European Perspectives on the Recession
Edited by David Howden
Maria Alvarado, Laura Muro and Kirk Lee Tennant Since the European financial crisis began, the reaction has mainly been political. Following political pressure, financial institutions such as the European Central Bank (ECB) and the individual national central banks that comprise the Eurosystem instigated policies aimed at stemming the tide of unemployment through deficit spending. The ECB facilitated this greatly by an expansive monetary policy that accepted increasing amounts of Eurozone government debt under less stringent collateral requirements than before the crisis emerged (Bagus and Howden, 2009a; 2009b). In addition to these early monetary and fiscal responses, European politicians were some of the earliest proponents of regulatory changes to the financial industry. Talk of compensation and bonus limits for bankers became common place (especially in the United Kingdom), while increasing regulatory constraints in collateral and financing operations were rushed through.1 Politically speaking, the proposed accounting rule changes were to accomplish two purposes. First, accounting data were to be reported in a manner that better represented the underlying substance of the economic transactions. Second, and more importantly, the new rules were to enact regulatory changes that would affect both the microeconomic and macroeconomic behavior of the financial markets. No matter what position one takes with regard to the proposed and adopted changes to accounting rules, a strong caveat must be attached to their effectiveness. The measurement of the effects of these changes is dependent on the ability of the proposed rule changes to affect microeconomic and macroeconomic behavior quickly. Measurement must be...
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