Sayuri Shirai: Europe's economic and financial developments and
monetary policy in Japan
Speech by Ms Sayuri Shirai, Member of the Policy Board of the Bank of Japan, at the
77th meeting of the Society for the Economic Studies of Securities, Tokyo, 9 June 2012.
* * *
I. Introduction
Good afternoon, members of the Society for the Economic Studies of Securities. My name is
Sayuri Shirai, and I am a Policy Board member of the Bank of Japan. It is indeed a great
honor and a pleasure for me to give a talk at this esteemed society. Today, I would like to
focus on Europe, which is the common theme of today's meeting, with the greater emphasis
being on the euro area, where developments have shown considerable uncertainty over
recent months.
First, let me briefly outline the content of this presentation, which will consist of four parts. I
would like to begin by describing recent changes seen in the euro area. Next, I will
summarize my view on the fundamental issues facing the euro area. Following that, I will
review the region-wide responses to the European sovereign debt crisis. In the final part, I
would like to summarize recent economic and price developments in Japan, the impact of the
European sovereign debt crisis on the Japanese economy, and Japan's monetary policy and
related developments.1 I very much look forward to a lively discussion with you after my talk.
II. Changes in the political situation and greater emphasis on growth - two
recent transformations in the Euro Area
As we are all aware, global financial markets have been nervous in recent months following a
period of some easing of strains in the first quarter of 2012. I believe that two important
changes have been associated with the recent enhanced sensitivity of global financial
markets: one is changes in the political situation; the other is growing focus on growth, the
interpretation of which appears to be somewhat different from what it was in the past.
Recent changes in the political situation
With regard to political changes, I view the first event in the euro area as having been the
collapse of the coalition government in the Netherlands on April 23, 2012. This occurred as a
result of disagreement over budget cuts. That dispute emerged because then-Prime Minister
Mark Rutte had stressed the need for additional budget cuts in order to meet the 3-percent
fiscal deficit target - the common target set by the EU - by 2013. However, his minority
coalition partner, the Freedom Party, rejected the proposal and demanded that the target
year be postponed. As you are aware, the Netherlands is one of the "core" countries of the
EU,2 which are known for having achieved favorable macroeconomic performance over a
long period. Prior to the global financial crisis of 2008-09, the fiscal balance of the
Netherlands had recorded a surplus, and the ratio of sovereign debt to GDP had remained
below the EU's 60-percent threshold. Since the crisis, the fiscal balance has shifted to a
deficit, with a peak of 5.5 percent of GDP in 2009; however, the Netherlands managed to
reduce that to 4.6 percent by 2011. Owing to the continued fiscal deficit, the sovereign debt
to GDP ratio has risen to 65.2 percent, though this is well below the euro-area average of
88 percent. Moreover, the Netherlands is, like Japan, a net external creditor nation, thanks to
its accumulated current account surpluses - a phenomenon that is in contrast with the
"peripheral" countries of the EU. The unemployment rate in the Netherlands is also low at
around 5 percent. Therefore, I was genuinely surprised by the news about the political
turmoil. This event reminded me that fiscal austerity measures are painful even for the core
countries, and the Dutch public felt frustrated about the recession that had continued over
three consecutive quarters from July to September 2011 and the resultant rising
unemployment rate. On April 26, nonetheless, the Dutch government managed to produce
an agreement with some opposition parties on austerity measures worth around €12.4 billion
in 2013 to meet the 3-percent target; however, the Dutch general election is scheduled to
take place in September.
The next regime change took place in France - the second-largest economy in the euro area
- and that event surprised the world. The first round of voting in the presidential election was
held on April 22, 2012, in which Mr. François Hollande, the candidate for the Socialist Party,
took a lead over Mr. Nicolas Sarkozy, the incumbent president and candidate for the Union
for a Popular Movement. During the election campaign, Mr. Hollande promised to renegotiate
the terms of the EU Fiscal Compact, which was signed by 25 of the 27 EU member countries
in March 2012.3 Like Mr. Sarkozy, he is also committed to meeting the 3-percent fiscal deficit
target in 2013 and subsequently balancing the budget by 2017. Mr. Hollande's plan was to
achieve this by, for example, imposing a tax on financial transactions, introducing a
75-percent income tax on earnings above €1 million euros, and raising the corporate tax on
the biggest companies to 35 percent, while reducing taxes on small and medium-sized
enterprises (SMEs) and scrapping a value-added tax (VAT) increase proposed by
Mr. Sarkozy. Mr. Hollande has also promised to expand public spending by such efforts as
raising state spending, reducing the retirement age to 60 years for those having worked more
than 41.5 years, hiring 150,000 youths in state-subsidized jobs, and hiring more teachers
and police officers. In the second round of presidential voting held on May 6, Mr. Hollande
won the first vote and became the country's first socialist president in 17 years. The market
now appears to have adopted a wait-and-see attitude before it judges the credibility of his
fiscal consolidation plan as well as the fate of the Fiscal Compact.
The biggest political change occurred in Greece after the general election held on May 6,
2012, in which the Panhellenic Socialist Movement (PASOK) and New Democracy (ND)
- who had joined in a grand coalition in November 2011 headed by Mr. Lucas Papademos,
the former European Central Bank (ECB) vice-president - lost by wide margins. Since no
political party won an absolute majority of seats, President Karolos Papoulias attempted to
offer successive exploratory mandates to the leaders of the three main parties in accordance
with the constitution. However, each party ended up failing to form a government and
returning their mandates to the president. After the president had failed in his final attempt to
form a government after meeting all party leaders, it was decided that Mr. Panagiotis
Pikrammenos, head of the Council of State, would become the leader of a caretaker
administration until a new election could take place on June 17. The result of the Greek
election intensified the nervousness of markets amid fears that a new government other than
PASOK and/or ND could reject the fiscal consolidation and economic reform programs
already agreed with the troika - the European Commission, the International Monetary Fund
(IMF), and the ECB. Greece would thus fail to receive its scheduled financial support,
thereby leading to the collapse of the government administration and a possible exit from the
euro area.
Increasing attention on growth
Against the background of these political changes, I noticed that a second type of change
has occurred in recent months: a number of key policy players have begun to actively use
the key word "growth," though in a different context from how it was used in the past. For
example, ECB President Mario Draghi stressed the need of a Growth Compact in addition to
the already-agreed Fiscal Compact on April 25, 2012. On May 3, he subsequently elaborated
the idea of a Growth Compact by proposing the following: (1) an increase in the involvement
of the European Investment Bank (EIB) and a redirection of EU structural funds toward the
low-income areas; and (2) prioritizing an expenditure cut (especially a cut in current, rather
than investment, expenditure) over a tax increase.4
On May 5, European economics commissioner Olli Rehn made remarks somewhat similar to
those of Mr. Draghi and stated that the EU needs to increase public investment to promote
growth and jobs in the region. Mr. Rehn said it should do so by creating project bonds for
infrastructure development (as proposed by the European Commission in October 2011),
increasing the lending capacity of the EIB, and improving accessibility of EU structural funds
for guaranteeing lending to SMEs. Mr. Rehn also stressed that, based on economic analysis,
the Stability and Growth Pact contains considerable scope for judgment regarding public
deficit and debt and also that its legal provisions applied to excessive deficit procedure; he
encouraged countries with fiscal surpluses to boost public spending. On May 8, European
Commission President Barroso announced a plan to expand infrastructure investment in the
EU by, for example, issuing project bonds by June 2012. Regarding the feasibility of a
renegotiation of the Fiscal Compact, Mr. Jean-Claude Juncker, head of the Eurogroup, has
taken a balanced position between the demand by Mr. Hollande to renegotiate the compact
and resistance to this by Ms. Angela Merkel. On May 7, Mr. Juncker declared that it would
not be possible to renegotiate the Fiscal Compact, although it would be possible to add
growth elements, but not necessarily in the form of a treaty. Reflecting these new moves,
EU President Herman Van Rompuy called for an informal European Council (EU summit) to
be held on May 23 to discuss the balance between growth and fiscal austerity measures.
EU's approach to growth thus far
The question emerges as to why the growth agenda has now suddenly become a focus of
attention. Does it mean that previously the EU had barely paid attention to the issue? It is
clear that the EU has been tackling the issue of promoting growth together with fiscal
consolidation over the past few years. As you may recall, for example, the European Council
in June 2010 adopted the growth strategy called "Europe 2020," whereby each member
country had to undertake structural reforms toward strong, sustainable recovery. The
strategy also targeted EU needs to better focus on boosting Europe's competitiveness,
productivity, growth potential, and economic convergence to deliver more growth and jobs.
Accordingly, five headline targets were agreed to as common objectives for guiding the
action of member countries.5
In line with this approach, the EU introduced a so-called "European Semester" in 2011,
whereby each member country submitted a medium-term budgetary strategy and a National
Reform Program to the European Commission for assessment. The commission then
published a country-specific report on detailed policy recommendations, covering fiscal
consolidation and structural reforms. Moreover, the EU introduced the "Macroeconomic
Imbalance Procedure (MIP)" in December 2011, which, as the name suggests, is a
surveillance mechanism that aims to prevent and correct macroeconomic imbalances within
the EU. This alert system uses a "scoreboard" of 10 indicators as well as detailed country
studies. Each indicator is given a threshold, so a large divergence in each country's
performance from the threshold functions as a warning signal.6 As in the original "Excessive
Deficit Procedure," which was applied to the size of fiscal deficits, strict rules come into effect
in the event of a large divergence in the form of a new "Excessive Macroeconomic Imbalance
Procedure (EIP)"; this carries a possible financial penalty of up to 0.1 percent of GDP for
euro-area member countries. The decision-making process in the new regulations will
employ reverse qualified majority voting to make all the appropriate relevant judgments
before a penalty is introduced. This semi-automatic procedure makes it difficult for member
countries to form a blocking majority.
In February 2012, the European Commission disclosed the first Alert Mechanism Report. Of
the 27 EU member countries, those that are already under enhanced economic surveillance
- Greece, Ireland, Portugal, and Romania - were exempted from examination under the
macroeconomic imbalances. The report indicated that 12 countries - Belgium, Bulgaria,
Denmark, Spain, France, Italy, Cyprus, Hungary, Slovenia, Finland, Sweden, and the United
Kingdom - bore some potential risk related to macroeconomic imbalances and thus
warranted further detailed analysis.7 According to the report, Spain, for example, will take
time to correct its external and internal imbalances despite the efforts being made to rectify
its imbalances owing to the sheer size of the internal and external debt. It has also been
pointed out that a fall in employment linked to downsizing in the construction sector and the
economic recession has been aggravated by a sluggish adjustment of wages. At the end of
May 2012, the commission confirmed that the 12 countries need to correct the large
macroeconomic imbalances and that the adjustment process should be closely monitored.
5
The five targets were as follows: (1) an increase of the employment rate for women and men aged 20-64 to
75 percent; (2) achieving combined public and private R&D investment levels to 3 percent of GDP;
(3) reducing greenhouse gas emissions by 20 percent compared with 1990 levels; (4) reducing school
drop-out rates to 10 percent and increasing the proportion of the population aged 30-34 having completed
tertiary or equivalent education to 40 percent; and (5) promoting social inclusion, particularly by reducing
poverty and aiming to lift at least 20 million people out of the risk of poverty and exclusion.
6
The 10 indicators are divided into two areas: external imbalances and competitiveness, and internal
imbalances. The external imbalances and competitiveness comprise the following: (1) three-year average of
current account balance as a percent of GDP (with an indicative threshold of between plus 6 percent and
minus 4 percent); (2) net international investment position as a percent of GDP (minus 35-percent lower
quartile); (3) three-year percentage change in real effective exchange rate (between plus and
minus 5 percent); (4) five-year percentage change in export market shares (minus 6-percent lower quartile);
and (5) three-year percentage change in export market shares. The internal imbalances comprise the
following: (6) year-on-year change in deflated house prices (plus 6-percent upper quartile); (7) private sector
credit flow as a percent of GDP (plus 15-percent upper quartile); (8) private-sector debt as a percent of
GDP (160-percent upper quartile); (9) general government debt as a percent of GDP (60 percent); and
(10) three-year average of the unemployment rate (10 percent).
7
The report concludes that the following countries do not require a further detailed review: the Czech Republic,
Germany, Estonia, Latvia, Lithuania, Luxembourg, Malta, the Netherlands, Austria, Poland, and Slovakia.
Background to the refocus on growth
Thus, it could be said that greater efforts have been made over recent years at the EU level
to boost growth and competitiveness. Why, then, has the question of growth been discussed
so intensively over recent months? In general, boosting growth requires the implementation
of various structural reforms (Chart 1). And some peripheral countries have only just
launched some needed structural reforms and are thus far from being in a position of
completing them. The answer to this question may be associated with public anxiety because
some reforms may be accompanied by social transformation and short-term economic
suffering, such as wage restraints, job losses, and profit losses in protected sectors.
Moreover, the public may become frustrated by fiscal austerity measures that end up
squeezing domestic absorption and promoting deleveraging of the banking sector in the
short term; this is because it takes time to realize long-term gains, such as an improvement
in credibility and a cut in long-term interest rates. Furthermore, sluggish growth in the rest of
the world has not generated sufficient external demand for the euro area that could offset the
shrinkage in domestic demand driven by the collective acts of fiscal consolidation. In
addition, it is important to recognize that the context of growth has shifted from improving
competitiveness, which could be achieved in the medium to long term, to moderating
short-term pains caused by austerity measures implemented during the economic recession.
Various interpretations related to growth
Despite the above reasoning, it is my impression that the word "growth" is interpreted
differently from the way it was in the past and by the people employing the term. It appears
that there are at least three types of interpretation.8 According to the first interpretation, the
EU should expand its region-wide infrastructure investment by issuing project bonds and
more actively utilizing EIB and EU structural funds to mitigate the adverse impact of fiscal
austerity measures adopted by a number of member countries. The second interpretation
holds that the current fiscal consolidation schedule could be slowed down - for example, by
extending the target year for fulfilling the 3-percent fiscal deficit goal if the situation allows it.9
With this interpretation, the better mix of revenue-generating and expenditure-reducing
measures is also stressed. According to the third interpretation, structural reforms should be
prioritized so as to effect an immediate positive impact on growth and employment. This
latter option may help reduce the sense of exhaustion with austerity programs that some
countries have experienced.
However, I believe that these interpretations do not rule out the structural reforms needed for
boosting growth in each country. Some action has recently been associated with the first
interpretation. On May 23, the informal European Council agreed that the board of the EIB
would be invited to consider an increase of its capital by June for financing projects across
the EU. The previous day, political agreement was also reached by the Council of the EU,
European Commission, and Parliament with regard to the pilot phase of the project bonds.
Based on the guarantee of €230 million from the EU budget, project bonds could possibly
finance up to €4.6 billion of key infrastructure projects in the areas of transport, energy, and
communications.10 The second interpretation, or a moderation of the fiscal consolidation
schedule, might be feasible if a country could present a credible medium-term plan. But this
may not be possible for some peripheral countries owing to a lack of market confidence. On
this issue, the European Commission made an initial move with Spain by suggesting a
possible extension of one year on the schedule for meeting the 3-percent fiscal deficit target
to 2014 - on condition of improved expenditure control over local governments and the
submission of a credible two-year budget plan for 2013-14.
III. Three fundamental issues related to the Euro Area
So far, I have discussed recent changes in the political situation and the increased focus on
growth in the euro area. My observation is that those changes reflect deeper fundamental
issues pertaining to the region: (1) issues arising from accumulated current account
imbalances; (2) issues related to the savings-investment gaps that constitute the current
account imbalances; and (3) issues arising from accumulated fiscal imbalances. These
issues are of course interconnected, but the distinction may assist in understanding the
fundamental problems that the region faces.
Accumulated current account imbalances
Regarding the first fundamental issue, the current account imbalances have expanded in the
euro area since the adoption of the euro (Chart 2). Thanks to an elimination of exchange-rate
risk and a decline in inflation differentials, peripheral countries - such as Greece, Ireland,
Portugal, and Spain - gained access to considerable financial resources from the region at
substantially lower interest rates than before. In real terms, their interest rates were lower
than those of the core countries. Cheap external finance enabled the peripheral countries to
swell their net external debt (Chart 3).11 Major financiers to the peripheral countries were
largely concentrated in the core countries (with current account surpluses) and France. Since
capital inflows to the peripheral countries mostly took the form of bank loans and bond
issues, the growing net external debt made those countries more prone to changes in
investor sentiment. In retrospect, if those countries had allocated the external financial
resources toward more productive investment and investment leading to a shift to
higher-value-added economic structure, they could have improved their economic
productivity and enhanced international competitiveness. Subsequently, this would have
enabled those countries to repay their external debt by gradually shifting to current account
surpluses.
Instead, the capital inflows largely financed domestic consumption and the real estate and
construction sectors (although this comment does not necessarily fully apply in the case of
Ireland, where a number of high-technology multinational firms have been operating). Thus,
the foreign borrowing did not promote sustainable economic growth or contain external debt
growth (Chart 2). To reduce net external debt, it is necessary to achieve a current account
surplus. At this stage, only Ireland, whose current account deficit was initially small, has
succeeded in achieving a current account surplus. It is fair to say that the other countries
have made efforts to reduce their current account deficits - at the scale of around
5 percentage points or more of GDP in the case of Greece and Spain and 4 percentage
points in Portugal during the period of 2007-11. Nonetheless, it will be some time before
these three countries could achieve current account surpluses, and so their net external debt
is unlikely to decline soon. In other words, the external imbalance on a stock (debt) basis will
remain for the time being. Meanwhile, among the core countries, Finland reduced its current
account surplus to GDP ratio by 5 percentage points over the same period, though Germany,
Austria, and the Netherlands barely reduced their current account surpluses. In particular,
the current account surplus to GDP ratio remains high in Austria (around 2 percent),
Germany (around 5 percent), and the Netherlands (over 7.5 percent). This enables these
core countries to further accumulate their net external assets. In other words, the surplus
countries have continued to accumulate net external assets, and the deficit countries net
external debt - despite some emerging improvements over the current account imbalances
in the euro area (Chart 3). I believe that this partly explains why the debtor peripheral
countries currently find it difficult to resume adequate private-sector-based capital inflows
despite their adjustment efforts.
Growing savings-investment gaps
With respect to the second issue listed above - savings-investment gaps - the savings-GDP
ratio (hereafter, saving rate) showed a declining trend in the four peripheral countries before
the global financial crisis. The scale of the decrease was greatest in Greece followed by
Portugal (Chart 4). It could be said that Greece and Portugal allocated a large part of their
capital inflows to both private and public consumption (such as public pay, pensions, and
medical care). Owing to the tendency for Germany to increase the saving rate, the current
account imbalances between Greece and Portugal, on the one hand, and Germany, on the
other, could be explained primarily by the difference in saving-rate patterns. However, the
saving rates of Ireland and Spain were not very different from that of Germany: Ireland and
Spain increased the investment-GDP ratios (hereafter, investment rates), while that of
Germany remained at a low level. Thus, the current account imbalances between Ireland and
Spain, on the one hand, and Germany on the other, could be attributed largely to the
difference in investment patterns (Chart 5). An increase in the two countries' investment
rates reflected a boom in real estate and construction investment. It is a well-known fact that
those two countries underwent rapid real estate price appreciation prior to the global financial
crisis.
Since the global financial crisis erupted, all four peripheral countries have faced a decline in
their saving rates. This implies that the improvement in the current account balances, as
indicated earlier, arose solely through a sharp decrease in the investment rates. This was
particularly the case in Ireland, where the drop in real estate prices was more drastic than in
Spain and which experienced the sharpest decline in the investment rate. However, the
decline in the investment rates for the other three countries has also been great. Given that
the four peripheral countries have suffered from a substantial fall in investment, it is
understandable that the idea of expanding EU-wide infrastructure-investment projects to
offset the adverse impact of austerity measures has been widely stressed recently, as noted
earlier.
Growing fiscal imbalances
On the third fundamental issue listed above - that related to accumulated fiscal
imbalances - Greece was the only country where the size of the fiscal deficit was large and
whose general government debt as a share of GDP exceeded 100 percent even before the
global financial crisis (Charts 6, 7). In Ireland and Spain, the ratio of general government debt
to GDP remained below the 60-percent target thanks to their accumulated fiscal surpluses.
Portugal had been poised to bring its fiscal deficit-GDP ratio down toward the 3-percent
target prior to the global financial crisis, and so its general government debt-GDP ratio
remained at around 70 percent.
Since the global financial crisis, the fiscal balances of most euro-area countries have
deteriorated because of the implementation of fiscal-stimulus policies and measures to bail
out the banking sector. The size of deterioration of the fiscal balance between 2007 and
2011 reached minus 2.6 percentage points in Greece, minus 13.2 percentage points in
Ireland, minus 1.1 percentage points in Portugal, and minus 10.4 percentage points in Spain.
By contrast, the deterioration in Germany's fiscal deficit-GDP ratio was a mere
1.2 percentage points over the same period, which contributed to the widening gap in fiscal
balances in the euro area. Moreover, Germany's fiscal deficit-GDP ratio is already below the
3-percent target and, according to the European Commission, the ratio is projected to drop to
around 1 percent in 2012 and reach a balance by 2013. Germany achieved more than
3 percent economic growth for 2010-11, and its unemployment rate dropped to a historical
low of 5.6 percent. These favorable outcomes have helped Germany conduct fiscal
consolidation without having to introduce drastic measures to cut its fiscal deficit. Meanwhile,
the peripheral countries are obliged to contain their fiscal deficits further to prevent overall
government debt from swelling. Since Germany faces a decline in the ratio of general
government debt to GDP in the near future, this means that the internal imbalances on a
stock (debt) basis are likely to expand in the region.
IV. Assistance at the EU or Euro-Area level
Given this background, the peripheral countries, rather than the core countries, are expected
to make greater economic adjustments, such as fiscal consolidation and structural reforms.
Some of these reforms will take time and cause hardship before they bear fruit. To mitigate
the adverse impact of the adjustments, financial assistance at the EU or euro-area level is
necessary. This is especially true for the peripheral countries because of their lack of
private-sector capital flows. Without regional or international financial support, such countries
would have been forced to squeeze domestic absorption so drastically that the public would
have had to go through intolerable suffering - notwithstanding that a correction could have
been made more rapidly for both the internal and external imbalances.
First recipient of international financial assistance - Greece
As is well known, Greece was the first country in the euro area to receive international
financial assistance. The total amount was set at €110 billion in the first round of assistance,
which was agreed to be shared between the euro-area member countries (€80 billion) and
the IMF (€30 billion). Since the general government debt for Greece had been growing
rapidly, the idea of private-sector involvement (PSI) gained favor in the euro area. After
negotiations, a large number of private sector creditors finally agreed to voluntarily accept
restructuring of the Greek debt. This PSI took place before the completion of the first round
of financial assistance scheduled for Greece and was regarded as a precondition for the
second round of financial assistance.12 The total amount for the second round of assistance
was set at €172.7 billion, including undisbursed amounts from the first program. The cost
was agreed to be borne by the euro area (€144.7 billion) mainly through the platform of the
European Financial Stability Facility (EFSF) and the IMF (€28 billion). The contribution from
the euro area included the amount related to the PSI incentive and bank recapitalization.
Newly established financial support system in the Euro Area
It will be recalled that the Greek sovereign debt crisis had a contagious effect on other
peripheral countries such as Ireland and Portugal. As a result of the contagion, these
countries found it difficult to raise funds in the market and thus asked the EU, the euro area,
and the IMF for financial support - in November 2010 in the case of Ireland and in May 2011
in the case of Portugal.13 The EFSF was established by the euro area following the decisions
made in May 2010, and it began operations in August 2010. It is backed by guarantee
commitments of €780 billion from the member countries and has a lending capacity of
€440 billion. In November 2011, furthermore, it was agreed to increase the EFSF's power by
(1) providing partial protection certificates to a sovereign bond issued by member countries,
and (2) creating a coinvestment fund to purchase sovereign bonds in primary and secondary
markets.
To prevent contagion of the sovereign debt crisis to other larger member countries, the euro
area decided to create a permanent crisis mechanism called the European Stability
Mechanism (ESM). The ESM, which will become operational in July 2012, will take over all
the features of the EFSF and have a maximum lending capacity of €500 billion, based on the
paid-up capital of €80 billion. Both the EFSF and ESM will coexist until the EFSF expires in
mid-2012. The new treaty to create the ESM was signed in February 2012. The decisions to
grant stability support are generally taken by mutual agreement, but in the case of urgency
they could be decided by a qualified majority of 85 percent of the votes cast. In addition, the
IMF has made efforts to raise funds globally in an effort to establish sufficient power to be
able to deal with a potentially contagious crisis arising from Europe. At the G20 summit of
April 2012, the IMF announced that it had raised more than $430 billion, including
contributions from the euro area ($200 billion) and Japan ($60 billion). Although not all of the
IMF funds will be available to Europe, it certainly reduces uncertainty related to the issue of
how to handle larger countries, such as Italy and Spain, in the case of contagion.
ECB monetary policy as a crisis response
In response to the recent sovereign debt crisis, the ECB has adopted a series of measures
since the middle of 2011. After having raised its policy rate or the interest rate on the main
refinancing operations from 1 percent to 1.5 percent by raising 25 basis points each in April
and July 2011, the ECB reduced the rate back to 1 percent by cutting 25 basis points each in
November and December. Other recent measures included US dollar liquidity-providing
operations, a cut in the reserve ratio, a modification of collateral requirements, fixed-rate
longer-term refinancing operations (LTROs) with full allotment, a securities market program,
and a covered-bond purchase program.
Among these measures, two notably appear to have contributed substantially to the
stabilization of global financial markets: (1) the