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The Political Economy of European Banking Union$
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David Howarth and Lucia Quaglia

Print publication date: 2016

Print ISBN-13: 9780198727927

Published to Oxford Scholarship Online: October 2016

DOI: 10.1093/acprof:oso/9780198727927.001.0001

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Lender of Last Resort and the ‘Fiscal Backstop’ in Banking Union

Lender of Last Resort and the ‘Fiscal Backstop’ in Banking Union

(p.156) 8 Lender of Last Resort and the ‘Fiscal Backstop’ in Banking Union
The Political Economy of European Banking Union

David Howarth

Lucia Quaglia

Oxford University Press

This chapter first analyses the central role performed by the ECB in boosting stability during the international financial and sovereign debt crises. The chapter then examines the temporary European Financial Stability Facility (EFSF) and its permanent successor, the European Stability Mechanism (ESM), set up to help tackle the sovereign debt crisis in the euro area. Finally, the chapter deals with the reform of fiscal policy coordination in the EU and especially in the euro area, intended to limit moral hazard in Banking Union potentially created by ECB extraordinary monetary policy to help banks and sovereigns and the euro area funding mechanisms established. In the operation of the ECB and the establishment of support mechanisms, two competing rationales were at stake: the need to prevent the break-up of EMU and the need to limit moral hazard created through intervention to help banks and sovereigns.

Keywords:   ECB, European Financial Stability Facility, EFSF, European Stability Mechanism, ESM, financial support, sovereign debt crisis, fiscal policy, moral hazard

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