The aim of this volume is to provide a reference guide to the contemporary challenges faced by the European Economic and Monetary Union (EMU). With the goal of providing a holistic picture, the editors have brought together a multidisciplinary team of scholars specialized in economic history, economics, political sciences, and law. This combination of multidisciplinary approaches makes the book unique, as most publications on EMU take a monodisciplinary approach, while the challenges faced by EMU are arguably multifaceted and therefore require a multidisciplinary approach. The authors of the contributions in the volume have been invited to judge the state of integration in EMU, thereby in particular taking into account the decade of experiences following the Global Financial Crisis (GFC), the European sovereign debt crisis, and the responses to the economic impact of the COVID-19 pandemic.

Over the recent two decades, monetary policy has increasingly become the art of managing expectations. As a consequence, central bank communication has become an important instrument in central banks’ toolkits. Central bank communication was initially primarily focused on financial markets. Recently, however, central banks started paying increasing attention to communication with the general public. The European Central Bank (ECB) is no exception. Although communicating with the general public is important, it is not clear whether non-experts are within reach of the ECB. Even if they receive the communications, it cannot be taken for granted that they process them, and do so appropriately, as non-experts might lack the relevant background or because the communication by the central banks is too complex. However, even if central bank communication with the general public may have limited impact on inflation expectations, central bank accountability simply requires that central banks talk (and listen) to the general public. Clear and easy to understand communication to the general public is essential for the ECB’s legitimacy. The ECB should therefore primarily focus on explaining its price stability mandate in communicating to the general public, and do so in a relatable manner.

Two main goals of the Stability and Growth Pact (SGP) are fiscal sustainability and fiscal policies’ contribution to economic stabilization. However, from the very beginning, several Member States of the European Economic Monetary Union (EMU) failed to stay within the SGP’s reference values, all too often leading to large fiscal imbalances, procyclical fiscal policies, and public debt overhangs. The SGP has therefore been revised several times to improve the enforceability and flexibility of the fiscal rules. In practice, however, these amendments made the European fiscal framework overly complex and incoherent, leaving national governments with too little incentive to pursue a prudent fiscal stance. To (better) promote fiscal sustainability in the EMU, the current weaknesses of the SGP need to be addressed. Several options have been suggested, mainly to decentralize the responsibility for fiscal discipline back to the national level or to reform the current framework. Notably, the latter option seems more likely to be implemented. Most proposals suggest a prominent role for an expenditure rule, augmented with a debt anchor. These proposals make perfect sense, but a discussion on the effectiveness and reform of the SGP shows that they will not remedy all current shortcomings of the fiscal rules.

Against the backdrop of the 2007–2009 financial crisis, this chapter discusses the growing importance of macroprudential supervision. In contrast to microprudential supervision, which focuses on the soundness of individual institutions, macroprudential supervision focuses on the stability of the financial system as a whole and on monitoring and assessing so-called systemic risk. This is the risk of a breakdown of an entire financial system rather than the failure of individual parts. The chapter sets out the key features of the conceptual framework for macroprudential supervision. Next, macroprudential instruments are discussed. Finally, the chapter touches on the issue of crisis management and resolution, discussing the main instruments that can be considered in crisis situations.

The function of insurance is to protect individuals and firms from adverse events by pooling risks. Life insurance protects against the financial consequences of premature death, disability, and retirement. Non-life insurance protects against risks such as accidents, illness, theft, and fire. Insurance is a risky business, as insurance companies collect premiums and provide cover for adverse events that may or may not arise. The insurance business is plagued by asymmetric information problems. There is a moral hazard problem when the behaviour of the insured, which can be only partly observed by the insurer, may increase the likelihood that the insurer has to pay. After signing the contract, the insured may behave less cautiously because of the insurance. Another problem is adverse selection: high-risk individuals (for instance, ill people) may seek out more (health) insurance than low-risk persons. The final section of chapter describes the variation in insurance systems across Europe and analyses financial conglomerates that combine banking and insurance

The traditional business of banking is taking deposits and providing loans. Banks have a comparative advantage over other financial institutions in providing liquidity. They have also developed technologies to screen and monitor borrowers in order to reduce asymmetric information between the lender and the borrower. These liquidity-providing and monitoring functions also give banks a key role in modern capital market transactions. Risk is fundamental to the business of banking. Progress in information technology, combined with demands by supervisory authorities, has spurred the development of advanced risk management models. This, in turn, has prompted the centralisation and integration of some management functions such as risk management, treasury operations, compliance, and auditing. This integrated risk management method is designed to ensure a comprehensive and systematic approach to risk-related decisions throughout the banking group. Banks with an integrated risk management unit can exploit diversification opportunities at the group level. The Chapter ends by describing the European banking market, which is made up of 27 national banking systems.

The European Union (EU) has its origins in the European Coal and Steel Community (ECSC), which was formed by six European countries in 1951. Since then, it has grown to 27 members through the accession of new Member States, and has increased its powers by adding new policy areas to its remit. At the time of writing, the EU is negotiating the first exit of a Member State after a majority of the UK electorate voted to leaving the EU on 23 June 2016 in a process that has come to be known as Brexit. The chapter explains the functions of the most important EU institutions (European Commission, Council of the EU, European Council, the European Parliament, and the European Court of Justice) and legal instruments (including directives and regulations). It proceeds by outlining the process of monetary integration, from the agreement in principle in 1969, to the creation of an internal market, and the adoption of the euro in 1999 by 11 Member States. The final section discusses steps towards financial integration, including the Financial Services Action Plan, Banking Union and Capital Markets Union.

Financial crises have occurred repeatedly throughout history. This chapter starts by exploring the different types of crises: banking crises, sovereign debt crises, and currency crises. A banking crisis indicates that a significant part of a country’s banking sector has become insolvent after heavy investment losses, banking panics, or both. A sovereign debt crisis/default occurs when a government fails to meet interest or principal payments on its debt obligations. Finally, a currency crisis causes the value of a country’s currency to fall precipitously. The chapter provides facts and figures about financial crises, and discusses some theoretical models. A first set of models is related to the liability side of banks. Since banks use short-term deposits to finance long-term loans, they are vulnerable to massive withdrawals cumulating in a banking run. A second set of models looks at the asset side of banks. Shocks to fundamentals (e.g. a collapse in real estate prices or increased bankruptcies in the non-financial sector) can upset the business cycle, resulting in deteriorating asset quality that can trigger further banking problems.