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ECB: Back To The Future? From Bail-out To Bail-in - by Ugo Marani and Giuseppe Lucio Gaeta

According to recent estimates from Mediobanca, European countries allocated net interventions, in the form of (re)capitalization, guarantees, credit and/or loans – net of returned or given up items – equal to more than €1000bn. Over 253 of these were destined for Spanish banks, 156 for British institutions, 110 for Irish banks and more than 80 for German and Italian banks. This financial transfer has no precedent in the history of our continent: the European Commission estimates that since the beginning of the crisis EU countries have been acting on behalf of 112 national banking institutions.

Looking at these interventions, one question may arise: can the philosophy of such bail-outs be related to the Keynesian vision of economic policy or to any other ‘unorthodox’ vision?

The answer is certainly negative for two reasons at least.

First of all, the interventions carried out in order to support banking institutions were not characterized by selective evaluations of their work which should have been essential in order to distinguish between illiquid and insolvent banks. Furthermore, European supervisors and regulators, both national and supranational, have never questioned the pernicious mechanisms that exist in the financial markets and have never questioned the propensity to generate and accumulate risk instead of minimizing it and controlling assets, such as derivatives, that may be carriers of systemic instability.

Secondly, the seriousness and knock-on effect of the subprime crisis should have triggered a Keynesian Resurgence in favour of a different approach to monetary and fiscal policies, after a 20-year surrender to stultifying economic liberalism.

If any resurgence did occur, it was short-lived since there has been no structural re-think of the limits of mainstream economics subsequently.

Read more: Back To The Future? From Bail-out To Bail-in

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