1. Lecture 14. EUROPEAN POLICY RESPONSE:
Economics 1490
THE WORLD ECONOMY:
GROWTH OR STAGNATION?
with
Professor Dale W. Jorgenson
Lecture 14. EUROPEAN POLICY RESPONSE:
THE EURO
October 17, 2017
Harvard University Department of Economics
Fall 2017

2. THE WORLD ECONOMY:
GROWTH OR STAGNATION?
A. Comparing Economies
B. U.S. Crisis and Recovery
C. European Slowdown
D. Asian Economic Miracles
E. Sustainability of Economic Growth
F. World Economic Outlook

3. EUROPEAN SLOWDOWN
11. U.S. Growth Resurgence 
12. Global Trade Slowdown 
13. Europe 2020 and the Single Market 
14. European Policy Response: The Euro 
15. European Policy Response: Brexit

4. TWO ECONOMIC CRISES IN EUROPE
The U.S. Crisis Was Transmitted Internationally by the Collapse of Inter-Bank Lending.
This Was Followed by the Collapse of Trade in Late and Early 2009.
Bank Bailouts Were Handled by Local Authorities – Governments and Central Banks.
The Sovereign Debt Crisis in Europe Began with the Greek Bailout in May 2010.

5. THE SECOND PHASE OF THE CRISIS
Signs of Financial Distress Emerged in Europe in 2011.
European Bank and Sovereign CDS Prices Revealed Possible Solvency Problems
European Central Bank Broadened Its Support of Sovereign Debt
Recovery from the Second European Crisis Has Taken Hold in 2017, Supported by Domestic Demand

6. TIME LINE FOR EUROPEAN SOVEREIGN DEBT CRISIS

7. A GLOSSARY OF EUROPEAN INSTITUTIONS
ALPHABET SOUP:
A GLOSSARY OF EUROPEAN INSTITUTIONS

8. EUROPEAN SYSTEM OF FINANCIAL SUPERVISORS (ESFS)

9. LONDON SPEECH
Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.
Mario Draghi, President of the European Central Bank, London, July 26, 2012.

10. MARIO DRAGHI: BIOGRAPHICAL HIGHLIGHTS
Born: Rome, Italy, 1947.
Ph.D., MIT, 1976.
Professor of Economics, University of Florence,  
Fellow, Institute of Politics, Kennedy School of Government, 2001.
Governor, Bank of Italy,
Chairman, Financial Stability Board,
President, European Central Bank, 2011-

11. EUROPEAN CENTRAL BANK POLICY
December 2011: Expanded Long Term Refinancing Operation for Banks
September 2012: Outright Monetary Transactions
: Lowered Policy Rate in Steps to 0.25%

12. EUROPEAN POLICY RESPONSE TO THE SOVEREIGN DEBT CRISIS
European Union Participated in Sovereign Debt Bailouts Through the EFSF and EFSM.
The EFSF and EFSM Were Superseded by the ESM
EFC Strengthened the Stability and Growth Pact
ECB Provided Support for Banks through Conventional And Unconventional Monetary Policy

13. EUROPEAN BANKING UNION
Four Essential Components: Single Supervisor, Single Regulator, Single Resolution Mechanism, Single System of Deposit Insurance
October 2014: ECB Examination of Balance Sheets of 130 European Banks with 85% of EU Deposits
November 2014: ECB Provides Single Supervisory Mechanism (SSM) for 130 Largest Banks.
January 2016: Single Resolution Mechanism by ECB.

14. SHARES OF GOVERNMENT BONDS
HELD BY DOMESTIC BANKS

15. INTEREST RATES ON LOANS TO BUSINESSES
IN SELECTED COUNTRIES OF THE EURO AREA

16. BANK CDS SPREADS CLUSTER ALONG COUNTRY LINES DURING CRISIS

17. CHANGE IN CROSS-BORDER BANK HOLDINGS,
2008Q-2012Q4

18. TOTAL FACTOR PRODUCTIVITY GROWTH

19. UNEMPLOYMENT RATE

20. GDP

21. INFLATION
4. Headline inflation has picked up, but core inflation remains stubbornly low (Figure 2).
International Monetary Fund (2017), Euro Area Policies, 2017 Article IV Consultation: Staff Report, Washington, DC, International Monetary Fund, July, pp

22. ANNEX. MONETARY POLICY TRANSMISSION CHANNELS

23. SUPRANATIONAL CONSTRAINTS AND RULES
ON FISCAL AGGREGATES

24. TIMELINE OF THE ECB’S COMPREHENSIVE ASSESSMENT

25. TOTAL DEBT-TO-GDP

26. FISCAL CONSOLIDATION, 2013-2022

27. DEBT-TO-GDP

28. THE EURO AREA GROWTH PROBLEM

29. LOANS TO NON-FINANCIAL CORPORATIONS
AND HOUSEHOLDS

30. THE FINANCIAL CRISIS IN EUROPE
The U.S. Financial Crisis Was Transmitted to Europe by the Collapse of Interbank Lending in 2008.
The Sovereign Debt Crisis in Europe Emerged in 2010, Beginning with the Greek Bailout in May.
The policy response was more diffuse in Europe
Recovery from the Second European Crisis Has Taken Hold in 2017

31. THE SECOND PHASE OF THE CRISIS
Indications of Renewed Financial Distress in Europe Began to Emerge in 2011.
This Involved Bank Debt and Sovereign Debt, Especially in the Periphery Countries.
The ECB Responded by Providing Financial Support for Sovereign Debt.
Initially This Was Indirect Support through Bank Lending, but Became Direct with the OMTs in 2012

32. CONTINUATION OF THE EUROPEAN SLOWDOWN
The European Recovery of 2017, While Supported by Domestic Demand, Is Weaker Than the U.S. Recovery.
Europe Is Developing a New Framework for Financial Regulation.
A Fiscal Union Has Been Discussed, but Little Progress Has Been Made.
Structural Reforms Like a Single Market in Services Appear to Be on Hold.