Towards Deeper Financial Integration in Europe: What the Banking Union Can Contribute

The European Banking Union is a major step forward in fixing major deficiencies in the institutional framework of the Euro area. The absence of effective banking supervision and resolution powers at the European level promoted excessive private risk-taking in the up-run to the Euro crisis. Effective private risk sharing once risks materialized has been hampered. A properly designed Banking Union facilitates and improves private risk sharing, and it is thus a necessary institutional complement to a monetary union. Yet, the institutional framework of the Banking Union needs further strengthening in three regards. First, the supervisory framework needs to ensure uniform supervisory standards for all banks, including those located in non-Euro area countries. Also, conflicts of interest between monetary policy and banking supervision need to be mitigated. Second, bank resolution suffers from a highly complex governance structure. Restructuring and bail-in rules allow for a high degree of discretion at the level of the resolution authority. We propose to introduce a statutory systemic risk exception, by which the exercise of discretion would be reduced, thereby strengthening the credibility of the bail-in. Third, in order to enhance the credibility of creditor involvement, fiscal backstops and ex-ante specified cross-border burden-sharing agreements are needed

Balance of Payments or Monetary Sovereignty? In Search of the EMU’s Original Sin

In a recent paper Marc Lavoie (2014) has criticized my interpretation of the Eurozone (EZ) crisis as a balance of payments crisis (BoP view for short). He rather identified the original sin “in the setup and self-imposed constraint of the European Central Bank” and, more in general, as expressed by other scholars, in the dissociation between fiscal and monetary policy. This is defined as the (flawed EMU) institutional set-up view. According to the (prevailing) BoP view, supported with different shades by a variety of economists from the conservative Sinn to the progressive Frenkel, the original sin is in the current account (CA) imbalances brought about by the abandonment of exchange rate adjustments and in the inducement to peripheral countries to get indebted with core countries. The original sin is the euro. The two view are not necessarily juxtaposed. While the BoP crisis looks as a fact, a better institutional design would have likely avoided the current crisis as long as it involved regional transfers robust enough to overcome the mentioned imbalances

The natural rate of interest and the output gap in the euro area: a joint estimation

Real interest rate gap, Output gap, Kalman filter, Euro area,

The forecasting power of real interest rate gaps: an assessment for the Euro area

The real Interest Rate Gap (IRG)-the gap between the short-term real interest rate and its 'natural' level-is a theoretical concept that has attracted much attention in central banks in recent years. This article aims at clarifying its practical relevance for monetary policy in real time. For this purpose, it provides an empirical assessment of the usefulness of a semi-structural versus purely statistical estimates of the real IRG for predicting policy relevant macroeconomic variables in the Euro area. However mixed, the results confirm that semi-structural estimates of the real IRG deserve being added to the central banks' toolbox.