ABSTRACT
The aim of European economic and monetary union, which culminated in the euro’s launch in 1999, has been to achieve price stability and steady economic growth. A condition for success is that none of the still separate governments takes advantage of certain “free rider” opportunities that arise from monetary union. This paper discusses the rate of credit extension by the eurozone banking system needed to deliver a rate of money growth consistent with price stability. This paper shows that the pace of bank credit expansion has fluctuated widely, in association with considerable instability in output and employment in some countries. The growth of bank assets was dominated by credit to the private sector in the euro’s mostly trouble-free first decade (i.e. from 1999 to the Great Recession). The greater importance of the state in banks’ financing and asset acquisition since the Great Recession has led to tension between governments, with the emergence of large credit and debit balances in the TARGET2 settlement system being a key flashpoint.
