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

Connect with the authors

About the BSE Master’s Program in Economics

Mini-Bot: Ingenuity or Ignorance

Alessandro Franconi ’17 (Macroeconomic Policy and Financial Markets)

“Mini-Bot: Ingenuity or Ignorance” is my first policy brief for the Luiss School of European Political Economy.

“The concept of using mini-BOTs to pay off trade payables may seem like a good idea, but if we analyze it in detail we can intuitively conclude that such a tool is futile and limited…It is clear that the mini-BOTs are a completely sterile, if not harmful, device for public finances, as their implementation (or just the information that the government is officially studying their implementation) would put again Italy on the road to leaving the euro.