_<u>(consistently) focus on output growth and strengthening the impact and credibility of other government reforms.</u>_ _<u>Monetary policy: a slow awakening, delaying recovery.</u>_ The ECB’s primary mandate is price stability<sup>47</sup> and the main tool through which the ECB traditionally conducted monetary policy was the refinancing rate it charged banks on short term loans. However, like other central banks post‐ 2008/2009, it also changed the size and composition of its balance sheet through direct interventions. During the financial and sovereign crises, the ECB intervened to stabilize financial markets, but shifted to combating potential deflation in the Eurozone. It engaged in both credit easing (to improve the transmission of monetary policy in specific markets) and quantitative easing (providing additional accommodation when short term interest rates are effectively zero or negative), and when traditional policy tools were not sufficient to bring normalcy into financial markets and inflation expectations.<sup>48</sup> Before the sovereign debt crisis struck in 2010, the ECB had already cut its main refinancing rate by 325 basis points, down to 1% (Figure 11a).<sup>49</sup> It also launched its covered bond purchase program (CBPP). The Fed’s balance sheet expanded at around the same rate in 2008‐09.

**Figure 11.a: Insured export credit Figure 11.b: Institutional quality rank constant (2005) Euros**

<!-- Start of picture text --> 15 30 0<br>12 25 20 17<br>31<br>20<br>9 40 37<br>15<br>6 60<br>10 69<br>3 5 80<br>0 0 100<br>2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2000 2002 2004 2006 2008 2010 2012 2014<br>Greece Ireland Portugal Spain Greece Ireland Portugal Spain<br><!-- End of picture text --> Values for Spain are on the right axis. Source: Berne Union via Joint BIS‐OECD‐IMF‐WB External Debt Hub.

Corruption perception index. Source: Transparency International.

After the 2008‐09 crisis, Fed and ECB policies diverged. ECB policy was relatively tight in comparison (Fig 11a, 11b) when GIPS entered the sovereign crisis. In 2010, in response to the sovereign debt crisis, the ECB launched its Securities Market Programme (SMP)<sup>50</sup> and the European Financial Stability Facility (ESFS) was announced by the European Council. SMP purchases began in 2010, and were mostly effected during May 2010 and end 2011‐ the period when GIP were under stress. In 2010, the ECB bought Greek, Irish and Portuguese bonds and by 2011, it was buying Spanish bonds. However, SMP purchases were sterilized to avoid the risk of inflation and the ECB monetary base did not increase for a year ‐ between July 2010 and July 2011‐ even though the sovereign debt crisis had begun. Between January and August 2011, SMP purchases were put on hold<sup>51</sup> and the Fed’s balance sheet expanded much faster than the ECB’s until end‐2011. Though its reference rate was already higher than that of the US Fed, the BOJ or the BOE (Figure 12a), the ECB, to counter rising inflation in core countries, raised its reference

> 47 In contrast, the Fed has an explicit dual mandate: price stability and full employment. The Fed has also had a wide range of supervisory and regulatory powers over financial institutions and activities. http://www.federalreserve.gov/pf/pdf/pf_5.pdf

> 48 ECB 2015a has a detailed treatment of the ECB’s various policies.

> 49 See also Fawley and Neely, 2013, Micossi, 2015 for a full discussion.

> 50 The SMP allowed the ECB to buy distressed sovereign bonds in secondary markets.

> 51 There was some disagreement among members about the program; Panico and Purificato (2013) concludes that the ECB did not do enough to indicate commitment to member countries.

25