Modern Financial Repression in the Euro Area Crisis: Making High Public Debt Sustainable?

Abstract

The sharp rise in public debt-to-GDP ratios in the aftermath of the financial crisis of 2008 posed serious challenges for fiscal policy in the euro area countries and culminated for some member states in a sovereign debt crisis. This note examines the public policy responses to the euro area crisis through the lens of financial repression with a particular focus on how they contributed to easing government budget constraints. Financial repression is defined in this context as the government’s strategy – supported by monetary and financial policies – to gain privileged access to capital markets at preferential credit conditions and divert resources to the state with the aim to secure and, if necessary, enforce public debt sustainability.

Following a narrative approach, this note finds that public debt management and resolution, European financial legislation, EMU crisis support and ECB monetary policy have significantly contributed to relieving sovereign liquidity and solvency stress and generated fiscal space through non-standard means. The respective authorities have in fact applied the tools of financial repression to restore stability after the euro area crisis.

Keywords: fiscal sustainability, public debt management, financial regulation, monetary policy, financial repression, euro area crisis

JEL Classification: E63, F38, F45, G18, G28, H12, H63