Institutions, Liquidity Preference, and Reserve Asset Holding in the Eurozone Core and Periphery Before and After Crises: Some Stylized Facts

While the creation of the Eurozone facilitated endogenous money creation across members before 2008, liquidity crises after the Global Financial Crisis (GFC) revealed structural features and power asymmetries that engendered liquidity crises for members. The European Central Bank’s reluctance to act as a lender or dealer of last resort after the GFC pushed governments across the Eurozone to bail out domestic financial systems. Private creditors and eventually the Eurosystem governing council excluded peripheral banks’ and governments’ debt from private repo funding and Eurosystem funding operations, inhibiting peripheral NCBs’ attempts at liquidity relief. Sustained private demand for core governments’ debt allowed their NCBs to engage in expansionary measures, while representatives from the core tended to oppose broader relief, leaving peripheral governments vulnerable to the Eurozone Crisis. This paper analyzes Eurozone banks’, NCBs’, and governments’ balance sheets to illustrate these changes, as well as the monetary power differentials that opened peripheral economies to crisis and austerity. Eurozone members returned to holding larger concentrations of reserve assets as a precaution against future rejections of domestic collateral by private creditors and the Eurosystem. As Eurozone governments respond to the pandemic, systemic liquidity crunches that hurt financial and fiscal activity remain a risk