Andrea Venegoni

The constitution of a European Monetary Union since January,1st1999 signed the beginning of a new era, as the main European economies renounced to their currency and to the related monetary policy authority, creating one of the largest currency areas in the world. This constitutes an unprecedented and, yet, unfollowed case, as the adoption of a unified currency by such mature, large and developed economies represents a unique case in the modern economic history. Along with the creation of the new currency, a new monetary authority, the European Central Bank, was established. To this new administrative body were transferred the main responsibilities of the national central banks, which lost their power in conducing the monetary policy, maintaining only some discretion in the supervisory activity on the banking sector (Article 105 of the Maastricht treaty). The announcement of the beginning of such an unprecedented and ambitious project aroused the academic debate which focused mainly on the suitability of the countries involved in forming a currency union (Bayoumi and Eichengreen, 1993), on the structure and strategy of the new European Central Bank (Bean 1998) and on the impact that its monetary policy would have on the economies under its influence (see Ehrmann et al., 2003, Chatelain et al. 2003 for extensive literature reviews). The key issue involved “symmetry”, both in the business cycles and in the functioning of the transmission mechanism of policy innovations in the member economies, as they displayed structural heterogeneities that, according to theory, make the design of the policy interventions a puzzle, and hinder the even propagation of the monetary stimuli. The present work aims at giving a thorough assessment of the state of the art of ECB activity’s effectiveness and impact on the Eurozone economy and on the financial markets. It analyses first the evolution of the transmission mechanism that regulates the propagation of monetary stimuli to the overall economy, in order to evaluate whether it works evenly across emu or it presents some degrees of asymmetry. Secondly, the focus shifts on the impact of ECB actions on the financial markets, as the ECB has entered in charge also of the supervisory activity on the main banking institutions of the Eurozone. This section assesses how the market reacted to the 2014 Comprehensive Assessment, that marked the passage of the supervisory duty from the national banks to the ECB. Lastly, the third and final section investigates how the equity markets of the main Eurozone economies react to monetary innovations, in order to understand whether asymmetries immediately appear on the financial markets. Overall, the analyses performed in each of the three sections allows to draw a picture of the situation that the monetary authorities, now responsible also of the financial system supervision, have to face, and allow to form some suggestion about future policy conduct. First of all, time has come to re-discuss not the monetary strategy (i.e. the inflation targeting) but the level of such a target, as it may be that the actual 2% level is to lower a threshold to allow for measures expansionary enough to counteract significant turmoil. Also, extraordinary measures that are able to influence the term structure lowering long term rates, might enter the standard toolkit of the central bank as authorities have become now familiar with these instruments during the crisis and now data are available to study and understand the effects they produce.On the supervisory side, the exercise held in Europe until now were not able to achieve the same results as the 2009 SCAP did in the U.S. Many critics point to the lack of a credible backstop mechanism as the main source of such different outcomes (see Spargoli, 2013 and Acharya and Steffen, 2014). Difficulties to guarantee a credible public capital injection in the Eurozone are certainly higher than in the U.S., as reaching an agreement between different governments to pool enough capital to cover possible shortfalls of the overall system is bound to be a political hurdle extremely difficult to overcome. Lastly, to promote the synchronization of the business cycles, that, as proved in the first section, suffered a push towards asynchrony from the two crises, country specific structural reforms are much needed in order to smooth the divergences, where possible, both in the industrial system and in the interconnections between it and the banking structure. Along with this, and in this spirit, is time for fiscal policy (in this case a coordinated fiscal policy among all member economies) to regain some importance in the macroeconomic policy setting, especially is of paramount importance to regain, as previously claimed for monetary policy, space for possible extraordinary measures.