Atlantic Sentinel

Tag: European Central Bank

  • Is Austerity Losing the Battle in Europe?

    The different measures implemented in Europe in order to boost growth through increased monetary action, investment and structural reforms have replaced austerity as the new dominant dogma. While Angela Merkel is adapting to the new situation, Bundesbank president Jens Weidmann disagrees with more budget flexibility and a possible QE by the European Central Bank (ECB) in 2015.

    In the past few days, Andrea Bonanni, Brussels correspondent for the Italian newspaper La Repubblica, published an article in which he announced that Angela Merkel and Germany had lost the long battle over austerity in Europe. (more…)

  • European Central Bank Signals Willingness to Intervene

    The oscillations of the European debt crises have become quite familiar to those observing it. A country or national bank suffers from a negative spiral of debt and fading confidence. This is followed by a new nudge in the direction of deeper integration, or a bailout package is announced. A northern country which is fiscally sound then makes a controversial statement of refusing to cooperate on the terms proposed. This process muddles on until a new country or institution is in a dire situation. Like last year, summer holiday season generates the greatest divide between the political process and the factors that affect the crisis.

    Quite apart from this has been the European Central Bank. For this reason, Mario Draghi, its president, recently caused a stir that reverberated far from the usual central bank watchers. (more…)

  • European Banking Union Step Toward “Transfer Union”

    In many European countries, two important but ailing institutions are currently interlinked: sovereign states and national banks. The interdependency between them explains in large measure why the continent’s leaders are contemplating a banking union.

    A national bank tends to unofficially support its sovereign by buying government debt. An ailing financial system can by itself generate a large negative shock to the economy due to its function in allocating resources. This is especially true in Europe as it depends greatly on its banks for this function. Large, systematically important banks tend to be implicitly backed by their sovereigns. When either experiences considerable stress, the other suffers similarly.

    The direction of causality is not always the same. In Ireland, a dysfunctional financial sector added too much debt to the sovereign when Dublin pledged to prop up its banks. In Greece, the amount of government debt generated a crisis which spread to its, and neighboring, financial systems.

    When Mario Draghi decided in December of last year to provide an unlimited credit window to banks, it proved not enough to permanently instil confidence. Banks that have amassed assets on their balance sheet that may not look attractive remain fundamentally unstable. Indeed, given that the European Central Bank doesn’t necessarily operate as a “lender of last resort,” it has only put more strain on the balance sheets of sovereign states that are expected to save private banks from collapse. With this in mind, it was not a surprise that investors considered the €100 billion recently requested by Spain in support of its ailing banks as an addition to sovereign debt.

    A banking union is seen as the next and a necessary step in “ever-closer union.” In view of all the other options that have been debated, most prominently eurobonds, the fact that a banking union is seen as the least worst compromise is telling. (more…)