Skip to main content
SpringerLink
Log in
Book cover

Europe's New Fiscal Union pp 103–132Cite as

Palgrave Macmillan

Developing an EMU Lending of Last Resort Capacity

  • Chapter
  • First Online:

  • 305 Accesses

Abstract

The European Central Bank arguably saved the euro. To reach this success, the ECB had to expand its task from securing price stability to safeguarding financial stability. This chapter documents how, through strategic yet conditioned interventions, the ECB took temporarily over the controversial role of EMU’s lender of last resort. Driven by a twin concern to safeguard the euro without giving up on its monetary dominance, the institution shaped its institutional environment to ensure that its new responsibility for financial stability would be sufficiently ‘re-insured’ so as to not jeopardize its independence to conduct its monetary policy. As the ECB does not formally possess the lending of last resort function, it had to revert to selected, strategic and timely interventions to exert this new quasi-fiscal authority.

This is a preview of subscription content, log in via an institution.

Chapter
USD   29.95
Price excludes VAT (USA)
  • Available as PDF
  • Read on any device
  • Instant download
  • Own it forever
eBook
USD   39.99
Price excludes VAT (USA)
  • Available as EPUB and PDF
  • Read on any device
  • Instant download
  • Own it forever
Softcover Book
USD   54.99
Price excludes VAT (USA)
  • Compact, lightweight edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info
Hardcover Book
USD   84.99
Price excludes VAT (USA)
  • Durable hardcover edition
  • Dispatched in 3 to 5 business days
  • Free shipping worldwide - see info

Tax calculation will be finalised at checkout

Purchases are for personal use only

Learn about institutional subscriptions

Notes

  1. 1.

    Interviewee 32 – European Central Bank official.

  2. 2.

    Interviewee 45 – Independent analyst.

  3. 3.

    The ECB’s monetary dominance is even enhanced by the fact that there is no single European or Eurozone fiscal policy, unlike in classic economic constituencies.

  4. 4.

    A strand of the monetary economics literature, called ‘Fiscal Theory of the Price Level’ led by economists (see for example, Leeper 1991; Sims 1994; and Woodford 1994), argue that, despite the independence of a central bank, fiscal dominance can still exist if governments do not internalise the inter-temporal budget constraint. If they are committed in ignoring this stability constraint, the central bank will have no options left but to adjust, thereby being trapped in a position of dominance.

  5. 5.

    Interviewee 22 – Italian Ministry of Finance official.

  6. 6.

    Interviewee 20 – Independent analyst.

  7. 7.

    Interviewee 44 – European Commission official.

  8. 8.

    The Lisbon Treaty’s Protocol 4 on the ECB, in its article 28, foresees a procedure for the capital increase of the ECB which can be increased by qualified majority subject however to conditions and limits determined by the Council. In this light, the Council has introduced a cap of 5 bn for the future increases of the ECB’s capital in the adopted COUNCIL REGULATION (EC) No 1009/200 0 of 8 May 2000. And since the ECB has decided in 2010 to increase its ‘subscribed capital by € 5 billion, from € 5.76 billion to € 10.76 billion’, with effect from 29 December 2010, no further capital increase could be performed after this date without a prior revision of the 2000 Council Regulation. https://www.ecb.europa.eu/press/pr/date/2010/html/pr101216_2.en.html

  9. 9.

    Interviewee 22 – Italian Ministry of Finance official.

  10. 10.

    Interviewee 30 – Finnish Ministry of Finance official.

  11. 11.

    Interviewee 42 – European Commission official.

  12. 12.

    Interviewee 30 – Finnish Ministry of Finance official.

  13. 13.

    Chapter 6 retraces the emergence of the idea of the Banking Union in more detail.

  14. 14.

    Interviewee 27 – Finnish Ministry of Finance official.

  15. 15.

    Interviewee 41 – Independent analyst.

  16. 16.

    Interviewee 11 – European Parliament official.

  17. 17.

    Interviewee 11 – European Parliament official.

  18. 18.

    Interviewee 12 – European Commission official.

  19. 19.

    Interviewee 29 – Finnish Financial Stability Authority official.

  20. 20.

    Interviewee 41 – Independent analyst.

  21. 21.

    Interviewee 30 – Finnish Ministry of Finance official.

  22. 22.

    Interviewee 9 – EU Council official.

  23. 23.

    Interviewee 9 – EU Council official.

  24. 24.

    La Repubblica, ‘Monti: Bene lo scudo anti-spread ma l’Italia non intende uttilizarlo’, 29 June 2012.

  25. 25.

    Interviewee 26 – Finnish Ministry of Finance official.

  26. 26.

    Interviewee 26 – Finnish Ministry of Finance official.

  27. 27.

    ECB Press Release, Technical Features of Outright Monetary Transactions, 6 Sept 2012.

  28. 28.

    Interviewee 30 – Finnish Ministry of Finance official.

  29. 29.

    Interviewee 30 – Finnish Ministry of Finance official.

  30. 30.

    Interviewee 30 – Finnish Ministry of Finance official.

  31. 31.

    Interviewee 20 – Independent analyst.

  32. 32.

    Interviewee 30 – Finnish Ministry of Finance official.

  33. 33.

    Judgement of the European Court of Justice of 16 June 2015, Peter Gauweiler and others vs. Deutscher Bundestag.

  34. 34.

    Interviewee 30 – Finnish Ministry of Finance official.

  35. 35.

    Interviewee 30 – Finnish Ministry of Finance official.

  36. 36.

    Interviewee 30 – Finnish Ministry of Finance official.

  37. 37.

    Interviewee 30 – Finnish Ministry of Finance official.

  38. 38.

    Interviewee 30 – Finnish Ministry of Finance official.

  39. 39.

    Interviewee 30 – Finnish Ministry of Finance official.

  40. 40.

    Interviewee 45 – Independent analyst.

References

  • Asmussen, J. (2013, June 11). Introductory Statement by the ECB in the Proceedings Before the Federal Constitutional Court by Jörg Asmussen. Member of the Executive Board of the ECB, Karlsruhe.

    Google Scholar 

  • Bank for International Settlements. (2014, September). Re-thinking the Last Resort (BIS Papers No 79).

    Google Scholar 

  • Beetsma, R. M. W. J., & Bovenberg, A. L. (1995). The Interaction of Fiscal and Monetary Policy in a Monetary Union: Balancing Credibility and Flexibility (Discussion Paper 1995–101). Tilburg University, Centre for Economic Research.

    Google Scholar 

  • Begg, D., Chiappori, P.-A., Giavazzi, F., Mayer, C., Neven, D., Spaventa, L., Vives, X., & Wyplosz, C. (1991). The Making of Monetary Union, Monitoring European Integration (Vol. 2). London: CEPR.

    Google Scholar 

  • Belke, A. (2009, March 15). How Much Fiscal Backing Must the ECB Have? The Euro Area Is Not the Philippines. Note, European Parliament Committee on Economic and Monetary Affairs.

    Google Scholar 

  • Bénassy-Quéré, A. (2016, April). Fixing a Sovereign-less Currency. VoxEU Column, 8, www.voxeu.org

  • Blommestein, H. J., & Turner, P. (2012, May 1). Interactions Between Sovereign Debt Management and Monetary Policy Under Fiscal Dominance and Financial Instability (OECD Working Papers on Sovereign Borrowing and Public Debt Management, No. 3). OECD Publishing.

    Google Scholar 

  • Buiter, W. (2009, March 21). Fiscal Dimensions of Central Banking: The Fiscal Vacuum at the Heart of the Eurosystem and the Fiscal Abuse by and of the Fed. FT Blogpost, Willem Buiter’s maverecon.

    Google Scholar 

  • Chang, M. (2016). The (Ever) Incomplete Story of Economic and Monetary Union. Journal of Contemporary European Research, 12(1), 486–501.

    Google Scholar 

  • Cour-Thiman, P., & Winkler, B. (2013, April). The ECB’s Non-Standard Monetary Policy Measures: The Role of Institutional Factors and Financial Structure (ECB Working Paper Series, No. 1528).

    Google Scholar 

  • De Grauwe, P. (2012, March 23). How Not to Be a Lender of Last Resort, CEPS Commentary.

    Google Scholar 

  • De Grauwe, P. (2013, February). Design Failures in the Eurozone: Can They Be Fixed? LSE ‘Europe in Question’ (Discussion Paper Series, LEQS Paper No. 57/2013). London.

    Google Scholar 

  • De Rynck, S. (2016). Banking on a Union: The Politics of Changing Eurozone Banking Supervision. Journal of European Public Policy, 23(1), 2016.

    Article  Google Scholar 

  • Dehousse, R. (2015, August 26–29). The New Supranationalism. Paper for Presentation at the ECPR General Conference Panel P298. Reflections on the Euro-crisis and the Future of Representative Democracy Montreal.

    Google Scholar 

  • Draghi, M. (2012, July 26). Speech by Mario Draghi, President of the European Central Bank. Global Investment Conference, London.

    Google Scholar 

  • Drudi, F., Durré, A., & Mongelli, F.-P. (2012). The Interplay of Economic Reforms and Monetary Policy: The Case of the Eurozone. Journal of Common Market Studies, 50(6), 881–898.

    Article  Google Scholar 

  • Eichengreen, B. (2012). European Monetary Integration with Benefit of Hindsight. Journal of Common Market Studies, 50(s1), 123–136.

    Article  Google Scholar 

  • Eichengreen, B. (2013, September 8). The ECB Grows Up. Il Sole 24 Ore.

    Google Scholar 

  • European Central Bank. (2010, May 10). Press Release, ECB Decides on Measures to Address Severe Tensions in Financial Markets.

    Google Scholar 

  • European Central Bank. (2011, July). The European Stability Mechanism. ECB Monthly Bulletin.

    Google Scholar 

  • European Central Bank. (2013, July). ECB Monthly Report.

    Google Scholar 

  • European Union. (2012, June 29). Euro Area Summit Statement. Brussels.

    Google Scholar 

  • Financial Times. (2012, June 19). Banks Wrestle with Tough Funding Options. http://www.ft.com/cms/s/0/30221076-b921-11e1-9bfd-00144feabdc0.html#axzz4HJfs0y30

  • Folkerts-Landau, D., & Garber, P. M. (1992, March). The European Central Bank: A Bank or a Monetary Policy Rule. (NBER Working Paper No. 4016).

    Google Scholar 

  • Giavazzi, F., & Wyplosz, C. (2015). EMU: Old Flaws Revisited. Journal of European Integration, 37(7), 723–737.

    Article  Google Scholar 

  • Goodhart, C. (1998). The Two Concepts of Money: Implications for the Analysis of Optimal Currency Areas. European Journal of Political Economy, 14(3), 407–432.

    Article  Google Scholar 

  • Goodhart, C., & Schoenmaker, D. (1995). Should the Functions of Monetary Policy and Banking Supervision Be Separated? Oxford Economic Papers, New Series, 47(4), 539–60.

    Google Scholar 

  • Heisenberg, D., & Richmond, A. (2002). Supranational Institution-building in the European Union: A Comparison of the European Court of Justice and the European Central Bank. Journal of European Public Policy, 9(2), 201–218.

    Article  Google Scholar 

  • Héritier, A. (2000, June). Overt and Covert Institutionalization in Europe. Preprints from the Max-Planck-Project Group on the Law of Collective Goods. Bonn.

    Google Scholar 

  • Héritier, A. (2013). Covert Integration of Core State Powers: Renegotiating Incomplete Contracts. In P. Genschel & M. Jachtenfuchs (Eds.), Beyond the Regulatory Polity? The European Integration of Core State Powers. Oxford: Oxford University Press.

    Google Scholar 

  • Hodson, D. (2011). Governing the Euro Area in Good Times and Bad. New York: Oxford University Press.

    Book  Google Scholar 

  • Hodson, D. (2012). Managing the Euro: The European Central Bank. In J. Peterson & M. Shackleton (Eds.), The Institutions of the European Union (pp. 199–218). Oxford: Oxford University Press.

    Google Scholar 

  • Honohan, P. (2017). Central Banking in Europe Today: Over-Mighty or Under-Powered? Lecture, 26 November 2018, European University Institute, Florence.

    Google Scholar 

  • Hu, K. (2015). The Institutional Innovation of the Lender of Last Resort Facility in the Eurozone. Journal of European Integration, 36(7), 627–640.

    Article  Google Scholar 

  • Illing, G., & König, P. (2014). The European Central Bank as Lender of Last Resort. DIW Economic Bulletin, 9, 16–28.

    Google Scholar 

  • Ioannidou, V. (2015). A First Step Towards Banking Union. Voxeu Column, 16 October 2012. www.voxeu.org

  • James, H. (2012). Making the European Monetary Union. Cambridge: Harvard University Press.

    Book  Google Scholar 

  • Kydland, F., & Prescott, E. (1977). Rules Rather than Discretion: The Inconsistency of Optimal Plans. Journal of Political Economy, 85(3), 473–492.

    Article  Google Scholar 

  • Leeper, E. (1991). Equilibria Under ‘Active’ and ‘Passive’ Monetary Policies. Journal of Monetary Economics, 27(1), 129–147.

    Article  Google Scholar 

  • Lewis, V., & Roth, M. (2015, May 09). Interest Rate Rules Under Financial Dominance. KU Leuven, Centre for Economic Studies, Discussion Paper Series.

    Google Scholar 

  • Matthijs, M., & Blyth, M. (Eds.). (2015). The Future of the Euro. Oxford: Oxford University Press.

    Google Scholar 

  • Mcnamara, K. R. (1999). The Currency of Ideas: Monetary Politics in European Union. Ithaca: Cornell University Press.

    Google Scholar 

  • Mcnamara, K. (2013). Currency Unions in Historical Perspective: What Can We Learn? Paper Presented at the Council for European Studies 2013 Conference, Amsterdam.

    Google Scholar 

  • Nieto, M. (2015). Regulatory Coordination in the Banking Union: The Role of National Authorities. In L. M. Hinojosa & J. M. Beneito (Eds.), European Banking Union, the New Regime. Spain: Wolters Kluwer.

    Google Scholar 

  • Padoa-Schioppa, T. (1999a, December 29). Europas Notenbank ist einsam (‘Europe’s Central Bank Is Lonely’). Interview with Die Zeit.

    Google Scholar 

  • Padoa-Schioppa, T. (1999b, February 29). EMU and Banking Supervision. Lecture by Tommaso Padoa-Schioppa, Member of the ECB Executive Board, London School of Economics, Financial Markets Group, London.

    Google Scholar 

  • Pisani-Ferry, J., & Wolff, G. (2012). Voxeu.org: http://voxeu.org/article/ltro-quantitative-easing-disguise

  • Pollack, M. (2003). The Engines of European Integration: Delegation, Agency and Agenda-Setting in the EU. Oxford: Oxford University Press.

    Book  Google Scholar 

  • Praet, P. (2015, March 11). Public Sector Security Purchases and Monetary Dominance in a Monetary Union Without a Fiscal Union. Speech by Peter Praet, Member of the Executive Board of the ECB, at the Conference, The ECB and its Watchers XVI, Contribution to the Panel on Low-Interest-Rate Policy and Non-standard Monetary Policy Measures: Effectiveness and Challenges, Frankfurt am Main.

    Google Scholar 

  • Rehn, O. (2012, September 3). Towards a Genuine Economic and Monetary Union. Speech, European Parliament ECON Committee.

    Google Scholar 

  • Saccomanni, F. (2016). Policy Cooperation in the Euro Area in Time of Crisis: A Case of Too Little, Too Late. In T. Bayoumi, S. Pickford, & P. Subacchi (Eds.), Managing Complexity: Economic Policy Coordination After the Crisis (p. 2016). Brookings: Institution Press.

    Google Scholar 

  • Sargent, T., & Wallace, N. (1981). Some Unpleasant Monetarist Arithmetics. Federal Reserve Bank of Minneapolis Quarterly Review, 5(3), 1–17.

    Google Scholar 

  • Scharpf, F. (1988). The Joint-Decision Trap. Lessons From German Federalism and European Integration. Public Administration, 66(2), 239–278.

    Article  Google Scholar 

  • Schelkle, W. (2012). European Fiscal Union: From Monetary Back Door to Parliamentary Main Entrance. CESifo Forum 1/2012, 13(1), 28–34.

    Google Scholar 

  • Sims, C. A. (1994). A Simple Model for Study of the Determination of the Price Level and the Interaction of Monetary and Fiscal Policy. Economic Theory, 4(3), 381–399.

    Article  Google Scholar 

  • Torres, F. (2013). The EMU’s Legitimacy and the ECB as a Strategic Political Player in the Crisis Context. Journal of European Integration, 35(3), 287–300.

    Article  Google Scholar 

  • Walsh, C. E. (2010). Monetary Theory and Policy (3rd ed.). Cambridge: The MIT Press.

    Google Scholar 

  • Winkler, A. (2016). The ECB as Lender of Last Resort: Banks vs. Governments. Jahrbücher für Nationalökonomie und Statistik, 235(3), 329–341.

    Google Scholar 

  • Woodford, M. (1994). Monetary Policy and Price Level Determinacy in a Cash-in-Advance Economy. Economic Theory, 4(3), 345–380.

    Article  Google Scholar 

  • Wyplosz, C. (2012, July). The Role of the ECB in Fiscal Adjustment Programmes. In The Role of the ECB in Financial Assistance Programmes. Study for the ECON Committee, Monetary Dialogue.

    Google Scholar 

  • Yiangou, J., O’keeffe, M., & Gloeckler, G. (2013). Tough Love: How the ECB’s Monetary Financing Prohibition Pushes Deeper Euro Area Integration. Journal of European Integration, 35(3), 223–237.

    Article  Google Scholar 

Download references

Author information

Authors and Affiliations

  1. European University Institute, Florence, Italy

    Pierre Schlosser

Authors
  1. Pierre Schlosser
    View author publications

    You can also search for this author in PubMed Google Scholar

Rights and permissions

Reprints and permissions

Copyright information

© 2019 The Author(s)

About this chapter

Check for updates. Verify currency and authenticity via CrossMark

Cite this chapter

Schlosser, P. (2019). Developing an EMU Lending of Last Resort Capacity. In: Europe's New Fiscal Union. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-98636-4_5

Download citation

Publish with us

Policies and ethics

Search

Navigation