THE EURO IN 2021 MOVING FORWARD: Monetary Union after Covid19 A Yearbook on the Euro 2021 Edited by Fernando Fernández Méndez de Andés. IE Business School ISBN: 978-84-09-27936-4 Legal Deposit: 978-84-09-27936-4 Published by: Fundación de Estudios Financieros and Fundación ICO. Printed by: Reimpventa CONTENTS LIST OF CONTRIBUTORS 5 FOREWORD 9 EXECUTIVE SUMMARY Fernando Fernández Méndez de Andés, IE Business School 11 PART I. THE EUROPEAN RESPONSE TO THE PANDEMIC 1. The monetary policy response: the role of the ECB Luis de Guindos, Vice-President, European Central Bank. 53 2. The Fiscal response: A step forward towards debt mutualisation? Jonás Fernández, European Parliament Committee on Economic and Monetary Affairs. 77 3. The political reaction. How did the European Institutions respond to the crisis? Cristina Manzano, Director of Esglobal. 95 PART II. ISSUES IN MONETARY POLICY 4. “Low for longer”, the consequence of negative interest rates Alejandra Kindelán y Concepción Sanz, Santander Research and Public Policy. 119 5. Fundamental uncertainty and climate: The two issues to guide the ECB’s strategy review Maria Demertzis and Marta Domínguez-Jiménez, Bruegel. 133 6. The independence of central banks and fiscal dominance Rubén Segura-Cayuela, Bank of America. 155 PART III. ISSUES IN FISCAL POLICY 7. The EU Budget: the new MFF and the Recovery Instrument: Next Generation EU Pilar Más Rodríguez, Principal Economist, BBVA Research. 169 3 8. Why Next Generation EU might be a poisoned gift (and how to avoid it) Antonio Roldán Monés, Director ESADE Center for Economic Policy. 197 9. The state of fiscal union in the Euro Zone. Are We Closer To A ‘Hamiltonian’ Moment? Enrique Feás, Senior Research Fellow, Elcano Royal Institute. 219 10. How to improve small and mid-sized bank crisis management? Antonio Carrascosa, former Board Member, Single Resolution Board. 239 PART IV. ISSUES IN REGULATION 11. Financial stability and banking regulation in the context of the Covid-19: some early policy reflections Christian Castro and Ángel Estrada, Bank of Spain. 263 12. How strong and liquid banks helped the Federal Reserve prevent a financial crisis in the spring of 2020 Bill Nelson, Adam Freedman, Francisco Covas and Gonzalo Fernandez, Bank Policy Institute, Washington D.C. 289 13. Banking supervision after the pandemic Fernando Restoy, Chairman, Financial Stability Institute. 311 GLOSSARY 323 TRUSTEES OF FEF 329 4 LIST OF CONTRIBUTORS EDITOR Fernando Fernández Méndez de Andés, PhD in Economics and Professor of Economics and Finance at IE Business School. International Consultant. Independent Board Member, Bankia. Former Board Member at Red Eléctrica, Chief Economist at Banco Santander and Senior Economist at the International Monetary Fund. CONTRIBUTORS Antonio Carrascosa, Board Member at the Single Resolution Board, Director General of the Spanish Bank Restructuring Authority (FROB), Director General for Economic Policy (Ministry of Economy), Director General for Financial Intermediaries at the Spanish Securities and Exchange Commission (CNMV) and Director for Regulatory Compliance at PwC. Christian E. Castro Torres, Head of the Global Prudential Policy and Impact Analysis Division in the Regulation Department at Banco de España. PhD in Business Economics, Universidad Autónoma de Barcelona. Formerly at the Bank of England, the Inter- American Development Bank, and the Central Bank of Argentina, focusing on financial stability and prudential policy. Francisco Covas, Executive Vice President, Head of Research at Bank Policy Institute (previously The Clearing House). Former assistant director of the Division of Monetary Affairs at the Federal Reserve Board focusing on the effects of changes in bank regulation on monetary policy, on the role of banks in the transmission of monetary policy, and stress testing models. Maria Demertzis, Deputy Director at Bruegel. PhD in Economics, University of Strathclyde. Previously at the European Commission and the Dutch Central Bank, and at the Harvard Kennedy School of Government. She has published extensively in 5 THE EURO IN 2021 international academic journals and contributes regular policy inputs to the European debate. Marta Domínguez Jiménez, Research Analyst at Bruegel. Previously an analyst within the Markets division of Citigroup in London. Bachelor’s degree from the University of Oxford and a Master’s degree from the College of Europe in Bruges. Publishes primarily on monetary policy, financial systems and international trade and capital flows. Ángel Estrada, Director General of Financial Stability, Regulation and Resolution at the Banco de España. M.A. in Economics and Finance, CEMFI-Bank of Spain. Different management positions at Banco de España and the Spanish Ministry of Economy and Finance. Policy positions combined with applied research published in prestigious professional journals. Enrique Feás, Senior Research Fellow at Elcano Royal Institute and Adjunct Professor at IE School of Global and Public Affairs. State Economist and Trade Expert, former Deputy Director General for Trade Policy with Africa and the Middle East. Founder and co-editor of Blog NewDeal, and a frequent contributor to the Spanish media. Jonás Fernández Álvarez, Member of the European Parliament, Coordinator of the Progressive Alliance of Socialists and Democrats in the Committee on Economic and Monetary Affairs. Executive MBA, IESE Business School and M.A. in Economics and Finance, CEMFI-Bank of Spain. Postgraduate programmes at LSE and Harvard University. Gonzalo Fernández Dionis, Vice President of Research, Bank Policy Institute in charge of economic analysis of banking and financial regulation. Former vice-president at the Royal Bank of Canada in London and senior analyst at Barclays Capital. PhD student at George Washington University, Master of public administration, Columbia University and CFA® charterholder. Adam Freedman, Assistant Vice President and Research Analyst at the Bank Policy Institute, where he contributes to economic research on banking policy and regulation. M.A. in political economy, jointly awarded by Georgetown University and l’Université libre de Bruxelles, Solvay School of Economics. Luis de Guindos, Vice-President of the European Central Bank. Minister of Economy, Industry and Competitiveness of Spain between 2011 and 2018. Prior to that, he held several management and executive positions in the public and private sectors. Graduate in Economics at CUNEF Spain and first in order of merit as State Economist and Trade Expert. 6 LIST OF CONTRIBUTORS Alejandra Kindelán, Head of Research, Public Policy and Institutional Relations, Banco Santander. Member of the Board of Santander Consumer Finance Europe and the IIF’s Steering Committee on Effective Regulation. Former Chair of the EBF’s Economic and Monetary Affairs Committee. Wellesley College and post graduate degrees at IESE and INSEAD. Cristina Manzano, Director of Esglobal, a leading digital publication on global affairs in Spanish; columnist of El País and El Periódico de Cataluña. Member of a number of institutions related to international affairs, such as Elcano Royal Institute, CIDOB, ECFR, the Club of Rome, Education for Employment, and others. Pilar Más, Principal Economist at BBVA Research. Director General for Macroeconomic Analysis and International Finance in the Spanish Ministry of Economy, Industry and Competitiveness. Member of the Management Board of CDTI and the Foundation for International Cooperation, Health and Social Policy. Economist, Mathematician and M.A. Public Management. William (Bill) Nelson, Executive Vice President and Chief Economist at the Bank Policy Institute (previously The Clearing House). Former deputy director of the Division of Monetary Affairs at the Federal Reserve Board, where his responsibilities included monetary policy analysis, discount window policy analysis, and financial institution supervision. Fernando Restoy, Chairman of the BIS Financial Stability Institute. Former Deputy Governor of Banco de España, Chairman of the FROB, Member of the ECB Supervisory Board and Vice Chairman of the CNMV, Spain’s securities market regulator. PhD in Economics from Harvard University and Master’s degree from the London School of Economics. Antonio Roldán Monés, Director of the ESADE Center for Economic Policy (EsadeEcPol). Visiting Professor in Practice at the School of Public Policy LSE. MPhil in European Political Economy (LSE) and MPA in Economic Policy, Columbia University (SIPA). Former Member of the Spanish Parliament, Economics Spokesman and Head of Policy for Ciudadanos. Concepción Sanz, Finance Director at Research Department of Banco Santander, former Head of Research, Banesto. MSc in Economics from CEMFI (Madrid), Advanced Studies in Economics, Universidad Rey Juan Carlos and a degree in Economics, Universidad Autónoma (Madrid). Ruben Segura-Cayuela, Head of Europe Economics Research, BofA Global Research. His team ranked #1 in the 2019 II Global Fixed Income Research Survey. Senior economist at Banco de España and Advisor at the Ministry for Economic Affairs in Spain. PhD in Economics from MIT and a Master’s degree from CEMFI. 7 FOREWORD Fundación ICO and Fundación de Estudios Financieros jointly decided in 2012 to publish an annual review of the Euro, the Yearbook, with the aim of expanding knowl- edge and raising awareness of the importance and role of the single currency, and to suggest ideas and proposals for strengthening its acceptance and sustainability. This partnership translates into the