Institutional Constraints and Liquidity Provision in the Eurozone Core and Periphery Before and After Crises: A Preliminary Comparison of the Eurozone Crisis and the Coronavirus Pandemic

This paper presents a preliminary comparison of the Eurosystem response to the Global Financial Crisis and Eurozone Crises with the onset of the Coronavirus Pandemic in 2020. It analyzes bank, national central bank (NCB), and government balance sheets to show the effect of ECB decisions to consrain or enable liquidity provision across the Eurozone, particularly along core and peripheral lines. It argues that these dynamics reflect Post-Keynesian theories of endogenous money, and the potential for monetary authorities to structurally influence liquidity preference and provision. As Eurozone governments debate whether to continue these practices, systemic liquidity crises that hurt financial and fiscal activity remain a risk at the time of writing.

Financialization, Structural Power, and the Global Financial Crisis for Europe's Core and Periphery

In the aftermath of the Global Financial Crisis (GFC), European governments intervened to support domestic financial systems;several years later, peripheral European economies were at greater risk of having domestic financial crises transform into fiscal crises. While mainstream economic thinking predicts financial markets will punish risky bank behavior with higher interest rates and punitive resolution measures, in fact, banks in core European economies, which engaged in riskier activity in the subprime mortgage market, faced preferential treatment in the aftermath of the GFC. This article argues that financialization, the increased structural economic power of financial institutions, increased the structural power of core members of the Eurozone to direct supranational policies after the GFC. It supports these claims with financial data from balance sheets for a sample of EU economies, as well as institutional analysis of the financial aspects of European integration, and the financial, monetary, and fiscal responses that followed the onset of the GFC. While banks in the Eurozone core were more likely to have engaged in risky behavior, they were more likely to receive liquidity assistance from monetary authorities like the Federal Reserve due to their activity in the US. As Eurozone governments consider how to respond to crises, such as the Covid-19 pandemic going forward, policies that more equitably support governments rescuing domestic financial actors should be considered in tandem with broader financial regulations of structurally important economic institutions.