European policy reaction to the financial crisis

The paper distinguish two periods of the crisis, one before and the other after the failure of the Lehman Brothers. During the first period, the effects of the crisis were mainly counter-acted through monetary interventions. During the second, which has produced more intense effects, the fiscal authorities have been bound to support the interventions of the monetary ones.
The size of the crisis in the euro area has been less dramatic than in USA for different reasons, going from the lower involvement in risky investments, to the more appropriate incentive systems and compensation policies, to the more effective regulation and oversight.In spite of these positive results, the perspectives of the crisis are uncertain.
In the new phase of the crisis a major role has to be played by national governments and fiscal policy, which must prove capable of supporting effective demand and the economies in an orderly and coordinated way. Unfortunately, the working of fiscal policy in the euro area has proved to be inadequate and to lack efficient forms of coordination. The inadequacy of the institutional organisation of policy coordination in the EMU is responsible for the slow growth of the economy in recent years because it constrains that kind of government expenditure (infrastructure, research and development, high education, etc.) which enhances the growth potentials of the economy.monetary and fiscal policies work as strategic substitute rather than complement.
The Stability and Growth Pact (SGP), a set of rules introduced to avoid uncoordinated national discretion on fiscal policy, has generated a tendency to conduct this kind of policy in a rigid way that overlooks the anti-cyclical and structural needs of the Member States. And the inadequate forms of policy coordination in the EMU have also produced a tendency to conduct fiscal policy in a restrictive way, failing to take advantage of the persistent trade surpluses of the area. This constraint on effective demand has negatively affected investors’ confidence, their expenditure and, consequently, productivity and growth.
The financial turmoil has shown that the financial systems are highly integrated and intertwined, clarifying that it is necessary have a global approach to these problems. In this approach the Financial Stability Forum (FSF) and to the Basel Committee on Banking Supervision (BCBS) play a leading role. The Eurosystem cooperates with them and works at the EU level under the lead of the ECOFIN Council and the European Commission. Up to now the institutional arrangements of fiscal and monetary policy coordination of the euro area have not proved effective and, according to the literature, need to be reformed.[1] The lack of satisfactory arrangements for policy coordination is the major source of preoccupation for the future evolution of the crisis in the euro area.


Carlo Panico
Francesco Purificato