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The financial crisis of 2007–10 has presented a number of key policy challenges for those concerned with the long-term stability of the euro area. It has shown that price stability as provided by the European Central Bank is not enough to guarantee financial stability, and exposed fault lines in governance and deficiencies in the architecture of the financial supervisory and regulatory framework. This book addresses these and other issues, including why the crisis affected some countries more than others, whether the euro is still attractive for new EU states, and what policy changes and structural reforms, both macro and micro, should be undertaken to ensure its future viability. Written by a team of leading academic and central bank economists, the book also includes chapters on the cross-country incidence of the crisis, the Irish crisis and ECB monetary policy during the crisis, and studies on Spain, the Baltics, Slovakia and Slovenia.
When euro notes and coins were originally introduced in January 2002, consumers in the member states of the Eurozone experienced a sharp spike in perceived inflation, which translated into a permanent perception that the switch to the new currency was associated with a one-time inflation shock. As evidence of this, the synthetic indicator of perceived inflation over the previous twelve months compiled by the European Commission from consumer surveys showed a jump from 27 in December 2001 to 60 in September 2002 and remained above 50 for most of 2002. The most succinct summary of this view was coined in Germany, where the euro was promptly dubbed ‘teuro’ (from teuer, meaning ‘expensive’ in German).
For consumer prices as a whole, the perception was largely disproved by the actual data on the development of consumer prices during the relevant period. Prices in January 2002 rose by 0.09 per cent in the Eurozone according to the harmonised index of consumer prices (HICP) and the annual inflation rate during 2002 was also similar to 2001 and 2003, oscillating between 2 per cent and 3 per cent (although there was an unusual jump at the beginning of 2002, attributed mainly to the weather). Therefore, the explanations of discrepancies between the perceived and the actual inflation tended to focus on either purely psychological interpretations of how individuals could experience higher inflation at the time of a change in currencies without any basis in reality, or interpretations combining higher-than-normal changes in specific prices, which are likely to form anchors of consumer experiences, with psychologically based misconceptions.
This volume brings together the papers and panel contributions presented at the conference on ‘The Euro Area and the Financial Crisis’, held in Bratislava from 6 to 8 September 2010. The conference was hosted by the National Bank of Slovakia and jointly organised by the National Bank of Slovakia, Heriot--Watt University in Edinburgh and Comenius University in Bratislava. The event was characterised by intensive discussions between central bankers, academics and policy-makers from all over Europe, which contributed directly and indirectly to the authors’ revisions of their papers. The basic question was: What are the implications of the financial crisis and the great recession for the future of the euro area?
The book begins in Chapter 2 with the keynote contribution by Governor Athanasios Orphanides on the issues surrounding financial stability in Europe. Part I addresses the experience of the crisis. Thorvardur Ólafsson and Thórarinn Pétursson try in Chapter 3 to identify the factors that caused the depth and duration of the crisis to be larger in different countries. Philip Lane in Chapter 4 focuses on the Irish case. Angel Gavilán, Pablo Hernández de Cos, Juan F. Jimeno and Juan A. Rojas in Chapter 5 examine the Spanish case. Aurelijus Dabušinskas and Martti Randveer in Chapter 6 consider the varying experiences of the Baltic countries. Part II considers the issue of accession to the euro area by countries in Central, Eastern and Southeastern Europe (CESEE). Biswajit Banerjee, Damjan Kozamernik and L’udovít Ódor in Chapter 7 analyse the different strategies for entry to the euro used by Slovakia and Slovenia. Miroslav Beblavý in Chapter 8 investigates whether euro entry was associated with significant rises in prices (especially for non-tradable goods and services) in Slovakia. And in the first panel contributions Governor Ewald Nowotny in Chapter 9 and Zdeněk Tůma, together with David Vávra, discuss in Chapter 10 whether and how CESEE countries should accede to the euro. Part III looks at the future of the euro area. Francesco Giavazzi and Luigi Spaventa in Chapter 11 argue that much more attention needs to be paid to current account deficits within the European Monetary Union (EMU). Daniele Franco and Stefania Zotteri in Chapter 12 consider the role that national fiscal rules could play in avoiding future problems. Thomas F. Huertas in Chapter 13 discusses mechanisms for ‘bail-in’ as an alternative to future bail-outs of financial institutions. Laurent Clerc and Benoît Mojon in Chapter 14 review the conduct of monetary policy in the euro area since the inception of the euro and the challenges that the Eurosystem has faced since the financial crisis. Boris Cournède and Diego Moccero in Chapter 15 assess the contribution that a price-level (as opposed to an inflation) target could make to the operation and performance of monetary policy. This is followed by contributions by Wendy Carlin, Vítor Gaspar, Stefan Gerlach and Jacques Mélitz to the second panel (Chapters 16--19), on how to restore confidence in the euro project.