The Challenge of Economic Rebalancing in Europe
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The Challenge of Economic Rebalancing in Europe

Perspectives for CESEE Countries

Edited by Ewald Nowotny, Doris Ritzberger-Grünwald and Helene Schuberth

In the long aftermath of the acute global financial crisis of 2008/09, “rebalancing” the economy with new sources of growth and productivity remains a persistent necessity. This book addresses the resulting trade-offs and challenges. These needs, and the corresponding policy challenges, are especially prevalent in Europe, in particular Central, Eastern and South-Eastern Europe. On this issue, this book contributes lessons learned from earlier balance sheet recessions. It also addresses the often overlooked link between macroeconomic imbalances and economic inequality. Further contributions focus on the interaction between monetary policy and financial stability, adding a regional perspective to these important issues.
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Chapter 11: The ECB, the banks and the sovereigns

Lucrezia Reichlin


On the bright side, the euro area economy seems finally to be on the path of a recovery at the time of writing in early 2015; and, after much hesitation, the European Central Bank (ECB) has announced a programme of sovereign bonds purchases to undertake quantitative easing (QE) which has been less divisive than what could have been expected just a few months ago. Although the programme is designed so as to decentralize the bulk of credit risk at the level of national central banks, markets have reacted positively to the announcement and, with the exception of Greece, we have seen further compression of spreads. On the dark side, however, the problem of debt overhang is likely to weigh on the euro area economies for the years to come since a low growth, low inflation environment is likely to persist even under the brightest scenario. In this context, and without a realistic prospect of further fiscal integration amongst the members of the European Union (EU), there is a risk that the European Central Bank will be overburdened by excessive responsibilities. To avoid this path, a new grand bargain between monetary policy authorities, governments and euro area institutions has to be achieved. To understand the dilemma that the ECB is likely to face if such a bargain is not achieved, it is useful to look back and analyse monetary policy in the euro area since the 2008 crisis.

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