Ewald Nowotny: The euro - a stability anchor in turbulent times1
Speech by Mr Ewald Nowotny, Governor of the Austrian National Bank, at the John Hopkins
University, Bologna, 10 September 2009.
* * *
When the euro was created a little more than ten years ago, many doubted whether a
common currency would be appropriate for the diverse economies of the euro area. The
financial crisis has tested the new institutions severely. As this contribution argues, the ECB
and the euro have passed the test very well. Having a common currency proved to be a
valuable asset, preventing additional strains that would have resulted from pressure on fixed
exchange rates, capital flight and exchange rate volatility. The paper portrays the measures
taken by the Eurosystem to stabilize financial markets, encourage bank lending, support the
real economy and ensure price stability. By delivering a common response to the crisis,
monetary policy provided an anchor of stability for the European Union. This positive
assessment, however, should not blind to the challenges posed by diverging trends within
the euro area, e.g. in terms of competitiveness or imbalances in the current account. Turning
the focus on the euro's perspectives in the next ten years, the final section discusses the
enlargement process and concludes on the future international role of the euro.
1. Proving the sceptics wrong?
When a bit more than ten years ago, on 1 January 1999, eleven EU member states adopted
the euro as single currency, they not only undertook a major step in the process of European
integration whose importance is difficult to underestimate. They also embarked on a bold
experiment in monetary policy that in important aspects was unprecedented in monetary
history. Never before had so many countries decided to voluntarily share sovereignty and
create a new currency from scratch.
It is therefore not surprising that the birth of the euro was preceded by years of lively debates
among academic economists on whether a European monetary union would be desirable or
even viable. There were many sceptics: It can't happen, It's a bad idea, and It can't last, as
Rudiger Dornbusch has nicely summed up the arguments of the critics (Jonung and Drea
2009). The intellectual tool at the heart of the discussion on monetary union was the theory
of optimum currency areas (OCA), which goes back to Mundell (1961). The argument is well
known: Countries or regions facing asymmetric shocks need different monetary policies and
an adjustment in the exchange rate. As the vocal euro-sceptic Martin Feldstein put it:
"A single monetary policy for a group of heterogeneous countries that
experience different shocks cannot be optimal - the problem is that, when it
comes to monetary policy, one size cannot fit all." (Feldstein 2009).
If heterogeneous regions do share a common currency, they need alternative adjustment
mechanisms like flexible wages, mobile factors, both labour and capital, and fiscal transfers.
The better these alternative adjustment mechanisms work, the lower is the cost to go for a
common currency. Introducing a common currency or joining a monetary union then comes
down to comparing the costs with the benefits (De Grauwe 2007). In the euro area the
bottom line is negative, according to the sceptics. The crucial alternative adjustment
mechanisms are too weak, raising the costs of a common currency beyond the expected
benefits (Feldstein 1997).
This simplistic OCA approach has been criticized from several angles. In particular the set-up
is static, neglecting the dynamics that the introduction of a common currency sets in motion.
In fact, monetary unification is an evolutionary process, where the use of a common currency
provokes a number of structural changes in the participating economies. A group of regions
that could not be considered an OCA ex ante, before the introduction of the common
currency, might thus evolve to become an OCA ex post (Frankel and Rose 1998). In fact,
intra-euro area trade has increased since the introduction of the euro, rising from a quarter of
GDP ten years ago to one third today. Available estimates attribute half of this increase to
the elimination of exchange rate volatility brought by monetary union (EC 2008). Rose (2008)
argues that more trade means better synchronized business cycles, thus facilitating a
common monetary policy. Structural breaks are not confined to trade in physical goods. As
thanks to the common market trade was already high among today's euro area countries
even before the inception of the common currency, the integration of financial markets was
probably more important in the case of EMU. In fact, there is strong empirical evidence for
the boost in financial integration brought by the introduction of the common currency (EC
2008, Lane 2008). Ideally, integrated financial markets encourage the movement of capital
towards its best uses, promote diversification, diminish the risk of local credit crunches and
smooth local cycles by financing temporary current account disequilibria between different
regions within a monetary union.
Overall, ten years into the life of the euro there are strong arguments to believe that the
importance of asymmetric shocks or at least their harmful side-effects have diminished and
will diminish further, especially if structural policies foster the convergence in productivity and
living standards between EMU member states. Most studies published on the occasion of the
tenth anniversary agreed that the euro had performed well in terms of macroeconomic
stability, low and stable inflation and employment growth (EC 2008, Pisani and Posen 2008).
However, unexpected to most, the tenth anniversary of the euro fell in the middle of a severe
financial market crisis that ushered in the worst recession the world has faced since the
1930s. For the euro, the crisis represented a test that neither its advocates nor its detractors
would have imagined a couple of years ago. This paper will argue that the euro and the
European institutions have weathered the challenge relatively well. In fact, the financial
turmoil highlighted a number of advantages of a single currency that the OCA framework had
tended to disregard. In the OCA argument the implicit alternative to monetary union is
national autonomy in determining the monetary policy stance, in particular autonomous
setting of interest and exchange rates. In reality, however, as has been underlined by the
financial dimension of the current crisis, floating exchange rates can hardly be considered a
viable alternative for many countries of the European Union. In addition, while the
supranational structure of the European Central Bank has been often portrayed as a source of
conflict and paralysis, the existence of a well-established, credible institution on the
European level has allowed a fast and coordinated policy response. In both dimensions, the
speedy coordination on a coherent policy response and the stability provided by a large
monetary area, the euro has proved to be an anchor of stability in critical times.
The paper is structured as follows. Section 2 portrays the measures taken by the European
System of Central Banks. As will be seen, the Eurosystem has reacted swiftly, timely and in
a manner well adapted to the specific needs of the euro area economy. Various financial
market indicators show that ECB policy effectively eased the strains in money and capital
markets and contributed to restoring the proper functioning of the financial system. While the
policy of the Eurosystem can thus already be considered a success, the true value of having
a single central bank and a common currency really becomes apparent when the
counterfactual scenario of a European Union without common currency is considered.
Section 3 gives some hints on the amount of pressure EU member currencies would have
felt in an ERM-style regime and the costs in terms of higher interest rates and/or distortion
brought by competitive devaluations. Still, there is little room for complacency. The most
important challenge for monetary union is the risk of diverging developments between euro
area countries, which are discussed briefly in Section 4. Section 5 attempts a look into the
future of the project euro. The euro area is set to take in additional members. While a
longterm benefit both to the existing union and the new members, care has to be taken that the
new members do not build up harmful financial imbalances. The paper concludes with an
outlook on the international role of the euro.
2. Speedy, adapted, determined - ECB policy during the crisis
The chronology of the financial turmoil that started in August 2007 is well known (BIS 2008,
2009). Unexpected losses in US subprime securities, a small segment of the international
financial markets, rapidly spread to the entire financial system, as risk was repriced for all but
the safest asset classes. In the process significant uncertainty arose about the size and
location of losses. The lack of information and doubts about the liquidity and solvency of
counterparties acted to amplify the effects of the initial losses. August 2007 saw a new type
of bank run, not by depositors (who are protected by deposit insurance schemes) but the
wholesale market. The premium on liquidity in the interbank markets shot up. The
impossibility to roll over short term financing forced banks and special purpose vehicles to
dispose off assets. In order to regain public confidence and create buffers against further
unexpected losses, the financial sector strove to maintain or even raise capital ratios.
Reasonable from an individual point of view, the collective effort to reduce leverage pushed
asset prices further down, provoking additional rounds of write-downs. In the first phase of
the crisis turmoil was relatively contained in the financial sector and real growth held up
reasonably well, especially in the emerging economies. In the wake of the collapse of
Lehman in September 2008, however, worries about a severe financial crisis led to dramatic
falls in the stock markets and a collapse in consumer and firm confidence. GDP growth fell
sharply worldwide and turned strongly negative in the major western economies.
2.1. Reacting to the crisis - a classification of central bank measures
Economic policy reacted by trying to short-circuit the mechanisms that had amplified the
initial losses and propagated their impact through the entire economy (Blanchard 2009). The
threat of insolvency was countered by private and public capital injections for systemically
important financial institutions. Additional liquidity was provided to accommodate higher
liquidity demand. When the crisis spilled over from the financial sector into the real economy,
a package of measures was taken to support demand and revert the broad shrinking of GDP.
Within this policy mix central banks entered on several fronts. The measures taken by central
banks can be broadly classified in two categories:
1. The lowering of policy rates. The setting of the policy rate is the standard tool of
monetary policy. Central banks around the world slashed interest rates, in particular
after output started to contract in late 2008 and inflationary pressures receded in
parallel. Currently, key policy rates are historically low in all major western
economies - currently the ECB refinancing rate is lower than ever before in the ten
year history of the institution, the same applies to the Bank of England, which is
more than three hundred years old (figure 1).2
2. In parallel as well as independently of lowering interest rates, central banks took
additional steps, which have been lumped together under the heading
"unconventional measures". These measures can be considered unconventional in
the sense that they altered dimensions of monetary policy which are normally not
subject to change. Unconventional measures concerned changes in the way liquidity
was provided as well as the direct targeting of variables outside the traditional focus
of monetary policy implementation like the quantity of money or credit as well as
various interest rates like mortgage rates or yields on corporate bonds.
Unconventional measures had two main purposes. First, to support the functioning
of financial markets and institutions so that lower policy rates were effectively
passed on to the economy. Second, in case that the official interest rate had
reached a lower bound, to provide additional stimulus to the economy. These
remarkable measures will be the focus of the remainder of section 2.
Figure 1
Policy rates
in %
7
6
5
4
3
2
1
0
01/07 04/07 07/07 10/07 01/08 04/08 07/08 10/08 01/09 04/09 07/09
Euro area USA Japan UK
Source: Central banks.
2.2. Eurosystem frontrunner in liquidity provision
Generally speaking, all major central banks implement monetary policy by setting a very
short-term interest rate (Borio 1997).3 While such a very short-term rate does not play an
direct role in spending and investment decisions, the short-term interest rate and
expectations about its future course determine the level of longer term rates, thereby
influencing consumption and investment and ultimately the central banks' strategic targets
like inflation (ECB 2004). The transmission of monetary policy impulses on the economy thus
relies very much on well functioning money and capital markets.
The first element in the transmission mechanism, the money market, came under significant
stress in August 2007. Concerns about sudden liquidity needs and caused banks' demand
for funds to rise sharply, while doubts about counterparties' solvency led supply to drop. As a
result the premium on unsecured and on longer-term loans rose sharply, the volume of funds
traded declined, and there were signs of rationing. With the collapse of Lehman in
September 2008 developments in the money market took a further turn for the worse. The
central banks reacted by making it easier for banks to access central bank liquidity along
several dimensions in order to support their capacity to lend to the private sector. The
Eurosystem was the first on August 9, 2007, to provide banks with additional liquidity. Other
central banks soon followed while the Eurosystem extended its liquidity measures step by
step in the two following years. The measures of the Eurosystem can be grouped under four
headings:
2.2.1. Fixed rate tenders with full allotment
Before the summer 2007, the Eurosystem provided the bulk of liquidity through tender
operations where banks bid a variable interest rate for a fixed amount of liquidity set by the
ECB. Under this arrangement the Eurosystem ensures that on aggregate liquidity demand
and supply are balanced. The distribution of liquidity however is left to the market
mechanism, leaving the individual bank uncertain whether it will receive funds in the ECB
tender operation or whether it will have to procure funds from other banks in the market. With
interbank markets impaired in the crisis, this uncertainty became very costly. As a
consequence the Eurosystem changed the tender procedure to full allotment at a fixed
interest rate, i.e. the Eurosystem stood ready to provide against eligible collateral as much
liquidity as the individual banks desired and did so at a fixed rate. The new tender procedure
removed any vestiges of uncertainty about liquidity management for banks. The operation
mode was first used on 9 August 2007, then again before year end 2007 and has become
the standard procedure for all tender operations from mid-September 2008 onwards. Figure
2 shows how allotted amounts increased in autumn 2008 as the Eurosystem accommodated
the risen liquidity demand of the banking sector.
2.2.2. Lengthening of maturities
As of September 2009, the Eurosystem not only provides unlimited amounts of liquidity, it
also does so at longer maturities than before the crisis. Longer maturities give banks
additional security in their liquidity management. After having introduced a new six-month
facility, the Eurosystem took in June 2009 the additional step of providing one-year funds.
Demand in the first one-year operation was huge, leading to a record amount of 442 billion
EUR being supplied to the euro area banking system. The facility should encourage bank
lending to the economy by reducing the maturity mismatch between the investment and the
funding side of the balance sheet. In figure 2, the progressive lengthening of maturities in
ECB refinancing operations is well visible.
Figure 2
Maturity composition of liquidity provided in the euro area
in billion EUR
1000
800
Lending facility
Other liquidity operations
600
Main refinancing operation
(1W)
1M
400
3M
6M
200
12M
0
Deposit facility
Liquidity needs (autonomous
factors + minimum reserves)
-200
Net liquidity
-400
01/07 04/07 07/07 10/07 01/08 04/08 07/08 10/08 01/09 04/09 07/09
Source: ECB
2.2.3. Collateral framework and counterparties
In order to obtain central bank liquidity banks have to be eligible counterparties in central
bank operations and they need securities that the central bank accepts as collateral, e.g.
government securities (Chailloux et al. 2008; ECB 2007). On both dimensions the
Eurosystem entered the turmoil period with a very flexible system already in place. In the
euro area, in principle all institutions subject to reserve requirements are eligible to
participate in open market operations.4 The list of eligible collateral was also defined very
widely before the outbreak of the crisis already, including, besides government securities, a
range of private sector securities and loans. The list was further enlarged in autumn 2008. As
a result, the total value of eligible securities is currently equivalent to about 130% of euro
area GDP, giving banks plenty of choice when obtaining funds from the Eurosystem. As will
be discussed in section 2.4 below, other central banks had to adapt their frameworks
profoundly to achieve the same results as the Eurosystem.
2.2.4. Foreign currency
The dysfunctions in the interbank market were not limited to a single monetary area, but also
affected foreign exchange markets (Baba et al. 2008). European banks found it especially
difficult to obtain U.S. dollar funding. In December 2007, reciprocal swap agreements
between the Fed and the ECB, BoE and SNB, respectively, were concluded to provide
European banks with U.S. dollar funding through the Eurosystem. Since the aggravation of
the turmoil in September 2008, the tenders were equally operated with full allotment. In turn,
the ECB signed swap-agreements with several European central banks outside the euro
area to provide euro funding to non-euro area banks.
2.3. Additional measures: covered bonds purchase program
In May 2009 the Eurosystem added a further tool to its set of unconventional measures: the
outright purchase of covered bonds. Again, the objective was to support the flow of credit to
the economy through the banking sector. Covered bonds are used by banks to refinance
their portfolios of long-term mortgage loans and loans granted to the public sector. Initially
strongly anchored in Germany, in recent years covered bonds have become an important
refinancing instrument for banks all over Europe.5 The crisis hurt the primary market for
covered bonds badly, making it more difficult for banks to refinance and thereby reducing
their willingness to grant longer-term loans. After fostering bank lending on the shorter end
through the unlimited provision of one-year funds, the Eurosystem decided to support the
markets necessary for more long-term refinancing by buying covered bonds outright. The
purchases should help revive the market in terms of liquidity, spreads and ultimately
issuance. The purchase program has a volume of 60 billion EUR and will be executed over
the coming year. Purchases started on 6 July 2009 and by 31 August the Eurosystem has
acquired bonds worth 9.2 billion EUR.
2.4. How do the measures of the Eurosystem compare to those of the Fed?
Like the Eurosystem other major central banks like the Fed or the Bank of England reacted
to the financial market crisis and economic slowdown with measures outside their usual tool
kit. Especially the Fed created numerous new programs that came to be known by their
acronyms (TAF, TSLF, etc.).
The multitude of programs and technical detail complicate the direct comparison between
central banks. In terms of their objectives, however, it appears that the Eurosystem and the
Fed are very similar: stabilize the transmission channel from its starting point - interbank
markets - to its end point - the effective flow of finance to the real economy. The apparent
differences between the measures adopted can in turn be explained to a large degree by
dissimilarities between the US and the euro area economies, both with respect to the
precrisis framework for monetary policy implementation as well as to more fundamental
differences in the structure of the financial system.
2.4.1. Operational frameworks
The central banks entered the crisis with different operational frameworks in place. In normal
times these differences were inconsequential. As the crisis unfolded, however, it became
necessary to adapt the frameworks in order to provide sufficient liquidity to the money
markets (Jobst 2009). As already pointed out above, the framework of the Eurosystem
proved very flexible, necessitating a minimum a changes. One example is the range of
counterparties. The Eurosystem always operated with a large number of counterparties,
while the Fed hat to create a number of new facilities to grant more banks access to Fed
funding.6 A similar phenomenon was observed in the area of collateral. Both the Bank of
England the Fed entered the turmoil period with a narrowly defined list of admitted securities,
basically treasury bills and bonds. When this proved too restrictive, both created swap
facilities where banks could exchange previously ineligible securities, e.g. corporate bonds,
against government securities (Fleming et al. 2009). In the euro area such programs were
not necessary, as the Eurosystem already accepted a wide range of publicly and privately
issued assets. To sum up, the different measures often reflected different starting points.
Overall, operational frameworks converged in many dimensions towards the ECB standard.7
2.4.2. Structural differences between the US and the EA financial systems
Turning to the more downstream segments of the transmission channel, policies differed
again. Here the main reason lies in the profound differences how households and in
particular firms are financed in the euro area and in the US. The euro area economy is to a
large degree financed through banks. Bank financing accounts for 145% of GDP in the euro
area while only slightly above 60% in the US. In the US, market-based funding sources like
shares and bonds amount to more than 300% of GDP, more than double the share in the
Euro area (ECB 2009a). The importance of banks is underscored by the key role played by
small and medium-sized enterprises (SMEs) in the euro area. Typically these are too small to
access financial markets. While in recent months some large companies have switched from
bank to market based finance to circumvent bottlenecks in bank financing, SMEs are
excluded from this alternative funding source. A second structural difference that influenced
the design of the policy response is the relative importance of housing for the US economy,
both in general as well as in the current crisis. In the US declining house prices have been
the trigger for the crisis and have been an important drag on household balance sheets and
consumption. In Europe, housing has played a much more minor role.
Figure 3
Size of capital market related to the private sector
percentages of GDP; end of year
400
350
300
250
debt securities issued by the private sector
quoted shares issued
200
bank loans to the private sector
150
100
50
0
Euro area USA
Source: ECB (2009a).
In order to be effective, central bank measures in the two economic areas had to target
different segments of the financial sector. Given the importance of markets in the financing of
the US economy, the Fed concentrated its efforts on key financial markets that were frozen
or characterized by excessive risk premia. Specific programs targeted the market for
commercial paper and residential mortgages. Additionally, the Fed strove to drive down
interest rates on residential mortgages by buying up government bonds. These traditionally
serve as benchmark for mortgage interest rates and by lowering government bond rates the
Fed hoped to lower consumer lending rates as well. That the Fed bought government
securities for this purpose is linked in turn to the fact that treasury notes and bonds made up
a large share of the Fed balance sheet already before the crisis. Using treasuries to influence
interest rate was thus a measure in line with previous Fed practice. To highlight the central
role of financial market prices for its policy, the Fed has labelled its approach "credit easing".
The effectiveness of monetary policy in the euro area depends much more on a functioning
banking system. Therefore the focus of the Eurosystem has been on stabilizing the funding
situation of banks. As described above, the important measures were longer maturities and
full allotment in its repo operations. Again, the emphasis on repos rather than outright
purchases is linked to the traditional importance of repos for liquidity provision in the euro
area. In this respect the purchase program for covered bonds was a very innovative step for
the Eurosystem. In terms of its objective, however, the target was again the banking system.
Reviving the covered bonds market was a means to foster the lending capacity of banks.
Consequently, the Eurosystem has branded its measures "enhanced credit support",
underlining the crucial role of bank intermediated lending in the euro area.
2.5. Limits to monetary policy
The valiant intervention of the Eurosystem to prevent a liquidity shortage in the banking
system, to restore the functioning of the transmission mechanism and to stimulate the
economy through lower interest rates should not blind to the inherent limits of monetary
policy, however. In order to be successful, monetary policy had to go in tandem with fiscal
measures. In particular, while in their traditional role as lenders of last resort central banks
can alleviate a temporary liquidity shortage of principally sound banks and other financial
institutions, monetary policy cannot be used to recapitalise banks. ECB measures had thus
to be coupled with government programs aimed at restoring the balance sheet of the banking
system through capital injections and guarantees. Equally important was the coordinated
fiscal stimulus to support consumption and investment when confidence was too low to
sustain spending through interest rate cuts alone.
Coordination is also required with financial regulation. In the short term monetary policy can
and at this time does help ease the process of resolving the financial imbalances that were at
the source of the current crisis. When it comes to preventing the recurrence of similar
imbalances in the future, however, the principal tool of monetary policy, the interest rate, is
not the instrument of choice. The principle objective of monetary policy is price stability and
using the same policy tool to achieve other targets creates potential conflicts in the setting of
the policy stance. To ensure stability of the financial system monetary policy has to be
complemented by a better and more encompassing regulatory regime.
3. Evaluating success
It is still early for a definite evaluation of the policy measures the Eurosystem has taken over
the course of the crisis. Yet even with more distance the assessment of policy will prove
difficult. To gauge the impact of central bank measures a counterfactual scenario is needed
that describes what would have happened in the absence of the measures taken by the
central banks. However, we do not possess an encompassing model of the financial system
that could take care of all the very complex yet highly relevant interactions. During a financial
crisis in particular, dynamics are highly non-linear, as the sudden worsening of conditions
after the collapse of Lehman has dramatically shown. Simply extrapolating pre-intervention
developments is unlikely to do full justice to central bank policy, if the real alternative
scenario had been a systemic breakdown.
3.1. Money and financial markets
Still, some insights can be gleaned from looking at specific segments of money and capital
markets. It has to be kept in mind, however, that such analysis is necessarily limited to partial
equilibria that neglect possibly important general equilibrium effects. The methodology is
simply to look for breakpoints in time series around the introduction of new policy measures.
The pressure on money market has manifested itself among others in rising spreads
between rates on longer-term unsecured lending, e.g. three months, and expected overnight
rates over the same period of time. The spread reflected two factors. First, banks worried
about future funding stress, which boosted their demand for longer-term funding. At the same
time, banks were concerned about counterparties' creditworthiness, which reduced their
willingness to lend, in particular for longer periods of time.8 The spread went up considerably
in summer 2007, before the year end 2007 and again sharply in September 2008 (figure 4).
Figure 4
Term lending rates and overnight index swaps
in % in basis points
6 200
5
150
4
3 100
2
50
1
0 0
01/07 04/07 07/07 10/07 01/08 04/08 07/08 10/08 01/09 04/09 07/09
Spread (rh axis) rate in MRO (lh axis)
3M EURIBOR (lh axis) 3M EONIA swap (lh axis)
Source: ECB, Thomson Reuters.
Unsecured interbank rates play an important role as benchmark for interest rates paid on
loans to households and firms in the euro area. Thus high spreads between the ECB policy
rate and money market rates increased financing costs of the broad economy above the
level desired by the ECB. In other words, the pass-through of policy rates to the economy
was impaired. As described above, the Eurosystem took a host of measures to restore the
proper functioning of interbank markets. As seen in figure 4, three month interbank rates
declined by 450 basispoints since their peak in October 2008. A large part of this decline is
due to the lowering of the policy rate by 325 basispoints, but an additional decline came from
lower risk spreads linked to the ECB liquidity measures.
Moreover, as a brief analysis in ECB (2009b) points out, the introduction of a fixed rate
tender with full allotment has contributed to stabilize the funding situation of the euro area
banking system and sustain the necessary flow of credit to households and non-financial
companies. Figure 5 shows the importance of central bank lending in the final quarter of
2008, when international flows reversed and funding from other euro area monetary financial
institutions (MFIs) dried up. In this situation, ECB funding provided a buffer, allowing even
liquidity constrained banks to provide new lending or at least to roll over existing loans.
Figure 5: Funding sources of euro area credit institutions by counterpart sector
(three-month flows; EUR billions)
Source: ECB.
Further down the transmission mechanism, it was important to see that lower money market
rates have fed through to lending rates paid by households and firms. The pass-through
typically takes some time to materialize. Evidence on lending rates so far suggests that the
historic relationship between money market rates and lending rates has continued to hold
(ECB 2009c, Jobst and Kwapil 2008). As a result rates on new loans for house purchases
and to non-financial corporations have come down broadly in line with reductions in the
policy rate, providing some needed stimulus to investment and consumption (figure 6).
Figure 6
Bank lending rates in the euro area
in %
10
9
8
households consumption
7
6 households other
purposes
5
households housing
4
non-financial companies
< 1 million EUR
3
non-financial companies
> 1 million EUR
2
1
0
01/07 04/07 07/07 10/07 01/08 04/08 07/08 10/08 01/09 04/09
Source: ECB.
Another market, where a calming influence of central bank policy can be documented, is the
international market for US dollar. Over the past decade European financial institutions had
built up a structural shortage of US dollar (Mc Guire and Peter 2009) and depended heavily
on FX swaps. With the onset of the turmoil in the money markets in August 2007, the
imbalance between US dollar de