Europe between financial repression and regulatory capture

Highlights

The financial crisis modified drastically and rapidly the European financial system’s political economy, with the emergence of two competing narratives. First, government agencies are frequently described as being at the mercy of the financial sector, routinely hijacking political, regulatory and supervisory processes, a trend often referred to as “capture”. But alternatively, governments are portrayed as subverting markets and abusing the financial system to their benefit, mainly to secure better financing conditions and allocate credit to the economy on preferential terms, referred to as “financial repression”.

We take a critical look at this debate in the European context. First, we argue that the relationship between governments and financial systems in Europe cannot be reduced to polar notions of “capture” and “repression”, but that channels of pressure and influence bet-ween governments and their financial systems have frequently run both ways and fed from each other. Second, we put these issues into an historical perspective and show that the current reconfiguration of Europe’s national financial systems is influenced by history but is not a return to past interventionist policies. We conclude by analysing the impact of the reform of the European financial architecture and the design of a European banking union on the configuration of national financial ecosystems.

1. Introduction

In the long shadow of the euro-area crisis, the relationship between governments and their banks has been brought to the the centre of the policy debate in Europe by the implementation of regulatory reforms, the risks associated with financial fragmentation, and the fight to sustain the flow of credit to governments and corporates. The attempt to interpret the patterns of pressure and influence running between governments and their financial system has led commentators to rediscover and give new life to concepts originating from academic debates of the 1970s such as “regulatory capture” and “financial repression”. Government agencies have been frequently described as being at the mercy of the financial sector, often allowing financial interests to hijack political, regulatory and supervisory processes in order to favouring their own private interests over the public good ” target=”_blank”> ².

But a closer look at the experience of European countries suggests that both the notion of “capture” and “repression” are too narrow to describe the complex relationship between financial stakeholders and their national governments. Instead, the history of European financial systems reveals how governments, central banks, public sector banks and financial institutions have historically been part of deeply interconnected European financial ecosystems bound both by political and financial relations. Patterns of pressures and influence within these financial ecosystems have always run in both directions and have been mutually reinforcing.

As Andrew Shonfield argued in 1965 in one of the first detailed analyses of the role of governments and of the “balance of public and private power” in western capitalism after WWII, these different financial ecosystems in Europe varied across countries because of different histories and institutions that framed such relationships” target=”_blank”> ⁴. The response to the euro-area crisis seems to have further encouraged this trend, and new institutional mechanisms, in particular the creation of a European banking union, typically aims at Europeanising further banking supervision and resolution thereby potentially reducing further the weight of national historical and institutional idiosyncrasies.

However, claims suggesting the end of national financial ecosystems in Europe are at best premature. This paper discusses how national financial ecosystems in Europe continue in fact to exercise a significant influence over financial policy-making and how the transition towards a more integrated financial framework (ie banking union) influences these relations. Our conjecture is that the rapid reversal of financial integration and a re-domestication of financial flows and financial risks triggered by the crisis” target=”_blank”> ⁶. More recently, many commentators seeking to explain the regulatory failures at the origin of the financial crisis have repeatedly pointed the finger towards the political clout of financial lobbies. The Report by the Financial Crisis Inquiry Commission established by the US Congress to investigate the roots of the crisis found that: “the financial industry itself played a key role in weakening regulatory constraints on institutions, markets, and products”. The Commission explained this influence by making reference to the $2.7 billion in federal lobbying expenses and $1 billion in campaign contributions spent by the financial sector between 1999 and 2008” target=”_blank”> ⁸.

The perception of financial industry groups capable to often act as rule-makers has brought a number of commentators to analyse the relationship between US financial firms and the political system through the lenses of “regulatory capture”. The origins of the term are usually attributed to the work of George Stigler in the early 1970s but this concept has been brought to the fore by Simon Johnson, former IMF chief economist, and other commentators during the recent financial crisis” target=”_blank”> ¹⁰, which naturally create a peculiar relationship. In Italy, state-owned banks have been privatised over the last few decades, but many of these institutions remain still today under the influence or control of foundations (“fondazioni bancarie”) that maintain close ties with the political system and in some cases are directly appointed by political parties” target=”_blank”> ¹². These formal and informal ties between the political system and the banking system make banks particularly receptive to political guidance at the local, state and federal level but also allow these institutions to exercise a significant influence over the regulatory process through their political connections.

Another characteristics of the European financial systems that is often ignored by US-centric analysis of regulatory capture is the greater reliance of European countries on bank credit for financing the real economy as well as sovereign debt. This structural feature of European financial systems, gives to banks rather than other financial intermediaries a particular importance and creates channels through which national financial institutions are likely to gain leverage over policy makers. As Cornelia Woll argues, “decision-makers will act in favour of the industry because they need finance for funding the so-called real economy, for funding the government and as a motor for growth”” target=”_blank”> ¹⁴.

Indeed, some of the same dynamics have been fully in display during the response to the global financial crisis when concerns about the potential impact of regulation on banks balance sheets and possible consequences on the extension of credit to the economy have brought politicians in a number of European countries to support the demands from their financial industry to water down these regulatory measures. The greater success of European banking lobbies in having their demands met during the implementation of Basel III at the European level has clearly been influenced by the link with the real economy that the financial industry was able to establish” target=”_blank”> ¹⁶. At the same time, the watering down of key regulatory requirements has been accompanied by repeated calls from European politicians towards banks which were asked to commit to increase credit to the domestic economy.

Overall, the experience of recent banking regulatory reforms in Europe are indicative not only of the fact that the significant political influence of banks is not uniquely a US phenomena. On the contrary, the influence of European banks over the design of financial policies frequently arises from a number of structural characteristics of the different financial ecosystems in which they find themselves operating. But shifting the focus from the direct lobbying of financial institutions towards the characteristics of different financial ecosystems in Europe also reveals a further corrective to notion of ‘capture’ that has frequently been used to interpret the relationship between banks and government agencies. While many US-centric have focused on the influence of financial actors and other interest groups over the state, channels of pressure and influence between European governments and their banking system within distinct European financial ecosystems have frequently been presented as running both ways and feeding from each other. These reciprocal channels of influence between European governments and their banking systems will be explored in the next section by looking at modern European history.

3. Historical perspectives on financial ecosystems

Examples of this symbiotic relationship between European governments and their financial system abound throughout modern European history. European governments have indeed frequently used banks to expand and broaden their reach over the economy either domestically or internationally. The creation of Deutsche Bank in 1870 in the context of the formation of the German Empire and the need to challenge the leadership of British banks in the global markets, as well as the creation of public credit institutions in Italy and France to support national financial development or postwar reconstructions are only some of the many examples throughout modern European history of the way through which financial nationalism and The promotion of “national banking champions” was also often intended to allow competition with European neighbours and the projection of power internationally to accompany the internationalisation of domestic firms” target=”_blank”> ¹⁸. Central banks − which were still at the time institutions with private shareholders granted with a monopoly on the right to issue − were perfect examples of these connections between governments and financial capitalism that developed throughout the nineteenth century. European governments or monarchs also exerted controls on some large credit institutions that were crucial for the financing needs and debt repayments of local authorities, as the Caisse des Dépôts and Crédit Foncier in France and the Cassa Depositi e Prestiti in Italy.

For a long period, the collusion between State and banks went hand in hand with significant government interference in the activities of financial firms in order to channel and allocate credit in a non-competitive way. But the controls of the State over financial systems strongly increased after the Great Crash throughout the 1930s in democratic and dictatorships alike, and were reinforced after the second world war with bank nationalisations and the increasing role given to public credit institutions.

Also in the years following the end of the second world war, western European governments continued to strategically directs their domestic banking system towards the achievement of specific public policy objectives. The term “financial repression” − coined in the early 1970s to describe developing economies in Asia and Latin America” target=”_blank”> ²⁰. This alternative financing of state intervention contained public debt while introducing political pressures and "distortions" of competition in the financial sector. Banks were sometimes requested to hold a certain amount of government bonds and of claims on certain sectors as a percentage of their total asset. The same outcomes could also be pursued indirectly by central banks in their design of monetary policy operations (reserve requirements, credit ceilings, liquidity ratios) and through collateral policy facilitating banks access to the discount window for certain categories of claims. The intervention of governments in the working of their respective domestic markets also frequently occurred through the development of public credit institutions as substitutes to banks and through the direct investment of Western European governments in some specific sectors (housing, agriculture, industry etc) and support industrial policies or resort to the development of state-owned credit institutions or public banks as substitutes to banks.

All in all, these policies were used – at different degrees across countries– to control risk in the banking sector, to support industrial policy, facilitate government-financing needs and control inflationary risks” target=”_blank”> ²² at the national level between government agencies, public and private lending institutions and industries. Employees circulated easily and frequently between public administrations and nationalised firms or banks. In the name of the public interest, industries negotiated with governments in order to receive subsidies, to be given priority, and sometimes to be rescued” target=”_blank”> ²⁴.

In sum, while distinct financial ecosystems characterised by symbiotic relationship and reciprocal patterns of influence between governments and their banking industry have exercised a significant influence in the past, these differences have frequently been presented as in decline at the turn of the century. The question remains whether the current crisis has interrupted this decline and reinvigorated past behaviours and historical relationships?

4. The European crisis and the recomposition of national ecosystems

The abrupt interruption in cross border capital movement has triggered a clear renationalisation of finance over the last three years and has profoundly modified relations between national financial systems and governments in Europe” target=”_blank”> ²⁶ has been followed by widespread calls for tighter regulation and supervision of the financial sector as a whole and of the banking sector in particular. In addition, in many instances, the crisis has unsettled governments’ access to financial markets and increased their borrowing cost. The economic downturn has in turn woken up a certain desire and a need to address credit shortages and intervene more forcefully in the financial system to improve and augment the extension of credit and facilitate the recovery. However, if governments in Europe have not resorted completely and openly to the policies and instruments that had characterised the Bretton Woods era, a number of developments could indicate a redefinition of the relations between the public and the financial sector along the lines of pre-existing historical relations and behaviours.

The most common and clearly identified aspect of these changing landscapes is the extent to which holdings of public debt have been on balance re-nationalised. Debt sustainability concerns, uncertainty about the integrity of the European monetary union and the reluctance of the central bank to address risks of multiple equilibria in sovereign debt markets in the euro area” target=”_blank”> ²⁸.

These dynamics have provoked a vivid reaction denouncing both financial repression and “fiscal dominance”” target=”_blank”> ³⁰.

Arguably, a large part of these claims, are in reality claims on the financial sector caused by the extension of large amounts of liquidity to the banking sector. Indeed, never in history did central banks support an entire financial system to this extent. While the UK stands out here as having provided relatively little liquidity support to its banking sector beyond purchase of government bonds, the ECB, on the contrary, has accumulated claims to the banking sector by a record amount. In 2011, central bank claims on the banking sector in the euro area was 30 percent of GDP, ranging from 0.1 percent for the Bank of Finland to 68.7 percent for the Bank of Ireland. Interestingly, those central banks that have the least government debt, tend to have the most claims on the private sector thereby potentially revealing important differences in the structures of national ecosystems.

The intervention of central banks in the financial sector has further been increased by the acknowledgement that macro-prudential regulation is a necessary complement to modern central banking. The new macroprudential mandate acquired granted during the crisis to central banks is in part a return to the theory and practice of central banking 30 years ago in Europe (even though the term “macroprudential” was coined recently) when central bankers thought their role extended well beyond the narrow remit of monetary policy.

A third significant evolution in the relationship between governments and the financial system that has in part turned the clock back can be found in the return of “public credit institutions” (also known as “development banks”). These state-owned lenders in France, Germany, Italy and Spain, respectively the Caisse des dépôts et consignations (CDC), the Kreditanstalt für Wiederaufbau (KfW), the Cassa depositi e prestiti (CDP) and the Instituto de Crédito Oficial (ICO) have considerably increased their scope as of recently. The CDC and CDP are old state owned institutions (created respectively in 1816 and 1863) that played an important historical role in the economic development of France and Italy. The KfW was created in 1948 to support the reconstruction of the German economy while the Spanish ICO is more recent (1971). Their role in the economy has increased greatly and rapidly during the financial crisis.While total assets of the credit institutions of the Euro Area increased by only 4 percent from 2008 to 2012, assets of public credit institutions increased by at least 30 percent and even 128 percent for the ICO. These institutions have also, together with the European Investment Bank, which has also expanded its lending activities quite substantially by 56 percent over the same period (2008-2012), collectively created the “long-term investors” club to promote their role in the economy as a provider of long term financing” target=”_blank”> ³² during the first wave of the crisis in particular in the case of IKB. It also expanded its financing to local SME and infrastructure in Germany and abroad. Indeed, the KfW played an important role in German financial aid to other European countries as in Greece with some €22bn of outstanding credits at the end of 2011, Italy with some €1.7bn, Ireland with €1.4bn, Spain with €3.2bn. These institutions are therefore not only important to understand the political economy of national eco-systems but also of new financial relationships between European nations during the crisis. Indeed, in Spain for instance, KfW lends to Spanish SMEs through the ICO. It is also interesting to observe that the countries that did not have an important “development bank” (such as Portugal and Greece) are now in the process of creating one” target=”_blank”> ³⁴. The intervention of European states in their financial system have not intended to become substitute for fiscal or industrial policy and thus differ drastically from historical quantitative tools used by central banks thirty years ago. Nonetheless, it is clear that the greater re-nationalisation in the holding of public debt by domestic financial institution, the unprecedented increase in central bank credit to the private economy, and the return of public credit institutions are three developments since the financial crisis that have reaffirmed the centrality of distinct European financial ecosystems after two decades in which these ties had been eroded by financial liberalisation and the process of European monetary integration.

5. European financial ecosystems and the move towards a banking union

The previous section has discussed how the changes in the patterns of financial intermediation and sovereign debt holding emerged in response to the crisis, but the implications of these trends extends well beyond economics and deep into the political arena and the debate concerning the reform in the European financial architecture.

The long and troubled history of the construction of an integrated market for financial services in Europe has often been described as a “battle of the systems” across different European countries, in particular between systems such as Britain where capital markets played a key role as the main source of financing and the continent where banks dominated the provision of credit” target=”_blank”> ³⁶.

The realisation of an integrated financial market encouraged first by the Banking Directive in 1977, the Single European act in 1986 and the Lamfalussy Report in 2001 had partially redesigned the fault lines in European financial policies. The traditional conflicts across different countries reflecting the preferences of their national champions was complemented by the emergence of coalitions of large pan-European groups with a strong interest in removing obstacles to the emergence of an integrated financial market for financial services in Europe, often pitted against firms with a more local or national outlook threatened by this trend.

The dynamics triggered by the financial crisis have reinforced the channels of pressure and influence between European governments and their banking systems. The greater nationalisation of financial intermediation as well as the wave of re-regulation revive strong national preferences and tensions in the design of financial policies. Debates surrounding the design and implementation of Basel III for example, have instead witnessed the re-emergence of traditional national cleavages, with different European regulatory authorities frequently running in support of their banking industry at the negotiating table. The violent realisation that the monetary union did imply lesser avenues for economic adjustment in response to shocks has certainly strengthened the reluctance of national governments to deprive themselves of policy levers to influence credit intermediation. On the other hand, the financial sector seems to have been able to use this dependency in order to extract concessions from national regulatory authorities that would serve its own interests. The influence of financial industry groups over the position of their respective governments has not been confined to countries with large financial sectors, but it has been pervasive also in countries where the financial industry occupies a smaller position in the economy” target=”_blank”> ³⁸, to the reactivation of certain supervisory and even monetary practices, the ties between national governments and the banking system has been in many ways reactivated in a way that tends to blur the rigid categories of capture and repression. As a result, a more nuanced prism is needed, focusing on agency that national specificities will be able to develop within European contexts as well as on the non-trivial equilibria between public and private interests. The political science literature, which has highlighted the existence and persistence of “varieties of capitalism” in Europe and the resilience of national ecosystems, will be particularly helpful in this respect. This strand of work should also help us to introduce the perspective brought by the political economy literature in the debates about the European monetary union over and above the importance of the need for a banking union as a necessary stabilising feature of the single currency.

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1 Baxter has defined capture as occurring “whenever a particular sector of the industry, subject to the regulatory regime, has acquired persistent influence disproportionate to the balance of interests envisaged when the regulatory system was established”. Lawrence G. Baxter (2011) ‘Capture in Financial Regulation: Can We Redirect It Toward the Common Good?’ Cornell Journal of Law & Public Policy 175-200. The origins of the concept: see George J. Stigler (1971) ‘The Theory of Economic Regulation’, The Bell Journal of Economics and Management Science, Vol. 2, No. 1. See also Dal Bó, Ernesto (2006) ‘Regulatory Capture: A Review’, Oxford Review of Economic Policy, 22(2), 203–225. For a recent discussion of the problem of capture in the context of the financial crisis see Carpenter, Daniel and David A. Moss (eds) (2013) Preventing Regulatory Capture: Special Interest Influence and How to Limit it, Cambridge University Press; Johnson, Simon (2009) ‘The Quiet Coup’, Atlantic Monthly, May; and Daron Acemoglu and Simon Johnson (2012) ‘Captured Europe’, Project Syndicate, May.

² Reinhart, Carmen. M. (2012) ‘The return of financial repression’, Financial Stability Review, 16, 37-48; Kirkegaard, Jacob F. and Carmen M Reinhart (2012) ‘Financial repression, then and now’, VoxEU.org, May; Allianz Global Investors (2013) Financial Repression. It Is Happening Already.

³ Andrew Schonfield (1965) Modern capitalism: The changing balance of public and private power, Oxford University Press. A subsequent literature in political sciences has coined the term i>“varieties of capitalism” to study these differences and their institutional roots: Colin Crouch and Wolfgang Streeck (eds) (1997) The Political Economy of Modern Capitalism: Mapping Convergence and Diversity, London: Sage; Peter A. Hall, David Soskice (eds) (2001) Varieties of Capitalism. The Institutional Foundations of Comparative Advantage, Oxford University Press.

^{4 ;}De Larosière Jacques (2009) Report on financial supervision to the European Commission; Mügge, Daniel (2006) ‘Reordering the Marketplace: Competition Politics in European Finance’, Journal of Common Market Studies, 44(5), 991– 1022.

⁵ For the literature on financial retrenchment globally see for example Lund, Susan et al (2013) Financial globalization: retreat or reset?McKinsey, available at Milesi-Ferretti, Gian Maria and Cedric Tille (2011) ‘The Great Retrenchment: International Capital Flows during the Global Financial Crisis’, Economic Policy vol. 26(4), pp. 285-342. Re-nationalisation of financial intermediation and financial policy has emerged as a response to the contradiction between international market integration and spatially limited political mandates, as highlighted in the political science literature: Pontusson, J. and Raess, D. (2012) ‘How (and Why) Is This Time Different? The Politics of Economic Crisis in Western Europe and the United States’, Annual Review of Political Science, 15, 13-33; Clift, B. and Woll, C. (2012) ‘Economic patriotism: reinventing control over open markets’, Journal of European Public Policy, 19(3), 307-323; Schmidt, V. A. and Thatcher, M. (eds) (2013) Resilient liberalism in Europe’s political economy, Cambridge University Press.

⁶ Goldstein, Morris and Veron, Nicolas (2011) ‘Too Big to Fail: The Transatlantic Debate’, Working Paper No. 11-2, Peterson Institute for International Economics; Johnson, Simon and Kwak, James (2011) 13 bankers: the Wall Street takeover and the next financial meltdown, Vintage.

⁷ FCIC (2011) The Financial Crisis Inquiry Report. Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States. Washington, DC: The Financial Crisis Inquiry Commission. See also Johnson, Simon (2009) ‘The Quiet Coup’, Atlantic Monthly, May.

⁸ US GAO (2011) ‘Securities and Exchange Commission. Existing Post-Employment Controls Could be Further Strengthened’, Government Accountability Office, GAO-11-654 Report, Washington DC.

⁹ Stigler (1971). See footnote 1.

¹⁰ The Landesbanken are themselves partly owned by regional confederations of Sparkassen (saving banks) and respective federal states. See also Grossman Emiliano (2006) ‘Europeanisation as an interactive process: German public banks meet EU competition policy’, Journal of Common Market Studies, vol. 44, n°2, p. 325-347.

¹¹ Giani, Leonardo (2008) ‘Ownership and Control of Italian Banks: A Short Inquiry into the Roots of the Current Context’, Corporate Ownership & Control, Vol. 6, No. 1, pp. 87-98.

¹² On the role of these networks for banking reforms, see Butzbach Olivier, Grossman Emiliano (2004) ‘La réforme de la politique bancaire en France et en Italie : le rôle ambigu de l’instrumentation de l’action publique’, in L’instrumentation de l’action publique (sous la dir. de Pierre Lascoumes et Patrick Le Galès), Presses de Sciences Po, Paris, pp. 301-330. More general references are Swartz, David (1985) ‘French Interlocking Directorships: Financial and Industrial Groups’, in Stokman, Ziegler and Scott (eds) Networks of Corporate Powers: A Comparative Analysis of Ten Countries; Kadushin, Charles (1995) ‘Friendship Among the French Financial Elite’, American Sociological Review, Vol 60, N_2, pp 202-221. For a quantitative approach highlighting the role of networks of former high ranking civil servants in shaping board composition of banks and other corporations, see Kramarz, Francis and Thesmar, David (2013) ‘Social networks in the boardroom’, Journal of the European Economic Association, 11:780–807.

¹³ Woll, Cornelia (2013) ‘The power of banks’, Speri, University of Sheffield, July.

¹⁴ Davies, Howard (2010) ‘Comments on Ross Levine’s paper “The governance of financial regulation: reform lessons from the recent crisis”’, Bank for International Settlements; see also The Warwick Commission on International Financial Reform (2009) In Praise of Unlevel Playing Fields, University of Warwick.

¹⁵ Howarth, David and Quaglia, Lucia (2013) ‘Banking on Stability: The Political Economy of New Capital Requirements in the European Union’, Journal of European Integration (May), 37–41.

¹⁶ Pagliari, Stefano and Young, Kevin L. (2014) ‘Leveraged interests: Financial industry power and the role of private sector coalitions’, Review of International Political Economy, 21(3), 575–610.

¹⁷ Morris and Veron (2011), see footnote 6. Gerschenkron, A. (1962) Economic backwardness in historical perspective. Economic backwardness in historical perspective, Harvard University Press.

¹⁸ Hautcoeur, Pierre Cyrille, Riva Angelo, and White Eugene N. (2013) ” target=”_blank”> and the Crisis of 1889′, paper presented at the 82nd Meeting of the Carnegie-Rochester-NYU Conference on Public Policy; Caroline Fohlin (2012) Mobilizing Money: How the World’s Richest Nations Financed Industrial Growth, New York: Cambridge University Press.

¹⁹ McKinnon, Ronald (1973) Money and capital in economic development, Brookings Institution Press.

²⁰ Hodgman Battilossi, Stefano (2005) ‘The Second Reversal: The ebb and flow of financial repression in Western Europe, 1960-91’, Open Access publications from Universidad Carlos III de Madrid; Monnet, Eric (2014) ‘The diversity in national monetary and credit policies in Western Europe under Bretton Woods’, in Central banks and the nation states, O.Feiertag and M.Margairaz (eds), Paris, Sciences Po, forthcoming; Monnet, Eric (2013) ‘Financing a planned economy, institutions and credit allocation in the French golden age of growth (1954-1974)’, BEHL Working Paper n°2, University of Berkeley; Hodgman, Donald (1973) ‘Credit controls in Western Europe: An evaluative review’, Credit Allocation Techniques and Monetary Policy, The Federal Reserve Bank of Boston.²¹ Monnet Eric (2012) ‘Monetary policy without interest rates. Evidence from France’s Golden Age (1948-1973) using a narrative approach’, Working Papers 0032, European Historical Economics Society (EHES).

²² Eichengreen, Barry (2008) The European economy since 1945: coordinated capitalism and beyond, Princeton University Press.

²³ Pontusson & Raess (2012) ‘How (and Why) Is This Time Different? The Politics of Economic Crisis in Western Europe and the United States’, Annual Review of Political Science, vol. 15, pp. 13-33; Zysman, John (1983) Governments, markets, and growth: financial systems and the politics of industrial change, Cornell University Press. The academic literature that builds on the “varieties of capitalism” has studied extensively how these national characteristics and “institutional complementarities” were shaped and reinforced by the role of the state, then shaping these various forms of “capitalism”. Schonfield, A. (1965) Modern Capitalism: The Changing Balance of Public and Private Power, Oxford University Press. Peter Katzenstein (1985) Small States in World Markets, Ithaca, Cornell University Press; Peter Hall, David Soskice (eds) (2001) Varieties of Capitalism, Oxford University Press.

²⁴ Mügge, Daniel (2006) ‘Reordering the Marketplace: Competition Politics in European Finance’, Journal of Common Market Studies, 44(5), 991–1022.

²⁵ Carmen Reinhart (2012) ‘The return of financial repression’, CEPR, DP8947; Sapir, André, and Wolff, Guntram (2013) ‘The neglected side of banking union: reshaping Europe’s financial system’, Policy Contribution, Bruegel; Goodhart, Charles (2013) ‘Lessons for monetary policy from the Euro-area crisis’, Journal of Macroeconomics.

²⁶ Stolz, S. M., and Wedow, M. (2010) ‘Extraordinary measures in extraordinary times: Public measures in support of the financial sector in the EU and the United States’, Occasional Paper 117, European Central Bank.

²⁷ De Grauwe, Paul (2011) ‘The European Central Bank: Lender of last resort in the government bond markets?’ CESifo working paper: Monetary Policy and International Finance (No. 3569). De Grauwe, Paul, and Ji, Yuemei (2012) ‘Mispricing of sovereign risk and multiple equilibria in the Eurozone’, Centre for European Policy Working Paper 361.

²⁸ Merler, Silvia, and Pisani-Ferry, Jean (2011) ‘Hazardous tango: sovereign-bank interdependence and financial stability in the euro area’, Financial Stability Review, (16), 201-210.

²⁹ In a 25 November 2013 speech, J. Weidmann said that “Monetary policy runs the risk of becoming subject to financial and fiscal dominance”.

³⁰ For example, speech by David Miles from the BoE: ‘Government debt and unconventional monetary policy’, at the 28th NABE Economic Policy Conference, Virginia, 26 March 2012.

³¹ The long-term investors club: See also green paper by the European Commission on long-term finance.

³² Between the end of 2007 and February 2008, IKB had to go through several rounds of financial support in which banks and the KfW agreed to two more bailout packages, which ended up increasing KfW’s participation in IKB from 38 percent to 90.8 percent. For more details see Cornelia Woll (2014) The Power of Collective Inaction: Bank Bailouts in Comparison, Ithaca, Cornell University Press.

³³ ‘Germany to help Spain with cheap loans’, EUObserver, 28 May 2013, http://euobserver.com/economic/120278.

³⁴ Reinhart, C. M. (2012) ‘The return of financial repression’, Financial Stability Review, 16, 37-48.

³⁵ Story, Jonathan, and Walter, Ingo (1997) Political Economy of Financial Integration in Europe: The Battle of the Systems, MIT Press.

³⁶ Hall, Peter and Soskice, David (2001) Varieties Of Capitalism: The Institutional Foundations of Comparative Advantage, Oxford University Press.

³⁷ Howarth, David, and Quaglia, Lucia (2013) ‘Banking on Stability:  The Political Economy of New Capital Requirements in the European Union’, Journal of European Integration (May), 37–41; Bruegel blogpost by Nicolas Veron.

³⁸ Woll (2014). See footnote 32.