Exceptional policies for exceptional times: The ECB's response to the rolling crises of the Euro Area, and how it has brought us towards a new grand bargain

This paper provides an appraisal of European Central Bank (ECB) policy from the beginning of the financial crisis to the summer of 2014. It argues that, as the crisis unfolded, ECB policy can be characterized as an attempt at finding a middle way between “monetary dominance” embedded in the Treaty and “fiscal dominance”. This middle course was pragmatic response to the challenges being faced but it failed to offer a stable solution to the underlying solvency issues, while permitting (or even creating) a damaging set of dislocations, notably a fragmentation of Euro financial markets, with damaging consequences on the real economy. We argue that since Draghi’s pledge to do “whatever it takes” to sustain the euro in July 2012, the ECB has attempted to construct a new institutional framework. We conclude that, although there are promising developments in some areas such as banking union, without a “new bargain” on how to deal with the debt overhang which is the legacy of the crisis, the euro area is under threat.