The Euro Area and the Financial Crisis The financial crisis of 2007–10 has presented a number of key policy challenges for those concerned with the long-term stability of the euro area It has shown that price stability as provided by the European Central Bank is not enough to guarantee financial stability, and exposed fault lines in governance and deficiencies in the architecture of the financial supervisory and regulatory framework This book addresses these and other issues, including why the crisis affected some countries more than others, whether the euro is still attractive for new EU states and what policy changes and structural reforms, both macro and micro, should be undertaken to ensure its future viability Written by a team of leading academic and central bank economists, the book also includes chapters on the cross-country incidence of the crisis, the Irish crisis and ECB monetary policy during the crisis, and studies on Spain, the Baltics, Slovakia and Slovenia m i r o s l av b e b l av y´ has an unusual blend of academic and political experience He is a Senior Research Fellow at the Brussels think tank, Centre for European Policy Studies and, at the same time, Member of the Slovak Parliament He is also Associate Professor of Public Policy at the Comenius University in Bratislava, Slovakia In the past, he served as a junior minister in his country’s government, created an influential think tank and worked for a range of multilateral development institutions as a consultant in Europe, Africa and the Caucasus d av i d c o b h a m is Professor of Economics at Heriot–Watt University He is a specialist in monetary policy who has worked on the UK, on French and Italian monetary policy, on European monetary integration and on monetary policy and exchange rate regimes in the Middle East and North Africa He is the editor or co-editor of a number of books on European monetary integration and monetary policy, including The Travails of the Eurozone (2007) and Twenty Years of Inflation Targeting: Lessons Learned and Future Prospects (2010) l ’ u d ov ´i t o´ d o r is an advisor to the Prime Minister and Minister of Finance in Slovakia In the past, he served as a member of the Bank Board at the National Bank of Slovakia and Executive Director responsible for research He also worked as a Chief Economist at the Ministry of Finance of the Slovak Republic He played an important role in institutional and structural reforms in Slovakia including the euro adoption in 2009 The Euro Area and the Financial Crisis Edited by Miroslav Beblav´y, David Cobham ´ and L’udov´ıt Odor c a m b r i d g e u n i ve r s i t y p r e s s Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, S˜ao Paulo, Delhi, Tokyo, Mexico City Cambridge University Press The Edinburgh Building, Cambridge CB2 8RU, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9781107014749 C Cambridge University Press 2011 This publication is in copyright Subject to statutory exception and to the provisions of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press First published 2011 Printed in the United Kingdom at the University Press, Cambridge A catalogue record for this publication is available from the British Library Library of Congress Cataloguing in Publication data The Euro area and the financial crisis / edited by Miroslav Beblav´y, David ´ Cobham, and L’udov´ıt Odor p cm “This volume brings together the papers and panel contributions presented at the conference on ‘The Euro Area and the Financial Crisis’, held in Bratislava from to September 2010” – Introd Includes bibliographical references and index ISBN 978-1-107-01474-9 Monetary policy – European Union countries Euro Global Financial Crisis, 2008–2009 I Beblav´y, Miroslav ´ II Cobham, David P III Odor, Ludov´ıt IV Title HG925.E8677 2011 330.94 05611 – dc23 2011027489 ISBN 978-1-107-01474-9 Hardback Cambridge University Press has no responsibility for the persistence or accuracy of URLs for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate Contents List of figures List of tables List of boxes List of contributors List of abbreviations and acronyms page viii xi xiv xv xvii Introduction m i r o s l av b e b l av y´ , d av i d c o b h a m a n d l ’ u d ov ´i t o´ d o r Towards a new architecture for financial stability in Europe athanasios orphanides Part I The experience of the crisis Weathering the financial storm: the importance of fundamentals and flexibility t h o r va r d u r t j oă r v i o l a f s s o n a n d t h o´ r a r i n n g p e´ t u r s s o n 23 The Irish crisis p h i l i p r l a n e 59 The crisis in Spain: origins and developments a n g e l g av i l a´ n , p a b l o h e r n a´ n d e z d e c o s , juan f jimeno and juan a rojas 81 The financial crisis and the Baltic countries a u r e l i j u s d a b u sˇ i n s k a s a n d m a r t t i r a n d ve e r 97 v vi Contents Part II Accession to the euro area The road to euro adoption: a comparison of Slovakia and Slovenia b i sw a j i t b a n e r j e e , d a m j a n k o z a m e r n i k a n d l ’ u d ov ´i t o´ d o r Is the euro really a ‘teuro’? The effects of introducing the euro on prices of everyday non-tradables in Slovakia m i r o s l av b e b l av y´ The euro’s contribution to economic stability in Central, Eastern and Southeastern Europe: is euro adoption still attractive? e w a l d n owo t ny 10 Is the euro still attractive for CEE countries? z d e n eˇ k t u˚ m a a n d d av i d v a´ v r a 131 157 184 190 Part III The future of the euro area 11 Why the current account may matter in a monetary union: lessons from the financial crisis in the euro area f r a n c e s c o g i ava z z i a n d l u i g i s p ave n t a 199 12 National fiscal rules within the EU framework daniele franco and stefania zotteri 222 13 The road to better resolution: from bail-out to bail-in thomas f huer tas 243 14 Financial stability and monetary policy: lessons from the euro area l a u r e n t c l e r c a n d b e n oˆı t m o j o n 15 Is there a case for price-level targeting? b o r i s c o u r n e` d e a n d d i e g o m o c c e r o 16 Heterogeneity in the euro area and why it matters for the future of the currency union we n d y c a r l i n 268 292 320 Contents vii 17 The euro area: how to regain confidence? v ´i t o r g a s p a r 329 18 How to regain confidence in the euro area? stefan gerlach 335 19 How to save the euro? Lessons from the US j a c q u e s m e´ l i t z 340 Index 344 Figures 4.1 Ratio of private credit to GDP, 1984–2008 page 62 4.2 Net foreign liabilities of the Irish banking system, 2003–10 63 4.3 Current account balance, 1998–2010 64 4.4 Spread between ten-year bonds: Ireland over Germany, 2007–10 70 5.1 Ex post real interest rates, 1995–2008 83 5.2 Age distribution of immigration inflows 84 5.3 Public finances, 1995–2008 84 5.4 Public debt, 1995–2008 85 5.5 External imbalance, 1995–2008 85 5.6 Current account balance, 1995–2008 86 5.7 Demographic changes: data vs model, 1998–2008 88 5.8 Demographic and interest rate changes: data vs model, 1998–2008 90 6.1 Comparison with previous recessions 100 6.2 Comparison of the Baltic States, 2004–9 or 2004–10 106 6.3 Output gap and REER indexes: Baltic States, 2004–9 118 6.4 Merchandise export and REER indexes: Baltic States, 2004–9 118 6.5 Output gaps: Baltic States, July 2010 estimates, 2000–11 120 6.6 Output gap for 2007: forecasts and estimates, 2005–10 121 7.1 Twelve-month HICP inflation and the Maastricht inflation criterion, 2000–10 135 7.2 Unit labour costs, 2000–9 138 7.3 Output gap estimates for Slovakia by alternative methods, 2000–8 139 7.4 Real exchange rates: Slovenia, 2000–10 144 7.5 Exchange rate and forex interventions: Slovakia, 2004–8 146 8.1 HICP inflation: euro area, the Czech Republic and Slovakia, 2001–10 164 viii List of figures 8.2 HICP inflation for passenger transport: Eurozone, Czech Republic and Slovakia, 2001–10 8.3 HICP inflation in restaurants, caf´es and similar establishments: Eurozone, Czech Republic and Slovakia, 2000–10 8.4 HICP inflation in hairdressing salons and personal grooming establishments: Eurozone, Czech Republic and Slovakia, 2000–10 8.5 Perceived inflation: Eurozone, Czech Republic and Slovakia, 2001–10 8.6 Correlation of twelve-month moving sample of the Slovak HICP with Eurozone and Czech HICP, 2001–10 9.1 (a) Output growth, 2006–10 and (b) output differential, 2003–15: CEE and euro area 10.1 GDP per capita: OECD country groups 10.2 Real exchange rates: euro area, normalised, 1999–2009 10.3 Trade balance: euro area 10.4 Inflation rates before and after EMU entry 10.5 Exchange rate and GDP growth during the crisis 10.6 Spreads on government bonds 11.1 The PPF 11.2 Value added in construction, 1999–2009 14.1 Indebtedness of non-financial sectors: US and in the euro area, 1999–2010 14.2 Short-term interest rates and Taylor benchmarks: (a) euro area, (b) US, 1999–2009 14.3 HICP inflation: euro area, 1999–2010 14.4 Effects of shocks to credit standards and stance of monetary policy: euro area countries 14.5 Contribution of credit standards shocks and monetary policy shocks to variance of variables of interest: euro area countries 14.6 Counterfactuals without monetary policy shocks, 1985–2009 14.7 Average daily amount of excess reserves 14.8 ECB key rates, 2006–10 14.9 Spread between three-month interbank and overnight indexed swap (OIS) rates: euro area and US, 2007–9 14.10 Provision and liquidity absorption by Eurosystem, 2007–10 14.11 Covered bond spreads against five-year swap rate, 2008–10 ix 165 166 166 170 171 187 191 191 192 192 193 194 210 213 272 274 275 277 278 280 282 283 284 286 287 338 Stefan Gerlach Commission, which will return to it to the euro area governments on a pro rata basis The net cost will thus be zero: the scheme will simply redistribute income from countries that have borrowed excessively to countries that have pursued more prudent fiscal policies Given the weak state of public finances currently, the rules would only apply to debt issued after January 2011 Since only a fraction of public debt is rolled over annually, it will take several years before the 60 per cent limit is reached However, if the charge is credible, governments will already now have incentives to reduce debt so as to decrease the charge when it becomes applicable Strengthening the European Financial Stability Facility (EFSF) But even if a revised and strengthened SGP, coupled with stricter surveillance through the new EFSA and the incentive effects of the FSC, will reduce the likelihood of a public debt crisis in Europe, some risk will always remain While the EFSF has been established to deal with a sovereign debt crisis, it has been designed to be operational for only three years This raises the risk that borrowers and lenders alike will assume that, after this period is over, we will return to the pre-crisis situation in which there is implicit bail-out insurance Rather than relying on constructive ambiguity to limit deficits, it would be much better to make crystal clear that a bail-out will be available but only on politically and economically very unattractive terms so that no government or investor would want to run the risk of a sovereign debt crisis For instance, euro area governments could agree that financial support would be available to any government that asks for it from the EFSF but any request would trigger an automatic write-down of the outstanding debt by 30 per cent If credible, this condition would make investors hesitant to lend to governments who are facing fiscal problems Similarly, any support would come with strict conditionality and would require budgets to be pre-approved by the European Commission and the EFSA These conditions would raise the political costs of borrowing and provide better incentives for fiscal prudence than the present arrangements However, for such a regime to be credible, the EFSF must be permanent Conclusions Restoring confidence in the euro area requires the tension between national fiscal policy and supra-national monetary policy to be resolved How to regain confidence in the euro area? 339 The SGP must be made more automatic and changed to entail a series of sanctions of increasing severity The political costs of large deficits must be increased in order to provide disincentives to borrowing and investors must be discouraged from lending to governments whose fiscal policies are in disarray To achieve this, stronger institutions are needed It is time to go back to the drawing board and create these 19 How to save the euro? Lessons from the US Jacques M´elitz The problems of the euro area brought to light some failures of the system Nevertheless, the resulting drop in confidence in the system has gone further than one could expect Questions have even arisen about the system’s survival Yet monetary systems not tend to dissolve simply because of faulty performance On the contrary, as a rule they endure even when they function very badly It takes a political force majeure to bring about the break-up of a single currency area, typically without connection to its monetary performance Why, then, has the possible default of a country engaged in irresponsible fiscal policy and accounting for only per cent of the euro area’s GDP raised questions about ‘saving the euro’ and the survival of the Eurozone? The issue has not received the attention it deserves It is often simply taken for granted that the departures from the Stability and Growth Pact (SGP) provide a sufficient reason for the earthquake that has shaken the whole currency area Yet if we look around the world past and present, the mismanagement of finances by regional governments has no particular tendency to bring down entire monetary systems, far from it In line with the usual – I think superficial – diagnosis of the ailment, proposed remedies for the euro area centre on strengthening the SPG, increasing joint political control over fiscal policy and providing joint insurance against government default, or some mixture of the three But what if a vital element of the problem is really the official doctrine that sovereign default is incompatible with the euro? What if the scale of the crisis that took place has resulted from financial markets’ conviction, based on that doctrine, that the future of the euro was at stake? What if assuring the long-run sustainability of the euro means convincing those markets, quite differently, that nothing as manageable as a Greek default can upset the euro area? That is precisely what the US example would suggest and what I will defend In that case, the right road ahead looks quite different It means shifting the emphasis away from avoiding government defaults toward assuring the stability and the solvency of the banking system at all times, regardless of the financial difficulties of some member governments 340 How to save the euro: lessons from the US 341 In the US, default on state and municipal contractual obligations is very much a possibility whenever lower-level governments are in financial trouble; bail-out cannot be taken for granted New York City defaulted in 1975; the biggest default of all by a lower-level government unit since the Second World War took place in 1983 when the Washington Public Power Supply System went into bankruptcy; Orange County defaulted in 1995 Various municipal governments have been on the verge of default at times in the last few decades, including Philadelphia and Cleveland There is also no SGP in the country Yet financial discipline is considerably higher in the US at the state government level than in the European Monetary Union (EMU) at the national level All states except Vermont have balanced budget rules; but these rules are self-imposed It is easy to argue that this difference in fiscal discipline on the two sides of the Atlantic is related to the fact that when push comes to shove in the US and a lower-level government unit cannot or will not meet its debt obligations, the lenders can expect to take a big part of the hit Some rudimentary analysis is relevant Consider any government unit unable to print money and without any prospect of a bail-out Theory tells us that credit rationing is very much a possibility As the interest rate that such a government offers on its debt goes up, extra lending dries up completely at some point as the expected rate of return on the government debt falls This must happen because higher nominal interest rates impair the government’s solvency and bring default nearer Risk aversion simply lowers the interest rate at which credit rationing begins Suppose we compare the situation in the US and the EMU since the 2007–9 financial crisis in this light The crisis brought about dire financing problems for many lower-level government units in the US and some national governments in EMU According to the spreads on credit default swaps, California and Illinois now (September 2010) have a higher probability of non-performance on public debt than Portugal and Spain This has been true for months Consider next the difference in response in the US and Europe Illinois simply stopped paying $5 billion of bills In June 2009, California issued vouchers for wage payments In addition, savage cuts in public services have begun and are now threatened in various states in difficulty, not only these two Nevada has made startling reductions in spending on higher education and welfare In the case of Portugal and Spain, nothing so drastic has happened thus far There have been occasional spikes in interest rate spreads over German bunds of 100 to 200 percentage points above usual levels Both Spanish and Portuguese governments have also been forced to plan greater austerity 342 Jacques M´elitz and reduced government deficit spending, but they have been able and willing to keep borrowing Part of the explanation may be, and probably is, that Portugal and Spain are more able to raise tax revenues than US states But another part is the higher probability of a bail-out in Europe The example of Greece is to the point Greece has been able to continue borrowing in 2010 at interest rates typically around 200 percentage points above Portugal and Spain on ten-year government bonds (and since May 2010 more than 500 percentage points higher than German bunds) If you the maths, it is clear that this could never have happened without a high probability of a bail-out In fact, you not need to the maths: there have been occasions in February–March and particularly May 2010 when some Greek issues would clearly have failed without the assurance of public lending and ECB support If Greece can borrow on the probability of a bail-out so could Portugal and Spain Based on this evidence, the current EMU strategy of treating government default as anathema permits member governments to sink into deeper waters, weakens the forces that would otherwise exist in favour of self-imposed budget restraints and thereby raises the probability of a bail-out But an actual bail-out is perhaps the most likely setting for the breakdown of the euro area If taxes ever need to rise all over the euro area in order to bail out a member government, one can easily imagine a pullout by Germany, followed by the Netherlands and Austria (if no others), in order to form a separate monetary union.1 What are the dangers of the opposite strategy of mimicking the US instead and moving towards heavier reliance on markets to discipline member governments and to price sovereign risk? The answer lies in the external effects of government default on the payments system and the banks, and this problem would be aggravated by contagion But those dangers exist in the US as well If the US federal government were to allow Illinois or California to default on state government debt in today’s circumstances of widespread financial difficulties across the states, there is a serious threat that interest premia would go up on the debt of most state governments and a wave of state defaults would follow For this reason, the federal government might well step in But if we look at the institutional manner in which the US deals with the problem, we find the answer to lie in country-wide prudential rules for banks and Many would say that Greece has already been bailed out But so far no holder of Greek debt has yet suffered a credit event Further, no one outside of Greece has yet paid any taxes to fulfil a claim on Greek debt Thus, according to my usage, no bail-out has happened However, none of the argument hinges on this choice of words How to save the euro: lessons from the US 343 central bank powers of lender of last resort (LOLR) There is no general announcement that state government default is incompatible with the dollar Instead there is a strict separation of the issue of joint support of the financial system and joint support of financing by the subgovernment units in the country Would Europe not be wise to adopt the same strategy and to cease to conflate the two issues? What this would mean, of course, is adopting EMU-wide prudential rules on banks, providing the ECB with full LOLR powers and, very significantly, dismissing the idea that the SGP is the pillar on which the whole Eurozone project stands This idea is highly perilous.2 Markets believe it, and at times of financial precariousness, what markets believe is extremely important According to my proposal, the SGP could still be upheld as a code of good behaviour which improves public finances in Europe and facilitates the task of the ECB But the basic philosophy would be that if any individual member government in the Eurozone engages in irresponsible fiscal conduct, contrary to the SGP, the creditors and its taxpayers would bear the brunt of the consequences Everything would be done to assure the stability of the financial sector in the euro area and the lack of repercussions on the risk premiums that the more financially responsible member governments need to pay Banks might be bailed out but not governments Any aid to member governments, if it came, would not concern the euro system but the International Monetary Fund (IMF), or if any aid did come from the EU it would be part of a programme that could as well have existed had the euro never appeared, and would be clearly sealed off Reference Reinhart, C and K Rogoff (2009) This Time is Different: Eight Centuries of Financial Folly, Princeton University Press If we really think that a government default would bring the euro down, we must conclude that the euro has no long-run future ahead; it is doomed A reading of Reinhart and Rogoff (2009) should convince any one Index Acemoglu, D 32, 57 Acharya, V 271, 290 Advisory Committee on Inter-governmental Relations 225, 240 Aglietta, M 268, 290 Ahrend, R 306, 316 Alesina, A 155, 156 Alessi, L 273, 290 Allen, W 32, 45, 50, 57 Allsopp, C 325, 328 Altissimo, F 162, 183 Amano, R 304, 316 Ambler, S 293, 304, 316 Andr´e, C 225, 232, 241 Andr´es, J 92, 95 Ang, A 304, 316 Angeris, A 292, 316 Antipa, P 275, 279, 280, 290 Aoki, M 300, 316 Aquiar, M 103, 127 ´ 87, 95 Arce, O Ardagna, S 155, 156 Arestis, P 292, 316 Artis, M 188 asset price bubble 29, 215, 272, 304–6, 321 Auerbach, A 86, 95 Austria 45, 184, 185, 235, 237, 342 Ayuso-i-Casals, J 225, 226, 227, 240 Back´e, P 186, 188 bail-in 243–4, 255–66 bail-out 244–9 Baily, M 264, 267 Bakker, B 110, 112, 127 Balassa–Samuelson effect 158, 169, 321 Balassone, F 223, 230, 234, 238, 240 Baldwin, R 185, 188 Baltic countries 97–126, 193 Banca d’Italia 224, 226, 235, 238, 240 344 ˜ 91, 95 Banco de Espana Banerjee, B 5, 137, 139, 156 Banker, The 53, 58 banking crisis 24, 27, 32, 39–43, 44–6, 47, 49, 50, 51, 65, 67–9 banking system 24, 29, 41, 44, 48 bank resolution 15–16, 68, 72–3, 78, 243–66 Barajas, A 31, 57 Barro, R 203, 220 Barth´elemy, J 280, 290 Basel Committee on Banking Supervision (BCBS) 10, 13, 17, 19, 263, 266 Batini, N 309, 311, 318 Baumann, E 230, 240 Bean, C 219, 220 Beblav´y, M Beck, T 79 Becker, T 98, 127 Beetsma, R 73, 79, 323, 328 Bekaert, G 304, 316 Belgium 45, 235, 236 Benati, L 292, 317 Berg, C 312, 317 ă E 98, 127 Berglof, Berkman, P 24, 32, 57 Bernanke, B 249, 266, 272, 290, 300, 317 Bernoth, K 331, 333 Bini Smaghi, L 18, 19 Blanchard, O 47, 57, 98, 127, 203, 208, 209, 220, 296, 297, 298, 317 Blanco, R 83, 95 Blinder, A 289, 290 Bloxham, P 57 Bodmer, F 229, 240 Bole, V 156 Bordes, C 281, 290 Borgy, V 272, 273, 290 Boschan, C 98, 127 Bossu, W 15, 20 Brachinger, H 159, 160, 183 Braz, C 234, 242 Index Brixiova, Z 98, 111, 123, 127 Brunila, A 333, 334 Bry, G 98 Buchanan, J 223, 240 Buiter, W 29, 57 Bul´ırˇ, A 192, 196 business cycle fluctuations 98–104, 124 Buti, M 333, 334 ´ C 292, 317 Calderon, Calmfors, L 236, 240 Calomiris, C 17, 19 Calvo, G 103, 127 Camdessus, M 232, 240, 241 Campa, M 87, 95 Campbell, J 264, 267 Capie, F 317 Capiello, L 331, 333 capital (adequacy) requirements 10, 19, 69, 71, 123, 251, 256, 263, 266 capital inflows 30, 38, 48, 99, 103, 105, 109, 110–11, 112–13, 125, 143, 145, 186, 199, 201, 211, 214, 219, 272 Carlin, W 4, 5, 322, 323, 326, 327, 328 Carvalho Filho, I 49, 57 Cassola, N 282, 290 Cecchetti, S 26, 50, 57 Central and East Europe (CEE) 186, 190–6 central bank independence 44, 49, 52, 324 Central, Eastern and Southeastern Europe (CESEE) 184–8, 193, 195–6 Chadha, J 317 channels of propagation of crisis 23–4, 28–32, 47–52, 104–8 Chinn, M 30, 57 Christiano, L 279, 290 Christl, J 156 Ciccarelli, M 276, 290 Cigan, H 137, 156 ˇ ak, M 16, 20 Cih´ Claessens, S 10, 20, 24, 28, 29, 33, 57, 98, 127, 264, 266 Clerc, L 5, 220, 272, 273, 281, 290 Cloyne, J 323, 328 Cobham, D 58, 183 Cochrane, J 264, 267 Cogley, T 300, 317 Coibion, O 300, 317 Coletti, D 307, 311, 317 competitiveness 75, 81, 95, 104, 117–19, 125, 324 contingent capital 70, 71, 264–6 Cortavarria-Checkley, L 15, 20 Costello, D 331, 333 345 Coulibaly, B 33, 57 Council of the European Union 14, 16, 17, 20, 226, 240 Courn`ede, B 5, 316 Cover, J 295, 307, 317 Crawford, A 304, 317 credit growth 11, 24, 61, 62–3, 75, 77, 81, 82, 111, 112, 113, 125, 140, 202, 214, 219, 269, 271–3, 276, 280 cross-border crisis management 9, 13–19 currency crisis 24, 27, 32, 43–6, 48, 49, 51 current account deficits 85–6, 89, 90, 93, 94, 95, 199–220 Cyprus 11, 162, 168, 172–3, 179 Czech Republic 99, 110, 158, 162–79, 193, 194, 195 Dab´an, T 238, 240 Dabuˇsinskas, A Daianu, D 98, 127 Dalgic, E 137, 141, 156 Danninger, S 224, 240 Darvas, Z 98, 127 Das, M 98, 127 Davis, E 29, 30, 57 Debrun, X 236, 237, 240 debt government 31, 36, 59, 81, 108, 200 private sector 31, 36, 47, 82, 201, 213, 271 De Castro, F 234, 242 deflation 65, 69, 292 De Larosi`ere, J 12, 13, 20, 219 Dell’Ariccia, G 24, 28, 29, 31, 33, 47, 57, 296, 297, 317 Delors Report 330, 331, 333 ă Demirguc-Kunt, A 29, 57, 79 demographic factors 82, 84, 87, 88–9, 222, 329–30 Denmark 45, 70, 326 Deroose, S 237, 238, 240, 242 Detken, C 273, 290 Detragiache, E 29, 57, 238, 240 Deutsche Bundesbank 230, 231, 235 Dhyne, E 308, 317 Diamond, D 267 Di Bella, G 238, 240 DoddFrank Act 262, 263 Dokko, J 77, 79 ă Donnebrink, E 230, 240 Dooley, M 30, 57 Doyle, B 77, 79 Druant, M 161, 183 Drummond, P 156 Duffie, D 264, 267 346 Index Dutta, J 159, 161, 183 Dvorsky, S 186, 188 ´ Egert, B 186, 188 Eggertsson, G 295, 317 Ehrmann, M 162, 183 Eichenbaum, M 279, 290 Eichengreen, B 77, 79, 235, 241 Eitrheim, O 58 emigration 115–16, 125 Engle, R 331, 333 Ercolani, M 159, 161, 183 Estonia 45, 97–126, 185 Estrada, A 82, 95 euro adoption 131–55, 157–79, 184–8 Eurobarometer 14, 16, 163, 164 euro/dollar exchange rate 75 euro notes and coin 157–79 European Banking Authority 12, 13 European Central Bank (ECB) 14, 50, 69, 72, 77, 114, 127, 140, 141, 143, 146, 147, 153, 156, 159, 160, 183, 202, 205, 206, 217, 220, 245, 281–8, 315, 332, 333, 337, 343 European Commission 13, 17, 20, 73, 79, 86, 95, 98, 119, 123, 127, 140, 141, 143, 147, 148, 150, 151, 156, 157, 163, 183, 185, 188, 199, 200, 202, 203, 205, 206, 218, 219, 220, 223, 227, 234, 236, 241, 333 European Council Conclusions 334 European Financial Stability Agency (EFSA) 336–8 European Financial Stability Facility (EFSF) 18, 70, 78, 338 European Financial Stability Mechanism (EFSM) 70 European (Economic and) Monetary Union (EMU), 43, 49, 50, 51, 52, 74, 77, 82–6, 199, 215, 222 European Stabilisation Mechanism (ESM) 78 European Systemic Risk Board (ESRB) 12, 13, 78, 219, 289 European Union Supervisory Authorities (ESAs) 12, 220 EU (van Rompuy) task force on economic governance 17, 86, 223, 235, 242, 332, 333, 334 Evans, C 279, 290 exchange rate regimes 32, 36, 39, 195–6 Exchange Rate Mechanism (ERM) II 133–4, 137, 142–8, 152–4 Fabiani, S 161, 183 Fagan, G 75, 79, 83, 208, 209, 220 Faruqee, H 98, 127 Fat´as, A 292, 317 Federal Deposit Insurance Corporation Improvement Act (FDICIA) 247, 248, 262 Federal Ministry of Finance 230, 231, 241 Fernandez-Arias, E 30, 57 Fidrmuc, J 186, 188 financial stability 8–19, 268–90 Financial Stability Board (FSB) 13 Finland 86, 116, 193, 222, 237 fiscal balances 24, 31, 44, 48, 59, 60, 61, 66–7, 69, 70, 75, 76–7, 84, 114, 149, 200 fiscal consolidation 81, 82, 84, 91–2, 95, 124, 133, 140, 148, 150, 151, 190, 222, 225, 337 fiscal institutions, independent 77, 235–7, 321, 324 fiscal policy 77, 79, 87, 91–2, 94, 104, 114–15, 123, 124, 125, 148–52, 322–7 fiscal rules 222–39, 330–1 Fischer, J 228, 241 Fischer, S 307, 317 Flores, E 240 Fonteyne, W 15, 20 Forbes, K 30, 57, 113 foreign bank ownership 108, 111 foreign direct investment (FDI) 30, 61, 62, 110, 145, 211 France 86, 160, 215, 232 Francese, M 238, 240 Franco, D 4, 223, 230, 234, 240, 333, 334 Francois, J 186, 188 Frankel, J 27, 57 Fratzscher, M 32, 57 French, K 264, 267 Friedman, M 186 Fry, M 56, 57 Gal´ı, J 289, 290, 296, 297, 308, 317, 318 Gardo, S 98, 127 Gaspar, V 4, 18, 20, 75, 79, 83, 95, 208, 209, 220 ´ 3, 82, 87, 95, 96 Gavil´an, A Geanakoplos, J 323, 328 Gelos, G 24, 32, 57 Gerlach, S 3, 4, 58, 331, 334 Germany 45, 86, 157, 158, 160, 193, 222, 229, 230–2, 233–5, 237, 239, 325–7, 342 Gertler, M 297, 308, 317, 318 Ghosh, S 113, 127 Index Giannoni, M 308, 318 Giavazzi, F 3, 90, 96, 203, 208, 219, 220 Gimeno, R 83, 96 Giovannini, A 219, 220 Giuliodori, M 73, 79 Giustiniani, A 15, 20 Gligorov, V 98, 127 Glyn, A 325, 327, 328 Goodhart, C 317 Gopinath, G 103, 127 Gorodnichenko, Y 300, 317 Greece 16, 74, 86, 188, 194, 199, 200, 203–7, 213–18, 342 Greenspan, A 271, 290 Greulich, G 183 Group de travail pr´esid´e par Michel Camdessus 232, 241 Guender, A 307, 313, 318 Guichard, S 225, 232, 241 Guid´ee, R 232 Gulde, A.-M 110, 113, 127 Gullo, A 15, 20 Hallerberg, M 235, 242 Harding, D 98, 127 Hardy, D 20 Hauner, D 236, 237, 240 Hausmann, R 235, 241 Hern´andez, D 240 Hern´andez de Cos, P 3, 82, 87, 96 Hernando, I 161, 183 Herring, R 10, 20, 264, 266 HM Treasury 228, 241 Hochreiter, E 153, 156 Holthausen, C 282, 290 Honohan, P 60, 61, 67, 71, 75, 76, 79, 80, 213, 217, 220 ă Hordahl, P 318 housing sector see property market Huertas, T ă Hufner, F 160, 183 Hungary 45, 71, 110, 113, 158, 237 Hunt, C 75, 80 Hurn´ık, J 192, 193, 196 Iacoviello, M 275, 279, 290 Iceland 25, 28, 32, 44, 45, 46, 50, 71, 77 Igan, D 24, 28, 29, 33, 57 immigration 76, 81, 83–4 incidence of crisis 23–39, 47–50, 51–2 inflation 24, 31, 34, 36, 41, 44, 47, 134–41, 273 inflation targeting (IT) 32, 36, 43, 195, 292 Ingram, J 202, 207 Inman, R 224, 231, 241 347 Inter-American Development Bank (IADB) 225, 241 interest rates 61, 64, 71, 74, 77, 78, 81, 83–92, 103, 104, 105, 109–12, 114, 125, 140, 143, 145, 146, 148, 155, 203, 217, 268, 270, 271, 276, 281, 284–5, 288, 293, 294, 295, 296, 297, 304, 309, 310, 312, 313, 316 interest rate (yield) spreads 63, 114, 244, 248, 284, 341 see also sovereign bond spreads international linkages 30, 36, 38, 39, 48–9 International Monetary Fund (IMF) 10, 18, 20, 67, 68, 69–74, 98, 127, 151, 194, 196 intertemporal budget constraint 207–12 Ireland 32, 45, 59–79, 116, 140, 188, 199, 200, 203–7, 213–18, 321 Ireland, P 304, 316 Italy 86, 140, 160, 204 Jăaaă skelăa, J 308, 318 Jaumotte, F 217, 221 Jevˇca´ k, A 137, 156 Jimeno, J 3, 82, 87, 95, 96 Johnson, S 32, 57 Jonk, S 234, 242 Jonung, L 235, 241, 312, 317 Julius, D 56, 57 Kashyap, A 264, 267 Kastrop, C 230, 240 Kelly, M 61, 62, 64, 80, 213, 214, 217, 221 Kennedy, M 225, 232, 241 Kent, C 57 Kerr, S 20 Khan, C 298, 317 Kiley, M 77, 79 Kim, J 77, 79 Kirchler, E 160, 183 Kletzer, K 30, 57 Kohler, M 26, 50, 57 Konuki, T 139, 156 Kopits, G 224, 225, 226, 231, 237, 241 Korniyenko, Y 98, 127 Kose, A 30, 58, 98, 127 Koske, I 160, 183, 234, 241 Kotlikoff, L 86, 95 Kozamernik, D 5, 137, 143, 156 Kremer, J 234, 242 Kryvstov, O 309, 318 Kuijs, L 156 Kumar, M 224, 226, 234, 236, 237, 240, 242 348 Index Kuttner, K 31, 58 Kwapil, C 161, 183 labour markets 60, 64, 73, 76, 81, 82, 86, 91, 92–4, 104, 109, 115–16, 125, 133, 138, 140, 155, 320, 326 Laeven, L 24, 27, 28, 29, 33, 53, 56, 57, 58 Lalonde, R 307, 311, 317 Lamfalussy, A 331, 334 Landau, B 161, 183 Landesmann, M 98, 127 Lane, P 3, 24, 28, 30, 54, 58, 59, 60, 61, 66, 67, 74, 75, 76, 77, 80, 98, 127, 215, 221, 328 Larch, M 234, 235, 241, 242 Lasierra, L 213, 217, 221 Latvia 45, 71, 97–126 Levchenko, A 30, 31, 57, 58 Levine, R 79 Lewis, L 30, 58 Liebscher, K 156 Lilico, A 304, 318 Linehan, S 234, 242 liquidity facilities 50, 69, 281–8 liquidity requirements 10, 19, 251 Lithuania 97–126 living wills 243, 250 Ljungman, G 238, 242 ´ Lopez-Salido, D 297, 318 ă Losch, M 183 Loupias, C 161, 183 Luxembourg 45 Maastricht criteria 133–55, 168, 202, 218 Maastricht Treaty 224, 226 MacKellar, L 156 macro-prudential regulation 10, 11–12, 19, 289 Maddaloni, A 276, 290 Mahadeva, L 56, 57 Malo de Molina, J 82, 95 Malta 32, 162, 168, 172 Marino, M 234, 242 Marqu´es, J 83, 96 Martin, A 87, 96 Martin, R 98, 127, 186, 188 Martinez-Mongay, C 213, 217, 221 Martins, F 161, 183 Marx, M 280, 290 Marzinotto, B 202, 221, 330, 334 Mastrobuoni, G 159, 160, 183 Mathăa, T 161, 183 Mauro, P 47, 57, 296, 297, 317 McGuire, P 54, 58 Meh, C 304, 305, 317, 318 M´elitz, J 2, 325, 328 Mengus, E 275, 279, 280, 290 Merton, R 250, 266 Mihov, I 292, 317 Milesi-Ferretti, G 24, 28, 30, 54, 58, 59, 80, 98, 127, 238, 240 Ministry of Finance of the Slovak Republic 140, 156 Mishkin, F 264, 267, 292, 318 Moccero, D Mody, A 230, 242 Moessner, R 32, 45, 50, 57 Mojon, B 5, 220, 268, 275, 279, 280, 290 Molineux, P 290 monetary policy 32, 47, 77, 83, 108, 133, 142–8, 155, 217, 219, 268–90, 292, 323, 324 unconventional 270, 285–8 Mooslechner, P 156, 188, 196 moral hazard 13–19, 71, 254 Morgan, M 98, 127 Morris, R 234, 242 Moulin, L 225, 226, 227, 237, 238, 240, 242 Muir, D 307, 311, 317 ă Muller, C 183 ¨ Munchau, W 230, 242 Murgasova, Z 156 Nakamura, E 308, 318 Nelson, E 311 Netherlands 45, 71, 222, 235, 237, 342 Neumeyer, P 103, 128 New Zealand 226 Nier, E 16, 20 Nolan, C 311, 317 Norway 45 Nowotny, E 6, 184, 188, 196 Obstfeld, M 32, 58 ´ Odor, L Oh, D 307, 313, 318 ´ Olafsson, T 4, 6, 28, 58 Organisation for Economic Cooperation and Development (OECD) 230, 234, 242 Orphanides, A 2, 12, 219, 221, 329 Ortega, E 92, 95 output gap 31, 35, 110, 114, 115, 117, 119–22, 126, 137, 138–41, 154, 234, 294, 295, 307, 309, 311, 322, 324 Index Pagan, A 98, 127 Pain, N 234, 241 Parkin, M 293, 318 Paulson, H 246, 267 Paustian, M 219, 220 Pecorino, P 295, 307, 317 Penalver, A 219, 220 Perold, A 250, 266 Perri, F 103, 128 Perry, F 103, 128 Petrovic, P 98, 127 P´etursson, T 4, 6, 28, 31, 54, 55, 58 Peydro, J 276, 290 Pigou, A 224, 231, 242 Pisani-Ferry, J 18, 20, 98, 127, 202, 221, 330, 334 Plekhanov, A 98, 127 Poissonnier, A 280, 290 Poland 110, 113, 158, 186, 194 Poole, W 270, 290 Portugal 74, 86, 188, 200, 203–7, 213–18, 237, 342 Posen, A 31, 58 Pradelle, P 137, 156 Prasad, E 30, 58 preferred stock 253, 254, 256, 257, 259, 265 Price, R 306, 316 price-level targeting 292–316 product market imperfections 92–4 productivity growth 60, 62, 82, 90, 137, 145, 147, 204–7, 216 property market 11, 59, 61, 62–5, 77, 82, 87, 105, 111, 213, 214, 215, 270, 280 prudential regulation 9–14, 19, 71, 123, 219 see also macro-prudential regulation Purfield, C 124, 128 Qvigstad, J 58 Rajan, R 29, 57, 264, 267 Randveer, M 6, 115, 116, 128 recapitalisation of banks 59, 66, 67, 68, 70, 72 Regling, K 76, 80 Reinhart, C 74, 80, 300, 343 Reinhart, V 74, 80, 317 Renne, J.-P 272, 273, 290 Rennhack, R 24, 32, 57 reserve requirements 108, 123, 126, 219 Restoy, F 83, 95, 331, 334 Richardson, M 290 Riksbank 111, 128 R´ıos-Rull, J 305, 318 349 ă Ritzberger-Grunwald, D 156, 185, 188, 196 Robinson, J 32, 57 Roger, S 56, 57 Rogoff, K 343 Rojas, J 3, 82, 86, 87, 96 Romer, C 323, 328 Romer, D 323, 328 Romh´anyi, B 237, 241 ˜ Ro˜ om, T 115, 116, 128 Rosati, D 98, 127 Rose, A 24, 27, 29, 30, 33, 57, 292, 317 Rosenberg, C 124, 128 Rowthorn, R 325, 328 Rudebusch, G 308, 318 Russia 45, 116 Sabbatini, R 161, 183 Sachs, J 325, 328 Sala-i-Martin, X 203, 220, 325, 328, 330 Sapir, A 98, 127, 202, 221, 334 Schadler, S 156 Schalck, C 234, 242 Scharfstein, D 264, 267 Scharler, J 188 Scheiber, T 186, 188 Schmidt-Groh´e, S 300, 318 Schmidt-Hebbel, K 292, 317, 318 Schnabl, P 271, 290 Schnadt, N 317 Schoenmaker, D 10, 20, 264, 266 Schuknecht, L 234, 242, 331, 332, 333, 334 Schultz, A 331, 334 Serven, L 29, 57 Shambaugh, J 32, 58 Shephard, K 331, 333 Sherlund, S 77, 79 Shi, H 137, 139, 156 Shiller, R 264, 267 Shin, H 264, 267 Shukayev, M 309, 318 Sibert, A 29, 30, 57 Sim, J 77, 79 Slaughter, M 264, 267 Slovakia 14, 110, 131–55, 157–79, 184, 185, 193, 194 Slovenia 131–55, 162, 168, 172–3, 179, 185 Smets, F 162, 183, 279, 280, 291, 297, 302, 307, 309, 310, 318 Sodsriwiboon, P 217, 221 Soskice, D 322, 323, 327, 328 sovereign bond spreads 60, 69, 185, 320, 331–2, 341 350 Index Spain 45, 74, 81–95, 140, 160, 188, 199, 200, 203–7, 213–18, 222, 226, 271–3, 342 Spaventa, L 3, 90, 96 Spiegel, M 24, 29, 30, 33 ˇ Sramko, I 146, 156 Stability and Growth Pact (SGP) 18, 87, 152, 218, 219, 224, 226, 233, 322, 332, 335–6, 340 Stahl, H 161, 183 Stark, J 331, 334 Stehn, S 230, 242 Stein, J 264, 267 Steinsson, J 308, 318 Sterne, G 56, 57 Stier, W 183 Stix, H 160, 183, 186, 188 Stokman, A 183 Storesletten, K 86, 96 Strauch, R 235, 242 Stulz, R 264, 267 Su´arez, J 82, 96, 213, 214, 217, 221 subordinated debt 67, 72, 253, 254, 256, 257, 259, 264, 265 supervision 10, 11, 12–14, 19, 212, 248 Surti, J 140, 156 Svensson, L 295, 301, 302, 307, 318 Sweden 45, 70, 76, 116, 193, 222, 228, 237, 239, 312–15, 324, 326 Swedish Fiscal Policy Council 228, 237, 242, 325, 328 Switzerland 45, 222, 229 Symansky, S 224, 225, 231, 238, 240, 241 systemic risk 10, 11, 12, 15, 76, 79, 247, 289 Takats, E 113, 128 Tavlas, G 153, 156 tax revenues 64, 66, 149, 151, 217 Taylor, A 32, 58 Taylor, J 219, 271, 273, 291 Taylor, T 219, 220 Taylor rule 219, 273, 297, 308, 311 Terajima, Y 304, 305, 317, 318 Ter-Minassian, T 224, 226, 242 Terrones, M 30, 58, 98, 127 Tesar, L 30, 58 Thaicharoen, Y 32, 57 Tirole, J 333, 334 Tkacevs, O 242 Tong, H 30, 58 Tosetto, E 234, 242 Trichet, J.-C 330, 334 ˚ Tuma, Z 6, 193, 196 Turrini, A 225, 226, 227, 234, 240, 242 Ueberfeldt, A 309, 318 unemployment 61, 65, 73, 81, 95, 104, 169 United Kingdom (UK) 45, 60, 63, 65, 70, 71, 76, 116, 222, 226, 227–8, 272, 321, 325 United Nations (UN) 329, 334 United States (US) 30, 45, 46, 60, 61, 212, 224, 245, 246, 247, 248, 251, 263, 271, 273, 283, 289, 325, 340–3 Upper, C 26, 50, 57 Uribe, M 300, 318 US House of Representatives 266 Valencia, F 27, 53, 56, 58 Vall´es, J 92, 95 Van Den Heuvel, S 77, 79 Van Elkan, R 156 Van Rompuy, H see EU task force on economic governance Vartia, L 98, 111, 123, 127 V´avra, D 6, 193, 196 Vegh, C 103, 127 Velculescu, D 148, 156 Ventura, J 87, 96 Vestin, D 307, 318 Vines, D 325, 328 Von Hagen, J 235, 237, 241, 242, 332, 333, 334 Von Peter, G 54, 58 Walsh, B 60, 80 Walsh, J 24, 32, 57 Walters, A 199, 218, 221, 321, 328 Watson, M 76, 80 Weder di Mauro, B 98, 127 Wei, M 304, 316 Wei, S 30, 58 Wieland, J 300, 317 Wierts, P 73, 79, 225, 237, 240, 242 Williams, J 271, 291, 307, 319 Wilson, J 290 ´ Wojcik, C 186, 188 Wolff, G 331, 334 Wolswijk, G 332, 334 Woodford, M 295, 296, 298, 300, 317, 319 ă Worgotter, A 98, 111, 123, 127 ă J 185, 186, 188 Worz, Wouters, R 279, 280, 291, 297, 302, 318 ¨ Wurtz, F 282, 290 Index Wurzel, E 225, 232, 241 Wyplosz, C 235, 242 Yaniz Igal, J 213, 217, 221 Yates, A 309, 318 Yoshikawa, H 300, 316 Yun, T 300, 319 351 ˇ akov´a, P 137, 156 Z´ Zettelmayer, J 98, 127 Zotteri, S 4, 234, 238, 240 Zumer, F 325, 328 ˇ Zumer, T 137, 143, 156, 186, 188 .. .The Euro Area and the Financial Crisis The financial crisis of 2007–10 has presented a number of key policy challenges for those concerned with the long-term stability of the euro area It... conference on The Euro Area and the Financial Crisis , held in Bratislava from to September 2010” – Introd Includes bibliographical references and index ISBN 97 8-1 -1 0 7-0 147 4-9 Monetary policy – European... Slovenska (the National Bank of Slovakia) for the invitation to address this conference on The Euro Area and the Financial Crisis I focus on a few issues related to the question of how the financial