EU Financial Markets

On 16 October 2024, Claudia Buch delivered a lecture titled Bank Profitability: A Mirror of the Past, Creating a Vision for the Future at Bocconi University. The event was co-organized by the Baffi Center on Economics, Finance, and Regulation and the Institute for European Policymaking @ Bocconi University (IEP@BU).

The Uni­Credit-Com­merzbank deal is a test case for the ECB, which will rever­ber­ate into the future, and be a golden oppor­tun­ity for its super­vis­ory board to uphold its inde­pend­ence

After revisiting the pros and cons, this paper concludes that, all in all, the rationale for introducing an ECB-sponsored digital euro for citizens, retailers, and producers, is not solidly established. Today’s highly dynamic, innovative, and efficient digital payment ecosystem does not require such an instrument, which would unavoidably duplicate existing applications and probably struggle to match private innovation.

The European Sovereign Bond market gyrations erupted in the wake of President Emmanuel Macron’s call for a snap parliamentary vote after his party’s defeat to Marine Le Pen’s National Rally in the European elections have sparked a debate on the opportunity of an activation of the Transmission Protection Mechanism (TPI). 
 

The main consequence of not achieving an integrated financial market is that Europe will not be able to finance the huge investment requirements needed for its ambitions in the fields of climate transition, energy security, digital evolution, defense, etc… 

The Fed and the ECB conducted monetary policy reviews in 2019-2020, when most of the above shocks were still in the making or yet to come. Both of them seem largely obsolete today, or at least incomplete. There is no appetite to restart them. 

This paper shows that the current operational framework of monetary policy relying on excess liquidity, together with a high level of interest rates, produces a remarkable redistribution of interest payments across the national central banks of the Eurosystem, due to the rules governing the pooling of monetary income among them. This mechanism implies significant fiscal transfers across the member countries of the euro area. Our estimates for 2023 show that their size can be in the order of several billion euro. 

This paper, prepared on a request by the European Parliament, contributes to a reflection aimed at identifying ways to revive and upgrade the banking union, so as to enable it to cope with the major transformational challenges facing Europe as we move forward in the 21^st century: Green, Digital, Geo-Strategic and Structural. 

Why have energy and goods prices followed the traditional trajectory – first up, then down – but the services sector has remained plagued by inflationary pressures?

The euro area has been subject to a series of very different shocks, some of which, such as the COVID-19 pandemic, were unprecedented. While the ECB’s reaction to these deflationary shocks was vigorous, it persisted too long with its expansionary measures and failed to see their inflationary impact when energy prices shot up. The future is likely to bring new challenges, but climate change might not be the most important threat to price and financial stability.

This document was provided by the Economic Governance and EMU Scrutiny Unit at the request of the Committee on Economic and Monetary Affairs (ECON) ahead of the Monetary Dialogue with the ECB President on 15 February 2024.

Even though European banks do have solid Basel ratios, their profitability is insufficient to make them attractive for investors. This suggests that – from the market’s perspective - the system may not be as sound and stable as regulators believe

The Council of the European Union (EU Council) agreed on a provisional set of new fiscal rules in its meeting on December 20, 2023, that introduces significant changes to the Commission’s proposals. The fiscal reform marks progress but is, at the same time, a lost opportunity.

Italy must be compliant ex post, and not only ex ante, with the new fiscal rules if it intends to guarantee the long-term sustainability of its public debt.

ECB independence is inconsistent with the present overreach of the institution into the economic policies of the member states, a function for which the ECB is not accountable.

If the European Union wants to have a global economic weight, it must equip itself with great European banking champions capable of attracting capital globally and able to support Europe as a development platform.

Inflation rates in the euro area and US increased sharply in 2022, in part following large energy price shocks. This column analyses the pass-through from energy prices to core inflation since the 1970s for the US and Germany. It shows that this pass-through is not constant over time, but time-varying. Pass-through from energy to inflation during the 1970s was high in the US, but not in Germany. Both countries experienced high pass-through in 2022, but this has declined in the most recent quarters, consistent with a return to more normal inflation dynamics.

We use the pricing mechanism of perpetual loans by our proposed European Debt Agency to determine a dynamic yield corridor that captures idiosyncratic risk and filters liquidity risk.

There is no doubt that monetary policy reacted late to the rising inflationary pressures experienced in 2021-22. The major central banks subsequently caught up rapidly and hiked interest rates at an unprecedented pace. However, as inflation reached its peak at the end of 2022 and has been falling since then, central banks may once again be late in adjusting their policies.

The US and the euro area have similar headline inflation rates, but very different drivers. In the US, inflation is mainly driven by housing costs. By contrast in the euro area energy now provides an important negative element, that is offset to a large extent by still increasing food prices

La Nota di aggiornamento del Documento di Economia e Finanza indica che la stabilizzazione del debito pubblico italiano richiede il raggiungimento di un surplus primario superiore al 3% del Pil nel giro dei prossimi 3-4 anni. Una manovra restrittiva di questo tipo non ha precedenti storici.

Our starting point was the stark increase in non-energy price inflation, which is the key element for the ECB since monetary policy cannot do anything about energy prices. Could the ECB have foreseen this development? Our analysis suggests that this would have been difficult based on past experience. 

Our analysis indicates that the budgetary documents presented by the Italian government are based on excessively optimistic forecasts regarding GDP growth, the effectiveness of budgetary measures and the revenues connected to privatizations. As a result, the very small projected decline in the public debt/GDP ratio is not likely.

​​​​​​In the discussion on monetary policy in the presence of supply shocks, we focus on the Euro area to understand the recent wave of inflation.

As the path to fiscal sustainability narrows, so does Italy’s political capital to credibly advocate a radical reform of EU fiscal rules. Italy's primary balance will need to improve by 0.9% of GDP each year in both 2025 and 2026: similarly sized improvements were recorded in only 3 of the 20 years before the pandemic (2 of which were at the height of the Eurozone crisis, in 2011 and 2012).

Federal Reserve monetary policy has been more expansionary than the one predicted by the rule until the second quarter of 2022, then this tendency was reversed.  The evidence is very different for the case of the Euro area, where the observed policy rates are consistently below those predicted by the model and fluctuate outside the range compatible with the model-related uncertainty.

The former managing director of the ESM discusses the long-term consequences of the Euro crisis and its aftermath.

While American and European central bankers might prefer to focus on their progress in tamping down inflation, there is no use pretending that they did not play a significant role in creating the problem.

The ratification of the modified ESM treaty by the Greek parliament took place easily, and smoothly, without the usual political tensions. The text was submitted to the plenary on the 28th of June 2021 and a week later, on July 6th, it was adopted by a large majority. Only the Greek Communist Party and minor parties of the extreme left and right voted against it. It was practically a non-issue for the mainstream Greek political parties and Greek citizens. Why so?

With the establishment of the ESM, the original form of the states' own responsibility for their budgetary policy (no bailout clause), which was central to Germany, has been permanently softened.

While banks are now profiting from the new interest rate scenario, the ultimate long-term effect of heightened interest rates on bank performance remains uncertain.

Given the common monetary policy in Europe, term premia on bonds issued by different countries are an immediate gauge of the heterogeneity in the transmission mechanism of monetary policy in Europe and of the need for intervention to protect the Euro area against it.

The dynamics of nominal government bond yields at different maturities play a central role in shaping the response of the real economy to monetary and fiscal policy interventions. Yields can be decomposed into two unobservable components: the sequence of expected one-period rates and the term-premia.

So much international trade happens in dollars that it would be very difficult to turn the tide against the currency any time soon.

Il dibattito sulla riforma del Meccanismo Europeo di Stabilità (MES) - che l’Italia rimane l’unico Paese UE a non avere ratificato - è tornato al centro del dibattito politico italiano. All’interno della maggioranza di governo sembrano coesistere due linee di opposizione alla ratifica – una “ideologica” e una “strategica”. Entrambe sono fallaci.