An Introduction to the Future Europe Journal Issue 2

1. Two different models of monetary integration in times of crisis

No political or economic institution can escape change, either through mutation or adaptation to new conditions. Indeed, sometimes radical change becomes necessary. Ideally an institution should be designed to be flexible enough for change to be easily possible while embedding new information-gathering and knowledge-building in its functionality, so that it allows those in charge of the institution to learn from past mistakes. No institutional setting is perfect, nor can it ever be regarded as complete, and no political project should be taken as permanent or fixed ‘once and for all’. The European Union (EU), and the Eurozone in particular, is no exception. When these principles are applied to something such as money, design is critical if its functions are to be preserved as a means of minimising transaction costs in a well-functioning market economy.[1] To achieve this, preservation of the purchasing power of the currency becomes essential. This is the most relevant criterion to assess the functionality of a currency as the universally accepted means of exchange among market participants. This is the benchmark that should be used to assess money and its effectiveness in facilitating transactions, which requires analysis of the legal, political, and economic institutions that affect the creation of money in a given territory.

The euro was envisaged as an essential step in the completion of the European single market and also, let us not forget, as a step forward in the process of enhancing both economic and political integration in the EU. In the language of the Maastricht Treaty, the aim was to achieve an ‘ever-closer union among the peoples of Europe’ (European Parliament, 2018). As one of the contributors to this issue reminded us some years ago, the euro is also a political project (see Schwartz, 2004) and, I will add, this is particularly apparent and indeed always becomes more relevant during a time of crisis – all the more so in particularly severe or protracted crises. The Global Financial Crisis, the subsequent ‘euro crisis’, and the COVID-19 crisis have all been accompanied by significant changes within the institutions governing the Eurozone, as well as the political and economic foundations upon which it rests. And this is precisely what this issue intends to address: it will consider how the monetary and fiscal responses to the pandemic have already affected and are likely to affect the ‘direction of travel’ in the development of the Eurozone, including its main institutions and policies. We will focus on the discussion of the types of economic policies put forward since spring 2020, how they were motivated, and what their main goals were, while paying particular attention to the role(s) played by the European Central Bank (ECB) in driving or financing such policies. Already a key EU institution before 2007, with the last two crises the ECB has effectively developed its functions and transformed itself into the most relevant policy actor in the understanding of recent economic and political events in the Eurozone.  

When the last stages in the process of monetary integration in Europe were being discussed, in the 1980s, the most popular model for the adoption of both a common and single currency for all member states was to be found in the so-called Delors report, which featured a very specific vision for monetary integration in Europe. In fact, adopting the definitions used by two of the authors in this issue elsewhere (see Capie and Wood, 2003), what the architects of the euro chose at the time was to create a ‘monetary union’, which involves the surrendering of the national currencies and the adoption of a single currency for all. The alternative scenario would have been a ‘currency union’ whereby countries keep their own currencies but adopt a common standard for all in terms of an external or common currency, as well as establishing a rule for determining the value of their national currency against it (under either a floating or a fixed exchange rate system). The latter model was used by the gold standard countries more than a century ago (1870s–1913), where the national currencies could be exchanged for gold at a given (in this case, very firmly fixed) parity. This system was very flexible and decentralised, as it allowed members to enter and leave at will, without the need to seek approval from the other members nor to coordinate their economic policies. All that new members had to do was to announce, commit to, and honour the exchange of their currency for the common currency at a set parity (that is, the convertibility of national bank notes into gold, under the classical gold standard). And indeed, countries could change the parity and even abandon their commitment as desired, again autonomously, because they remained fully sovereign in the making of their own economic decisions.

In sharp contrast with a currency union, under a monetary union such as the Eurozone, there is a single central bank and a single currency and member states join by international treaty and thus by mutual accord. This construct is a more regulated and rigid system. Indeed, it closely resembles the formation of the traditional modern state, which usually has ‘one currency, one central bank and one Treasury’, though the latter feature was not mentioned in the initial Eurozone constitution in the 1990s. Therefore, a monetary union was established without a fiscal union. Instead, the Maastricht and Lisbon treaties included several provisions (which are still in place) to prevent member states from borrowing from the European System of Central Banks (that is, the ECB plus the EU national central banks) and featured the well-known ‘no bailout clause’, preventing one member state rescuing another during a time of crisis. This effectively meant that a fiscally errant member state, in the absence of the other member states’ support or ECB intervention, would be left to leave the Eurozone if necessary. In addition, following the successful example of the Bundesbank, the ECB was granted independence and was also given a very clear mandate to maintain price stability above other goals in its statutes. All in all, the euro architects opted for a model of a single currency for all, but not a political currency – one which, above all other considerations, should be managed in a way that preserves its purchasing power. However, this model has been revealed once again to be at odds with a fully functioning (modern) central bank able and willing to support the government(s) in times of severe crisis.

Monetary history shows that modern central banks with the monopoly power to issue the national currency were established to support the government’s efforts to raise funds more easily. If we take the example of the Bank of England (1694), the newly established Bank was given special privileges by the government, including the exclusive ability to issue paper notes for a certain amount, against the granting of a loan to the government for the same amount (see Smith, 1936). Other privileges and the extension of the monopoly power were granted in the following years, and the amount lent out to the government increased correspondingly. This process results in the establishment and development of a bank (later referred to as the central bank) with a significant advantage in the market against its competitors. At the time, lending to the government was not a routine operation, of course, but in times of crisis the national central bank would be expected to (and actually did) come to the rescue of the government by acquiring its newly issued debt. The central bank helped to alleviate the financial strain on the government by offering lower interest rate payments and thus made the servicing of the debt more affordable. In such critical times, the timely assistance of the national central bank expands the boundaries of the government’s budget constraint by providing an additional means to finance spending (that is, the printing of new money to pay for the debt). More recently, in the first decades of the twentieth century, national central banks started to engage in what we now call ‘open market operations’ on a more regular basis, accepting government bonds as the main form of collateral in the provision of regular credit to commercial banks. This is how modern central banks operate routinely nowadays, thus incentivising the purchase of sovereign bonds by commercial banks, which they will be able to present to the national central bank when requesting both regular and extraordinary lending. Therefore, if only indirectly, the system of money creation in modern economies does favour government financing. In addition to this, particularly since the 2007/2008 crisis, central banks have been willing to purchase sovereign bonds on a massive scale.[2]

2. The debate on the role and independence of the ECB

One of the key questions discussed in this volume will be whether national central banks, and indeed the ECB as the central bank of the Eurozone, can be truly independent in times of severe crisis. In other words, can they prevent governments using them as a source of privileged finance? This tension has been present since the establishment of the ECB. Should the central bank’s main task be the preservation of the purchasing power of the euro, or should the ECB act primarily as a standard ‘national central bank’, though in this case the central bank of a multi-state monetary union, thus being willing to support the government(s)? The Maastricht Treaty provisions seemed to have established provisions to preserve the ECB from political interference, and yet we have seen how asset purchase programmes, mainly consisting of the acquisition of member states’ debt (so-called quantitative easing), were launched after the Global Financial Crisis, albeit only after a long delay, and again, this time in a much more rapid and decisive manner, during the COVID-19 crisis. It seems that the link between the national central bank and the government is so profound and intricate that central bank independence becomes irrelevant as an effective institutional constraint when it matters the most.

The debate on the role of the ECB within the Eurozone is crucial to understand the evolving nature of the Eurozone and the type of economy Eurozone policymakers wish to create. It is far from being just a technical discussion on ECB policies and functions, as it very much involves a conflict between two very different views on the construction of the Eurozone: on the one hand, one that favours a decentralised vision of the Eurozone, with a strong but limited ECB and monetary independence from any political power, as well as member states being in charge of their own fiscal policies; versus, on the other hand, a more centralised vision of the Eurozone, with the ECB willing to support the member states as required, and also featuring increased oversight by the European institutions of member states’ fiscal and other economic policies. Whatever the reader’s preferred option, it is very apparent that the ‘euro crisis’ and the COVID-19 crisis have moved the ‘political pendulum’ quite rapidly towards a more centralised vision of the Eurozone, one where the range of EU institutions and government policies become more prominent and more significant regarding the regulation of the economy. Peacock and Wiseman (1967) showed that if government spending is increased in times of a major event such as a war, it very rarely returns to the pre-crisis level. This phenomenon has been coined the ‘displacement effect’ of public spending. The same feature seems to apply to the changes made to the EU institutions and policies since the ‘euro crisis’. The Eurozone’s institutions have been transformed and now have greater control of policy while adopting a more interventionist political and economic stance, which has displaced the consensus and vision for the euro at the time of its launch in 1999. Either vision of the Eurozone, if it had been designed coherently, would have been feasible, although they represent very different ideas on the role of government in a market economy.  

3. Summary of the content

In the remainder of the Introduction, I will summarise briefly the content of the contributions to the volume. The topics covered are quite diverse, ranging from questions of political economy, such as the analysis of the approach taken by policymakers in addressing the COVID-19 crisis and the legacy of such an approach in the future, as well as the constitutional stance of the Eurozone, on the one hand; to more concrete questions related to the ECB’s independence, the recent review of its policy strategy, the assessment of the bailouts in the Eurozone compared with those in the United States, and the current debate on the reform of the Eurozone’s fiscal rules and the completion of the so-called European banking union, on the other. What all these contributions have in common is an assessment of how much EU and Eurozone institutions – and their policies – have changed in the light of the impact of the COVID-19 crisis, as well as some proposals regarding the changes needed to improve the functioning of the Eurozone.

The first two articles in the volume are very much focused on how the COVID-19 crisis has affected the underlying political and economic approach taken by policymakers in Europe to address the pandemic and, specifically, the policy design and policies favoured to overcome the crisis. In the first article, Alberto Mingardi (Istituto Bruno Leoni) provides an excellent – though not very optimistic – narrative on the strongly interventionist paradigm and top-down vision adopted by policymakers in addressing the COVID-19 crisis. Mingardi elaborates on the distinction made by the great US economist Thomas Sowell between two opposite visions of society and political matters. The first acknowledges that we are restricted necessarily by limited knowledge and information. Therefore, the outcomes in human society are the result not of an omniscient central planner but rather of cooperation and interaction among individuals pursuing their own goals in the best way they can (thus, the ‘constrained vision’). The second presumes that society can be managed to achieve a greater good and that if there is a problem, we will surely be able to identify the solution for it, which can be efficiently implemented by the policymaker (thus, the ‘unconstrained vision’). The constrained vision would favour a bottom-up approach in designing economic and political institutions; in sharp contrast, the top-down unconstrained vision calls for those in power who think they know the solution to the problem to intervene. Mingardi evaluates the solutions to the challenges posed by the pandemic since 2020 in the light of these two visions and concludes that they have been very much determined by politicians with a top-down mentality, behaving as if they knew the solution to the problem as well as showing a complete lack of regard for any limitation in their knowledge affecting such policies, in the form of growing public deficits or other effects. In his view, this is a trend that will have lasting consequences for the direction of the economy in the post-COVID-19 world in Europe.

In a similar vein, Professor Pedro Schwartz (Universidad Camilo José Cela) continues with a political economy analysis of the reaction of the EU authorities to the COVID-19 crisis, and in particular the ‘Recovery Plan for Europe’ approved in 2021. This plan includes the 2021–2027 Multiannual Financial Framework and the new ‘Next Generation EU’ fund. Professor Schwartz identifies the roots of the Plan in the industrial policies of governments in the nineteenth century and after the Second World War in Continental Europe and the United States. In line with these policies, the Next Generation EU plan assumes that governments know how to manage the economy, which justifies the creation of more institutions and a larger bureaucracy to design and implement the plan. This means a stronger Commission with both more powers and new sources of revenue, and thus higher taxes in Europe. As Professor Schwartz puts it, rather than a bottom-up process led by free markets and institutional competition, this is another attempt at further integration of the Eurozone through the creation of a more federal Europe with more powers at the centre. In the author’s view, this is another example of economic planning that, as F. Hayek and L. Mises showed a century ago, is by its own design and limitations condemned to fail. Professor Schwartz concludes with a very clear assessment: ‘whether this Plan will make Europe freer and more prosperous must be answered with a hesitant No’.

Professors Forrest Capie (Bayes Business School) and Geoffrey Wood’s (University of Buckingham) piece is the first in a series of four articles focused on the ECB and how its roles and policies have been affected and changed, particularly since the outbreak of the COVID-19 pandemic. They explain the origins of the Bank of England in 1694 and the subsequent development of its roles to highlight how the unavoidable connection between the national central bank and the government goes back to its foundation. This makes it impossible to have a truly independent central bank. In fact, we can find abundant historical evidence of the support given by the national central bank to the government, particularly in times of crisis. The ECB is no exception. Even if it was designed as an independent central bank in the Bundesbank tradition, the ECB has acted politically, especially during the COVID-19 crisis, with the purchase of government debt from the member states. In their view, this has not been due to any need to improve the monetary transmission mechanism in the Eurozone; rather, it was done to support government finances. Instead of focusing their discussion on central bank independence, they propose that the ECB follows the principles (rules) adopted by successful central banks in the past, such as the provision of liquidity against collateral in times of a bank crisis, thus acting as an effective lender of last resort of the banking system; and as regards the purchase of public debt, a sound rule would consist of ensuring that price stability is preserved, thus essentially limiting the scale of such purchases. In the light of the current inflation episode in the Eurozone and other leading economies, the application of this principle would have resulted in the ECB not buying as much debt as it has done since March 2020.    

Professor Alberto Ruiz-Ojeda (Universidad de Málaga) discusses the constitutional arrangements in the Eurozone and suggests a reform which would establish a new constitutional consensus; it would include the addition of meta-rules in the fiscal and monetary realm in order to protect the euro from political interference, which in turn would enhance economic growth and productivity in the Eurozone. As he explains in his article, the current institutional setting of the Eurozone, very much the result of the Maastricht and Lisbon treaties, has proven insufficient to protect the value of the single currency. It is an asymmetrical system that delegates monetary policy to the ECB while keeping fiscal policies at the national level, though subject to some form of fiscal constraints. However, the ECB is lacking in a monetary strategy and a policy rule suitable to assess inflationary trends in the first place and eventually to tackle inflation, while the EU’s fiscal rules have proven to be ineffective in keeping member states’ public finances in check. This has resulted in tensions among the Eurozone membership, very much exemplified by the dispute between the 2021 ruling of the German Constitutional Court regarding the ECB’s policy on asset purchases, and the European Court of Justice. Ruiz-Ojeda advocates the adoption of new fiscal and monetary rules at the EU’s constitutional level to overcome the flaws of the current euro architecture. These rules would be binding and could not be altered by policymakers at will.  

Professor Tim Congdon (Institute of International Monetary Research) addresses one of the major challenges of the Eurozone. As he puts it, since its establishment the Eurozone has been confronted by a potential ‘free rider problem’; all member states benefit from low and stable inflation, but in a multi-state Eurozone each member state will be tempted to overspend and borrow from the ECB, thus contributing to a higher rate of inflation whose costs will be shared by all member states. Describing the problem in some detail, Professor Congdon explains how money is created in modern economies by the banking system when extending new loans, and indeed by the central bank when lending to the government. The author explains how the behaviour of the ECB has changed in the last 20 years. It was initially under the influence of the Bundesbank tradition (1999–2007), but then came three major crises that have dramatically changed the ECB policies and paradigm. As summarised in the article, thanks to these three crises ‘the ECB and the nation states have become financially and monetarily irresponsible. Unless these irresponsible tendencies are reversed, the future viability of EMU [Economic and Monetary Union] will come into question.’ The ‘free rider problem’ is yet to be resolved, and the ECB’s response to the COVID-19 emergency since March 2020 has resulted in extraordinary growth in the amount of money and in the highest rate of inflation in the Eurozone since 1999. In the author’s opinion, since 2007 the ECB has abandoned its adhesion to the Bundesbank tradition and principles and, particularly since 2020, it has entered uncharted territory with an expansion of its asset purchases operations, high monetary growth, and high inflation. The free rider problem has clearly been reflected in the size of the Target-2 system (im)balances, which have grown significantly as a result of the last three crises.

John Greenwood (International Monetary Monitor Ltd) continues with a discussion of the ECB, assessing its 2021 monetary policy strategy review. The focus of his analysis is whether the new strategy will contribute to stability in the rate of growth of (broad) money in order to achieve low and stable inflation in the long term. In his view, with its recent review the ECB has deviated from its previous anti-inflation strategy in favour of policies focused more on the short term. The changes made in the ECB strategy in 2021 resemble those introduced by the US Federal Reserve in 2020. The author shows how both major central banks have moved their strategies in the same direction, very much disregarding the effects of changes in the amount of money on asset prices, consumer prices, and nominal income. In the case of the ECB, the 2021 strategy review has meant the abandonment of the two pillars used by the ECB to make policy decisions (the so-called economic pillar and monetary pillar) in favour of interest rate-based policies that disregard any use of the amount of money as a key indicator of changes in prices in the medium and long terms. This means that the ECB does not consider changes in the amount of money to be the primary determinant of changes in prices in the long term. In his view, as we are already observing with the acceleration of inflation in the US, these changes will not deliver more stable money growth or steady inflation in the Eurozone.

Professor Francisco Cabrillo (Universidad Complutense de Madrid and UNIR) and Dr Rocío Albert (Universidad Complutense de Madrid) address another major issue in the Eurozone – the debate on the reform of fiscal rules after COVID-19, which were suspended during the pandemic. The authors discuss the changes made to the fiscal rules in the Eurozone in the aftermath of the Global Financial Crisis to control member states’ public finances, which resulted in ‘an excessively complex system, which in practice makes it very difficult to carry out such control. The main variables to monitor are not clearly defined, and their assessment is subject to so many possible interpretations that the application of the preventive and corrective arms of the SGP [Stability and Growth Pact] becomes virtually non-operational, inefficient, and even non-credible.’ The article includes the proposal of clear rules – rather than just standards – to contribute to fiscal sustainability in the Eurozone. They support the adoption of a fiscal rule that requires balanced budgets in a multi-year budget period, so that it considers the effects of the business cycle on public revenues and spending. In order to avoid a deficit bias in the rule along the cycle, the rule would require balanced budgets or even a surplus when the economy is growing at an annual rate of 2 per cent or above. As regards the size of the public debt, they suggest a rule that sets up different criteria according to the size of the debt to GDP ratio in each member state, in particular imposing a higher debt reduction when the ratio is higher than 90 per cent. In the application and enforcement of these rules, the authors advocate the establishment of independent fiscal institutions with new powers in all member states, though supervised by the European Commission.

In the final part of this issue, we address two specific questions resulting from the Global Financial Crisis in 2007/2008: the bailouts of European banks along with a proposal for reform, and the completion of so-called European banking union.

Aneta Hryckiewicz (Economic Institute for Empirical Analysis), Natalia Kryg (European Bank for Reconstruction and Development), and Dimitrios P. Tsomocos (Saïd Business School) start by asking a very controversial, and indeed unpopular, question: what should be done about a bank considered to be systemic or ‘too big to fail’ when it needs to be bailed out? In the absence of a market willing to take the lead, they consider government intervention for distressed banks as inevitable in some cases and focus in their article on what we need to learn from the experience of bailouts in Europe since 2007. They do so by comparing what they consider a more successful bailout experience in the United States during the Global Financial Crisis. In the US, the Treasury acquired preferred stocks which, with some exceptions, did not carry voting rights. As part of their intervention in the banking sector, US authorities focused on making changes in bank governance, without being involved in the day-to-day banking business. In addition, priority was given to the disinvestment of the Treasury holdings at the earliest opportunity. In fact, as the authors underline in the article, this strategy was very successful as the Treasury was able to recover the vast majority of the funds by 2013 and had made a profit by the end of 2018. In contrast, in Europe the rapid deterioration of banks’ balances after 2007 resulted in a more significant intervention in those banks by the member states, in the form of partial or total nationalisation of several banks with the acquisition of common stocks which carried voting powers. This effectively meant a much larger involvement of the government in the banking business. The authors conduct an empirical analysis to compare these two bailout systems and conclude that the US system was able to facilitate access to sufficient capital by the distressed bank, as well as enabling changes to be made in the senior management team of the bank along with its restructuring. In the light of this experience, they propose the creation of a unified resolution system in Europe run by the Resolution Authority with an intervention focused on changes in the bank’s governance.    

The volume ends with Professor Rosa Lastra’s (Queen Mary University) contribution, in which she welcomes the centralisation of both the supervision and the resolution of significant credit institutions in the aftermath of the Global Financial Crisis but also identifies a ‘missing pillar’ in the development of European banking union. This is the lender of last resort function. In her article, she advocates for the ECB to be responsible for the provision of liquidity not only to the market (as is already the case) but also to individual credit institutions in need of liquidity, which at the moment is done by the national central banks in the Euro area. In a crisis scenario, time is of the essence and the ECB is in a better position than member states’ authorities to assess contagion risks in the Eurozone; therefore, the ECB should be responsible for the provision of emergency market liquidity as well as individual bank liquidity to illiquid but solvent credit institutions. In addition, Professor Lastra underlines the differences in the management of a crisis by the ECB on the one hand and the Bank of England and the US Fed on the other, as in the Euro area there is no single Treasury able to back the decisions made by the ECB. The article ends with a positive assessment of the response by the ECB and the EU to the COVID-19 crisis, in the form of the provision of extra liquidity to the market, the pandemic emergency purchase programme, and the approval of the Next Generation EU programme.


Capie, F. , & Wood, G. (2003). ‘Introduction’. In F. Capie and G. Wood (eds.), Monetary Unions: Theory, History, Public Choice. London: Routledge.

European Parliament (2018). ‘The historical development of European integration’. European Parliament. PE 618.969. June.

Hayek, F. (1976). Denationalisation of Money. Hobart Paper Special 70. London: Institute of Economic Affairs.

Peacock, A. , and Wiseman, J. (1967). The Growth of Public Expenditure in the United Kingdom, 1890–1955. London: George Allen and Unwin.

Schwartz, P. (2004). The Euro as Politics. London: Institute of Economic Affairs.

Smith, V. (1936). ‘The Rationale of Central Banking and Free Banking’. Liberty Fund.

[1] Of course, an alternative paradigm is also possible; rather than designing what money is and how it should be governed, it could be left to the market to do so. This would be a bottom-up approach to monetary integration and monetary creation in Europe that would require no explicit design by anyone. Rather, money (or, to be more precise, different types of money) would be issued in a competitive system guided by the ability of the issuer to provide the best means of payment in the economy (see the seminal work by Hayek (1976) on the ‘Denationalisation of Money’).

[2] Strictly speaking, open market operations are repurchasing operations involving the central bank and commercial banks, whereby a public bond is taken by the central bank temporarily as collateral when a commercial bank borrows from the central bank. Once the maturity of the loan expires, the bond returns to its owner, the commercial bank. The asset purchases operations, or quantitative easing, we have witnessed since 2007/2008 are of a different nature; they involve an outright purchase of (mainly but not only) public bonds by the central bank.


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