innovation & Competition Policy Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: December 6, 2017
Read article More on this topic More by this author

Opinion

The European Commission should drop its ill-designed idea of a finance minister

Beyond the opposing ideas of Jean-Claude Juncker and Wolfgang Schäuble for future euro-area governance, Guntram Wolff explores how alternatives such as a reformed Eurogroup might yield more effective fiscal policy-making.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 4, 2017
Read article Download PDF More on this topic More by this author

Policy Brief

Beyond the Juncker and Schäuble visions of euro-area governance

Two diametrically opposed visions of the euro-area architecture have been put forward. Departing from both Juncker’s and Schäuble’s proposals, the author identifies new ideas to develop the euro-area governance

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: December 1, 2017
Read article More on this topic More by this author

Blog Post

German wages, the Phillips curve and migration in the euro area

This post studies why wages in Germany have not borne strong increases despite a relatively strong labour market. I list four reasons why announcing the death of the Phillips curve – the negative relationship between unemployment and wage growth – is premature in Germany. One of the reasons I report is substantial immigration from the rest of the EU.

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: November 29, 2017
Read article Download PDF More on this topic

Policy Contribution

How should the European Central Bank ‘normalise’ its monetary policy?

During the crisis, the ECB resorted to a number of unconventional monetary tools. This paper discusses how to phase out these policies and what the ‘new normal’ in monetary policy should look like.

By: Grégory Claeys and Maria Demertzis Topic: European Macroeconomics & Governance Date: November 23, 2017
Read article Download PDF More by this author

Parliamentary Testimony

Croatian Parliament

After the crisis: what new lessons for euro adoption?

Key learning for euro adoption lies within the experience of southern euro member states and the macroeconomic performance of euro ‘ins’ and ‘outs’ among newer member states. Zsolt Darvas discusses promising signs for eventual euro adoption in Croatia and the unsuitability of the Maastricht fiscal criteria for joining the euro, in his speech delivered at an event organised in the Croatian Parliament on 15 November 2017

By: Zsolt Darvas Topic: Croatian Parliament, European Macroeconomics & Governance, Testimonies Date: November 20, 2017
Read article Download PDF More by this author

External Publication

European Parliament

Sovereign Concentration Charges: A New Regime for Banks’ Sovereign Exposures

Europe’s banking union has been central to the resolution of the euro-area crisis. It has had an encouraging start but remains unfinished business. If it remains in its current halfway-house condition, it may eventually move backwards and fail. EU leaders should seize these opportunities

By: Nicolas Véron Topic: European Macroeconomics & Governance, European Parliament Date: November 17, 2017
Read article More on this topic More by this author

Blog Post

A slightly tighter ECB

The ECB’s recent decision on QE was somewhat on the dovish side. Francesco Papadia gives his view on why it is time to start a discussion about reducing the degree of ease of monetary policy.

By: Francesco Papadia Topic: European Macroeconomics & Governance Date: November 15, 2017
Read article More on this topic More by this author

Blog Post

Accounting for true worth: the economics of IFRS9

The introduction in 2018 of forward-looking provisioning for credit losses in EU banks delivers on a key objective in the post-crisis regulatory agenda. This was intended to dampen future lending cycles. For now, banks will be sheltered from the impact on regulatory capital requirements, as the implications for financial stability are far from clear. In any case, the new standards should encourage the disposal of banks’ distressed assets, underpinning the ongoing agenda on NPLs.

By: Alexander Lehmann Topic: Finance & Financial Regulation Date: November 13, 2017
Load more posts