From Panic-Driven Austerity to Symmetric Macroeconomic Policies in the Eurozone

• Published in: Journal of common market studies 2013-09, Vol.51 (S1), p.31-41
• Main Authors: De Grauwe, Paul, Ji, Yuemei
• Format: Article
• Language: English
• Subjects: Austerity policy; Banking; Bonds; Central Banks; Central Europe; Crises; Economic crisis; Economic policy; Euro-currency markets; Eurocurrency market; Europe; European central bank; European Union; Macroeconomic policy; Markets; Panics; Policy analysis; Risk; Strategic planning
• ISSN: 0021-9886; 1468-5965
• DOI: 10.1111/jcms.12042

On 6 September 2012 the European Central Bank (ECB) announced its 'Outright Monetary Transactions' (OMT) programme, which promised to buy unlimited amounts of sovereign bonds during crises. After long hesitation the ECB appears to have made the fateful, but correct, decision to become a lender of last resort, not only for banks for also for sovereigns, thereby re-establishing the stabilizing force needed to protect the system from market fears and panic that have destabilized the eurozone. The effect of this announcement was quite dramatic. It took away the fear factor that dominated the eurozone in 2012: the fear that the eurozone could collapse soon. By taking away this existential fear, the ECB made it possible for government bond spreads to decline dramatically. Thus the decision of the ECB was a game changer and put meat onto the bones of Mario Draghi's July 2012 promise to 'do whatever it takes' to save the euro. Will this new role for the ECB be sufficient to save the eurozone? The question is analyzed in this article in two steps: first, we look at the risks that have been created by austerity; and second, we ask what kind of macroeconomic policies would be most appropriate. Adapted from the source document.