Credit lines between central banks can be a powerful instrument to restore international financial stability during a crisis. Yet, so far, few political scientists have ventured to study central... Show moreCredit lines between central banks can be a powerful instrument to restore international financial stability during a crisis. Yet, so far, few political scientists have ventured to study central bank cooperation in the context of European macroeconomic governance and the implications for the international role of the euro. This paper closes this gap in our knowledge by looking at the European Central Bank’s (ECB) cooperation with non-Euro Area central banks during the Global Financial Crisis 2008/09 and the COVID-19-crisis 2020. Based on recently declassified policy documents and eight insider interviews I find that the ECB’s handling of the international role of the euro has changed over time. In 2008, the ECB had decided the credit terms largely based on perceived sovereign credit risk. In 2020, the ECB granted better lending conditions to countries that were institutionally closer to the Euro Area. Based on this I argue that the ECB has redefined its interests during international crises from limiting financial risks to promoting the institutional objectives of the Euro Area. This indicates not just that the ECB has in 2020 acted more proactively as international lender of last resort, but also that it has done so largely in line with political considerations. Show less
Credit lines between central banks can be a powerful instrument to restore international financial stability during a crisis. Yet, so far, few political scientists have ventured to study central... Show moreCredit lines between central banks can be a powerful instrument to restore international financial stability during a crisis. Yet, so far, few political scientists have ventured to study central bank cooperation in the context of European macroeconomic governance and the implications for the international role of the euro. This paper closes this gap in our knowledge by looking at the European Central Bank’s (ECB) cooperation with non-Euro Area central banks during the Global Financial Crisis 2008/09 and the COVID-19-crisis 2020. Based on recently declassified policy documents and eight insider interviews I find that the ECB’s handling of the international role of the euro has changed over time. In 2008, the ECB had decided the credit terms largely based on perceived sovereign credit risk. In 2020, the ECB granted better lending conditions to countries that were institutionally closer to the Euro Area. Based on this I argue that the ECB has redefined its interests during international crises from limiting financial risks to promoting the institutional objectives of the Euro Area. This indicates not just that the ECB has in 2020 acted more proactively as international lender of last resort, but also that it has done so largely in line with political considerations. Show less
The widespread presence of foreign banks in Central and Eastern Europe (CEE) was seen as a potential source of instability during the financial crisis of 2008/09. However, foreign banks acted... Show moreThe widespread presence of foreign banks in Central and Eastern Europe (CEE) was seen as a potential source of instability during the financial crisis of 2008/09. However, foreign banks acted primarily as a stabilizing force by supporting their subsidiaries and forwarding liquidity, rather than cutting and running. In doing so they closed a significant gap in the EU’s financial stability framework and prevented both a worse financial crisis and currency crises in the new member states. In this paper, I argue that the expectation that foreign banks would step in as private lenders-of-last-resort was exactly the reason why CEE policymakers had encouraged foreign bank entry around the year 2000. Their policy frameworks looked unsuitable for withstanding a financial crisis, but this was the result of rule and policy transfers from the EU which did not take these unique market structures into account. Indeed, already by 2004 it was clear that foreign banks would manage liquidity conditions in CEE and that monetary policy would, at best, accommodate that. The theoretical contribution based on this is that financial market structures developed to be a pillar of the regional financial system in their own right. Although they emerged without central guidance, high levels of foreign bank ownership had the effect of aligning expectations and resulted in material support during the financial crisis. Balance-of-Payments support, it follows, is not just the result of official cooperation; private actors may wield more control over liquidity conditions than central banks. Show less
