The ECB, the banks and the sovereigns

On the bright side, the euro area economy seems finally to be on the path of a recovery at the time of writing in early 2015; and, after much hesitation, the European Central Bank (ECB) has announced a programme of sovereign bonds purchases to undertake quantitative easing (QE) which has been less divisive than what could have been expected just a few months ago. Although the programme is designed so as to decentralize the bulk of credit risk at the level of national central banks, markets have reacted positively to the announcement and, with the exception of Greece, we have seen further compression of spreads. On the dark side, however, the problem of debt overhang is likely to weigh on the euro area economies for the years to come since a low growth, low inflation environment is likely to persist even under the brightest scenario. In this context, and without a realistic prospect of further fiscal integration amongst the members of the European Union (EU), there is a risk that the European Central Bank will be overburdened by excessive responsibilities. To avoid this path, a new grand bargain between monetary policy authorities, governments and euro area institutions has to be achieved. To understand the dilemma that the ECB is likely to face if such a bargain is not achieved, it is useful to look back and analyse monetary policy in the euro area since the 2008 crisi