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

The monetary integration of the Eurozone initially accommodated endogenous money creation across its members; however, liquidity crises that followed the Global Financial Crisis (GFC) revealed structural disparities in liquidity provision in response to funding crises. By refusing to act as a lender of last resort, the European Central Bank pushed governments across the Eurozone to guarantee domestic financial liabilities. The importance of repurchase agreements to fund Eurozone banking and the predominance of European government bonds in general collateral left peripheral governments vulnerable to decreased private demand for their debt, and financially constrained by private intermediaries’ refusal of peripheral sovereign bonds in general collateral. This constraint created accelerated the sovereign debt crises driving the Eurozone crisis. This paper analyzes Eurozone banks’, National Central Banks’, and governments’ balance sheets to show how they have internalized the lessons from the GFC. We find that these entities have returned to holding larger concentrations of reserve assets, a practice that some architects of the Eurozone had hoped monetary integration at the supranational level would end. As Eurozone governments consider how to respond to the Covid-19 pandemic, liquidity crunches that hurt financial and fiscal activity across the Eurozone remain a risk.