Authors Iain Begg | Gabriel Glöckler | Anke Hassel ... - The Europaeum

Target financial stability
The EMU architecture was designed with the objective of safeguarding
price stability in the Eurozone, leaving financial stability aside. After a
long period of excess financial liquidity flowing in and out of European
financial markets, asset price inflation, imprudent accumulation of
financial risks and over reliance of financial institutions on leverage, this
omission invites renewed interest.
While the euro has crucially contributed to economic and financial
stability, 1 financial stability as such has been absent from the
macroeconomic models used by the ESCB, and EU central banks in
general. Several economists and institutions, including the Bank for
International Settlements, have long proposed the need for central banks
to target asset price inflation as well, with an eye on preventing asset price
bubbles. Moreover, as Paul de Grauwe suggests, since financial stability
today also depends on avoiding deep recessions, stabilising the business
cycle should also be of concern to the central bank. 2 This might be
departing from the Maastricht-prescribed exclusive ECB focus on
monetary stability, a field where the ECB has so far demonstrated success.
Recent financial developments, however, have shown that a narrow
definition of central bank success as confined to price stability is not
enough. There is a case to be made for the ECB and other central banks to
follow financial sector asset price movements more closely.
The “regulatory philosophy” applied on the eve of the crisis has been
shown to be wrong: a systemic crisis can still occur even if bank supervisors
ensured individual banks were safe. There is now a shift in emphasis from
micro to macro-prudential regulation, focusing on systemic stability. 3 The
de Larosière Group 4 has recommended setting up a European Systemic
Risk Council (ESRC), under the ECB, comprising EU-level committees of
financial and banking supervisors and the Commission, with the task of
gathering information on all macro-prudential risks in the EU, and
working closely with the IMF, the Financial Stability Forum and G20 at a
global level. In late September 2009 the Commission proposed the
creation of a European Systemic Risk Board (ESRB) along the lines
recommended by de Larosière.
Some believe it is time to revise the Treaty of the EU, to grant supervisory
authority and formal lender of last resort capability to the ECB, the only
institution in the Eurozone able to issue unlimited amounts of a global
reserve currency. Article 105.6 of the EU Treaty provides the possibility of
transferring Eurozone financial supervision (except for the insurance
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After the crisis: A new socio-economic settlement for the EU