Sebastian Grund

LLM Candidate, Harvard Law School.

PhD in international law, University of Vienna.

Formerly Policy Expert at the European Central Bank.

A common safe asset for the Euro area – The legal perspective

11/03/2020

The euro area consists of 19 European states that share a single currency but lack a common fiscal policy. The European sovereign debt crisis of 2011-2012 revealed the fragility of this set-up, when distress in certain national debt markets hampered the transmission and the singleness of monetary policy, pushing the currency union to the brink of a break-up. Another related complication that came to the fore during the crisis was the interdependence between sovereigns and their banks. In the euro area, banks are heavily exposed to sovereigns, which means that shocks in the banking sector propagate to the sovereign and vice versa. This mechanism has been referred to as “doom loop”, “feedback loop”, or “sovereign-bank nexus”. Notwithstanding major efforts to revamp the supervisory and regulatory architecture, the doom loop is seemingly be alive and kicking.

I. INTRODUCTION

The euro area consists of 19 European states that share a single currency but lack a common fiscal policy. The European sovereign debt crisis of 2011-2012 revealed the fragility of this set-up, when distress in certain national debt markets hampered the transmission and the singleness of monetary policy, pushing the currency union to the brink of a break-up. Another related complication that came to the fore during the crisis was the interdependence between sovereigns and their banks. In the euro area, banks are heavily exposed to sovereigns, which means that shocks in the banking sector propagate to the sovereign and vice versa. This mechanism has been referred to as “doom loop”, “feedback loop”, or “sovereign-bank nexus”. Notwithstanding major efforts to revamp the supervisory and regulatory architecture, the doom loop is seemingly be alive and kicking.

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