Save The Euro Policy: European Debt Crisis and Covid-19 Pandemic

Economics master project by Kadir Özen and Hirotaka Ito ’21

Euro bills and face masks

Editor’s note: This post is part of a series showcasing BSE master projects. The project is a required component of all Master’s programs at the Barcelona School of Economics.

Abstract

The 2008-2009 Global Financial Crisis led to European debt crisis leaving the periphery of euro zone with very high borrowing costs compared to core countries. When Covid-19 Pandemic Crisis hit the economies, monetary policy tools of European Central Bank prevented a similar debt crisis. We identify the underlying factor of the ECB monetary policy that is active during the 2011-2012 debt crisis and Covid-19 Pandemic periods operated through sovereign spreads preventing the contagion of fragmentation risk of euro area. We call this new factor, save-the-euro with which we shed light on the monetary policies of this unusual periods.

Conclusions

  • Identified the new dimension of the ECB Policy, save-the-euro policy, that captures stabilization policy of ECB that works through euro zone sovereign yields
  • This policy addresses euro area fragmentation risk 
  • An expansionary save-the-euro policy leads to a highly statistically significant appreciation of Euro against US dollar: Sharp contrast with the standard textbook treatment
  • Document the reversal of flight-to-safety flows in the euro area

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