Squaring the Circle: A QE for the ECB

The European Central Bank is in a pickle.  The pillars of monetary policy, money supply growth and inflation, are crumbling.  The main interest rate it influences, the repo rate, is already at a lowly 25 bp.  Excess liquidity is trending lower as European banks returned funds borrowed under the Long Term Repo facility. This is […]

Could Mario Draghi Implementing QE at the ECB Possibly Help Matteo Renzi Raise the Italian Deficit?

What a convoluted title! Still, the lack of formal elegance might just be compensated for by its communicative efficacy. The aim of the above header is to link two names in people’s minds, both of them Italian: Mario Draghi and Matteo Renzi. Naturally the idea is not original, the FT’s Peter Spiegel  recently published an […]

Revisiting Banking Union in a Single Currency Area (Part 2)

The current banking union framework remains far from ideal if the currency union dimension is taken into account. While decisions so far have been focusing on the moral hazard of banks, these measures fail to solve an additional market failure in the Euro area caused by the moral hazard of governments competing on funding costs, […]

Revisiting Banking Union in a Single Currency Area (Part 1)

Evidence suggests that financial integration in the Euro area is retrenching at a quicker pace than outside the union. Home bias persists. Meanwhile, governments continue to compete on their funding costs via interventions to support ‘their’ banks, avoiding spill over effects on costs of public debt but so distorting the level playing field with massive […]

Liikanen Out of the Blocks

Introduction On 29 January 2014, the EU Commission published a legislative proposal and accompanying press release regarding a regulation on structural reform of the EU banking sector.  Recognising that the Bank Recovery and Resolution Directive will be unable to address the issue of “too-big-to-fail” in its entirety, and in furtherance of the political agenda to […]

Draghi Reiterates Forward Guidance

The most important take away from ECB President Mario Draghi’s initial remarks is that he has reiterated the forward guidance that rates will remain this low or lower for an extended period. There were some suspicions, given clear signs of an economic recovery, judging from the PMI data, which Draghi did acknowledge. Draghi also revealed […]

Autumn’s Known Unknowns

During the height of the Iraq war, then-U.S. Secretary of Defense Donald Rumsfeld spoke of “known unknowns” – foreseeable risks whose realization is uncertain. Today, the global economy is facing many known unknowns, most of which stem from policy uncertainty. In the United States, three sources of policy uncertainty will come to a head this […]

Evidence of Hampered Monetary Policy Transmission Channel in the Euro Area

Mario Draghi cautioned on the ‘hampered’ transmission channel of monetary policy in his now famous London speech last week: To the extent that the size of these sovereign premia hampers the functioning of the monetary policy transmission channel, they come within our mandate. I referred to the clogging of rates policy back in April via […]