Euro Crisis Research Articles

Central bank policies and financial markets: Lessons from the euro crisis

In a novel econometric framework, we identify differences and significant asymmetries in financial markets' responses to the European Central Bank (ECB)'s various policy interventions during the eurozone crisis. Dollar liquidity interventions reduced stress in bond markets and improved economic sentiment, as reflected in higher equity prices. In contrast, the ECB's euro liquidity provisions and monetary stimulus measures delivered modest results. In both these cases, government bond spreads typically did decline but the risk of large spread increases and equity losses also increased. Only the Outright Monetary Transactions (OMT) intervention had a substantial expansionary effect. The results emphasize the importance of unambiguous monetary policy for driving market expectations.

A Tide that Lifts Some Boats: Assessing the Macroeconomic Effects of EU Enlargement

Abstract Based on two-country scenarios (entrants vs. incumbents), this paper employs the synthetic control method to quantify the macroeconomic effects of the European Union (EU) enlargement, and examines whether these effects varied before, during, and after economic crises. We find that enlargement effects are very complex, and significantly varied across economic cycles and the country groups. In particular, EU enlargement induced large and positive effects on the entrants which were merely stifled in the wake of the financial crisis and the subsequent euro crisis. In the interim, the 2004 enlargement triggered an instantaneous negative shock on the incumbents which was further exacerbated by the crises. Subsequently, the entrants recovered beyond their pre-crises gains, registering approximately 14 % higher per capita incomes by 2019, with Poland emerging as a clear winner. Meanwhile, incumbents’ per capita incomes have, on average, declined by approximately 9 %. While our findings largely support the notion that the entrants are en route to catching up with their incumbent counterparts, a formal β-convergence analysis exploiting the observed and synthetic data intuitively confirms that EU integration reduces the half-life by 50 %.

Private bank deposits and macro/fiscal risk in the euro-area

We use a panel of ten euro area member states to examine the link between macro/fiscal risk and private bank deposits relative to Germany. Our main findings are summarised as follows: First, the relationship between relative deposits and macro/fiscal risk factors is not stable over time. Second, the significant time variation characterizing this relationship is driven by aggregate EMU-wide macro/fiscal risk conditions. Third, relative deposits in periphery EMU countries are generally more responsive to macro/fiscal risk. Fourth, the ECB’s unconventional monetary policy moderated the effect of the global financial and European debt crises on the relationship between relative deposits and macro/fiscal risk. Our empirical findings can inform the ongoing policy debate regarding the completion of the European Banking Union.

Stuck in 2012: The hesitant geographies of European financial integration since the Eurozone crisis

At the heart of the Eurozone crisis was a dramatic divergence in interest rates between member states and a reversal of previously booming cross-border credit expansion from ‘core’ to ‘periphery’ by European banks. The resulting crisis and retreat behind national borders across the Eurozone challenged European elites’ decade-long project of producing European scale as a space for financial accumulation. The Eurozone crisis has been well-described but post-crisis geographies of financial integration have received limited attention. We chart the financial positionality of member states and the relations between them in the period 2012–2019 using a variety of metrics including intra-Eurozone cross-border bank lending. The post-crisis period is dominated by the European Central Bank’s determination to do ‘whatever it takes’ to save the Euro and its financial system. The resulting asset purchases give it a qualitatively different place in the Eurozone financial system and end the crisis period’s retreat behind national borders. But they do not restore pre-crisis dynamics, and, in addition, unevenness along national lines remains. The crisis era core and peripheral labels still hold but the data also reveal important nuances: not least that the distribution of giant banks matters and offshore financial centres cut across core/periphery boundaries. Yet, even as there is no return to booming core-to-periphery credit, German lending into the Eurozone and its counterpart, Italian borrowing, symbolizes the continuing fragility of the Eurozone banking system. European Central Bank efforts ended the crisis, but more than asset purchases will be required if we are not to remain stuck in 2012.

How the Eurozone shapes populism: a comparative political economy approach

ABSTRACT The rise of populist parties is a defining feature of political change in the advanced capitalist countries. Whereas a large body of research explores populist parties in domestic politics, we know little about how populist parties of right and left have responded to the transformation of the transnational Eurozone regime. In this paper, we show how the diverse exposure to the costs and benefits of EMU can explain their EU-level economic policy positions and thereby create opportunities for populist alliances across the left-right divide. In the debtor countries of Southern Europe, populist parties of both right and left have resisted demands for neoliberal reform during the Euro crisis while supporting fiscal risk-sharing arrangements during the COVID-19 pandemic, making populist left-right coalitions possible. In the creditor countries of Northern Europe, by contrast, populist right and left parties have been fundamentally divided throughout. Based on case study analyses of Germany and Italy, the most prominent creditor and debtor countries, our findings suggest that populist parties may only find common ground when ‘Brussels’ interferes in domestic policy-making autonomy by imposing neoliberal reform.

Legal Strategies at the Governance Precipice: Transnational Lawyers in the European Union’s Sovereign Debt Crisis (2010–2012)

How do transnational lawyers valorize their expertise in a political and economic crisis? This article argues that knowing how transnational lawyers valorize their expertise is critical to understanding how transnational law evolves and affects society, especially when existing legal frameworks prove to be inadequate and novel practices must pave new paths. Using the acute phase of the Eurozone crisis between 2010 and 2012 as an empirical case, I examine how European Union (EU) legal agents constructed a framework that accommodated the uncertainty of governing a crisis while also mediating the contentious politics between EU Member States. The analysis shows that as intergovernmental bargaining dominates Eurozone crisis governance, EU legal advisors intervene to reconcile these bargains with the EU legal order using novel practices that simultaneously valorize their legal expertise. These practices in effect engender a high degree of interdependence and interconnection between the EU legal order and several intergovernmental arrangements—especially the European Stability Mechanism—leading to the creation of a unique form of EU governance: semi-intergovernmentalism. This article contributes to debates on legal globalization by empirically examining how transnational legal agents valorize their expertise through strategies directed at defending their autonomy while protecting the normative coherence of their transnational legal order: the EU.

Tourism market in turbulent times: evidence of asymmetric connectedness

ABSTRACT Tourism markets have faced significant challenges due to global geopolitical and economic events. This study aims to investigate the asymmetric connectedness across regional and country-level tourism markets. By employing a time–frequency-domain analysis informed by the efficient market hypothesis and modern portfolio theory, we construct connectedness networks for both regional and country-level markets. Our findings reveal a strong asymmetric connectedness in these markets, with negative return spillovers being particularly prominent during events such as the 9/11 attacks, London and Madrid bombings, the 2007–2009 global financial crisis, European debt crisis, Syrian and Libyan civil wars, the emergence of ISIS, and the COVID-19 outbreak. These insights offer valuable implications for stakeholders in regional and country-level tourism markets and suggest effective strategies for recovery and resilience.

Reservation Rates in Interbank Money Markets

AbstractThis paper proposes a dyadic econometric model with reservation rates to control for endogenous matching in interbank money markets. We apply our method to a unique data set and study the interbank market during the European sovereign debt crisis. The estimates uncover the existence of reservation rates, their omission can bias important quantities like the discount enjoyed by big banks, a potential measure of the “too‐big‐to‐fail” subsidy. We test predictions of various theories on the interbank market. The market did not freeze completely during the crisis and active peer monitoring was still in place under limited information asymmetry. Dispersion in rates and liquidity hoarding was driven by banks' nationality, regardless of the borrower quality.

In Europe we trust: selecting and empowering EU institutions in disruptive circumstances

ABSTRACT Over the past decade, the European Union (EU) made significant strides in economic and fiscal policy integration without formal treaty-based changes. After the euro crisis, member states granted the European Central Bank banking supervisory powers. During the pandemic, they entrusted the European Commission with raising EU debt through NextGenerationEurope. This article examines the empowerment of supranational institutions as a deliberate ajustment to disruptive circumstances. By so doing, it demonstrates that empowerment can happen through legislative acts and joint decisions by member states. The study reveals that when states have multiple agent options, like in the banking union, they select the institution they trust the most. Conversely, in nested delegation games, extensive monitoring and reporting requirements, as in the case of NextGenerationEurope, are aimed at avoiding the defection of single member states, what we call ”principal slack”, at the implementation stage.

Why reconnect to nature in times of crisis? Ecosystem contributions to the resilience and well‐being of people going back to the land in Greece

Abstract Multiple crises, including climate change, ecosystem degradation, economic, political and social upheavals, severely impact people's well‐being. Ecosystem services (or nature's contributions to people) play a key role during crisis that needs to be further elucidated. Most research focusses on the material benefits that ecosystems provide in times of crisis, paying less attention to intertwined intangible, nonmaterial dimensions. Yet, these intangible ecosystem benefits are often crucial for people's resilience and well‐being in times of need. We examine the role that nature plays for resilience and well‐being in times of crisis through a case study of Greece's back‐to‐the‐land movement during the European economic crisis. We conducted semistructured interviews with 76 households that had gone back‐to‐the‐land to understand why people sought to reconnect to nature and what their experiences were. Our results show that reconnecting to nature provided material ecosystem benefits such as food and income often from previously undervalued ecosystems (e.g. abandoned orchards) as well as nonmaterial ecosystem benefits such as mental health, feelings of safety, calm and independence that helped people cope with the crisis and adapt and transform to new socio‐ecological contexts. Participants reported that reconnecting to nature also changed their relational values. People mentioned gaining new perspectives, meanings and relationships with others and the natural world. While the crisis significantly affected people's material well‐being, reconnecting with nature helped people cope with crisis but also prompted a profound reevaluation of what constitutes a good life, leading to changes in their subjective and relational well‐being. This enhanced their capacity to act and plan for the future (their agency). Overall, our research emphasizes how reconnecting to nature and its multidimensional ecosystem benefits during crises can have transformative effects on individuals' resilience, well‐being and their relationships with the environment. Our research shows that not only material benefits of ecosystem services need to be valued but also intangible, nonmaterial benefits that affect material, subjective and relational dimensions of well‐being and resilience. Read the free Plain Language Summary for this article on the Journal blog.

Tail risk contagion across electricity markets in crisis periods

This study examines tail risk contagion across returns series of (i) ten major electricity markets and (ii) five raw materials used for electricity production during crises, using data from 2006M07 to 2023M03. The crises covered, in the study to examine tail risk contagion, are the global financial crisis, the European debt crisis, the COVID-19 pandemic and the Russia-Ukraine war. We estimate tail risk using the Conditional Autoregressive Value at Risk (CAViaR) method and employ the quantile vector autoregression (QVAR) connectedness approach to examine the tail risk spillover. In addition, we examine the effect of uncertainty factors on tail risk spillover. The QVAR result shows significant contagion across the electricity markets during crises, particularly pronounced in extreme quantiles. We identify geopolitical risk as the substantial uncertainty factor driving the contagion across these electricity markets. The findings have significant implications for regulators in formulating policies to reduce the effect of crises and uncertainty factors.

Geographical Dimensions of Populist Euroscepticism

The appeal of populism has been explained by individual preferences expressed along two dimensions: a left-right economic dimension and a cosmopolitan-traditionalist cultural dimension. However, this distinction has been contested by recent studies pointing out that economic and cultural factors reinforce each other in linking structural transformations, like globalisation and technological change, to populist political outcomes. Given the spatially uneven character of the effects of structural transformations, our contribution argues that ‘place’ should be a central category in the analysis of Eurosceptic populism. By focusing on place, it becomes easier to understand how material and identity-related factors interact in triggering a demand for populism, and how this interaction sets the ground for the reception of populist narratives in different locations. We set out a research agenda for improving our understanding of the political implications of local socio-economic trajectories in Western European left-behind areas, places in Central and Eastern Europe struggling since transition into democracy begun, Southern European locations hit by the Eurozone crisis, and beyond.

Time-variation in the effects of push and pull factors on portfolio flows: Evidence from a Bayesian dynamic factor model

The extent to which push and pull factors affect international capital flows is widely debated. We contribute to this strand of literature by estimating the relative importance of push and pull factors for portfolio flows over a time span, encompassing the global financial crisis, the European sovereign debt crisis as well as the beginning of the Covid-19 pandemic. To do so, we extract common and country-specific components from fund flow data using Bayesian dynamic factor models with time-varying coefficients and stochastic volatility. Assuming that the common component represents push factors and the country-specific component pull factors, we show that (i) time-variation matters and (ii) there is a substantial amount of heterogeneity in the importance of factors across regions (advanced versus emerging market economies) and asset classes (equity versus bonds). We find that the relative importance of push factors for flows into advanced economies has on average increased over time, particularly for EU countries. With respect to flows into emerging market economies, we find very heterogeneous results between individual countries. Moreover, we identify risk measures, US stock market returns, US real interest rates, the US real effective exchange rate and the oil price as important push factors. Pull factors seem to covary with domestic stock market returns, in particular.

Collective Policy Learning in EU Financial Assistance: Insights from the Euro Crisis and Covid‐19

This article examines policy change in the EU’s financial assistance regime through a collective learning perspective. By defining a financial assistance regime as the set of rules governing the disbursement and withdrawal of funding to the member states in the context of crisis management, the article seeks to address the following research question: How can we explain the exact form of change in the EU’s financial assistance regime between the euro crisis and the Covid-19 pandemic? The article finds that financial assistance in the EU moved from “intergovernmental coordination” with the European Stability Mechanism to a form of “limited supranational delegation” with the Recovery and Resilience Facility and argues that such a change is due to a collective policy-learning process. This finding suggests that the EU tends to learn from past crisis experiences, freeing itself from established institutional constraints, only when the next crisis becomes a concrete cause for concern. However, when the next crisis strikes, the EU is indeed able to radically alter its practices based on previous policy failures.

Monetary policy models: lessons from the Eurozone crisis

This paper theoretically and empirically investigates the puzzling decade-long concurrence of expansionary monetary and fiscal policies, decreasing credit flows, fall in price levels, and sluggish real activity observed in the Euro area from the outset of the 2007–2008 financial crisis. To this end, we propose a monetary general equilibrium model that clarifies the transmission mechanisms, debt–deflation channels, and the paramount role of financial leverage decisions underlying these peculiarities. On this basis, a vector error correction model is specified which confirms the theoretical predictions and provides insights into the elements specific to the long-term relations. In addition, the estimated impulse response functions document the associated short-term dynamics outlining the debt–deflation mechanism.

The Euro’s Taxing Path to Political Legitimacy

ABSTRACT In Europe’s Crisis of Legitimacy: Governing by Rules and Ruling by Numbers in the Eurozone, Vivien Schmidt authoritatively charts how the European Union weathered the crisis of its single currency in the 2010s, gradually moving from fiscal austerity and structural reform to a more systemic solution and flexible interpretation of the euro’s governing rules. Using a discursive institutionalist approach in combination with a “systems theory” understanding of democratic decision making, Schmidt persuasively argues that we need to look at the euro problem as a fundamentally political problem that lacked democratic legitimacy as long as technocrats were in charge of policy solutions. Schmidt argues that the euro crisis needs to be broached from the point of view of the E.U.’s split-level legitimacy as well as the growing politicization of E.U. governance in an era of increasing populism and rising Euroskepticism. Schmidt’s application of discursive institutionalism allows readers to judge for themselves whose and which ideas mattered, why and in what way they were implemented, and how they gradually evolved over time.

Current Account Adjustment of the Euro Area in the 2010s: Causes and Policies

In the early 2000s, several countries in the euro area (EA), mostly in the South, experienced an increase in current account deficits, while Northern countries saw an increase in current account surpluses. During the euro crisis, the South transitioned from a current account deficit to a surplus, while the North's surplus widened, thereby increasing the EA's overall current account surplus. To analyze the causes of the current account adjustment in the EA during the 2010s and to identify economic policies that reduce external imbalances, we employ a New Keynesian DSGE model with three regions (the North of the EA, the South of the EA, and the rest of the world). Our analysis reveals that the EA's expansionary monetary policy, fiscal consolidation, and lackluster productivity performance explain a significant portion of the current account adjustment. Furthermore, we find that the fiscal revaluation and expansion of the North would have limited effects on external imbalances.

The evolution of commodity market financialization: Implications for portfolio diversification

The financialization of commodity markets is a well-documented phenomenon spurred by the massive growth of institutional funds directed into commodity indices from the mid-2000s. More recent research suggests that a subsequent era of de-financialization has coincided with the retreat of institutional investors. This paper uses a latent factor model to examine the dynamic impact of commodity market financialization on spot currency, commodity and equity market linkages, focusing on countries with ‘commodity currencies’. The financialization period is characterized by increased interdependence of non-oil and oil commodity markets with each other and with other asset markets, implying reduced diversification potential. We find that commodity markets have become more highly interconnected with currency and equity markets of the large commodity exporters over the most recent sub-sample. We suggest that apparent de-financialization may be attributable to contagion effects from global crisis events, including the Great Recession and the European Debt Crisis of 2012.

Crisis and reform in Greece: a theoretical discussion on the domestic policy environment

ABSTRACT This article examines the domestic reform environment in Greece during the Eurozone crisis and explores how it affected the policy implementation process. It provides an integrated theoretical approach by combining the elements of the Advocacy Coalition Framework (ACF) and the Narrative Policy Framework (NPF). The ACF and NPF prove useful in explaining the tumultuous implementation of the three memoranda in Greece. The pro-memorandum/pro-change coalition emerged weak in Greece and was destined to fall apart in a short time due to its failure to employ effective narrative strategies. On the other hand, the status-quo coalition and its belief system emerged stronger by utilizing effective narrative strategies. These factors resulted in a lack of broader social and political consensus regarding the necessity of reforms during the initial phase of the crisis, ultimately leading to a continuous cycle of disarray and external conditionality.

Correction to: Impunity and Capitalism: The Afterlives of European Financial Crises

Correction to: Impunity and Capitalism: The Afterlives of European Financial Crises