This chapter describes how the relationship between government debt management and monetary policy has evolved since the late twentieth century. When the Bank’s Monetary Policy Committee was established in 1997, the relationship was distant, but after the Global Financial Crisis, with the advent of quantitative easing, the relationship became a very close one, in which debt management objectives have been subordinated to monetary policy

This chapter argues that the combination of the European economic and monetary constitution with neo-liberal ideology amounts to a straitjacket that is impeding the necessary move towards a more sustainable economy. The chapter explores the limitations on Member State fiscal spending contained in the Treaty on the Functioning of the European Union, and contrasts those limitations with the very broad discretion granted to central banks to conduct monetary policy. Central banks’ ‘quantitative easing’ policies have, as they were intended to, boosted asset prices, skewing wealth distribution in favour of the already wealthy. They have also lowered the borrowing costs facing governments and large corporations, but it is not clear that they have been successful in terms of stimulating economic growth through higher investment and spending. Finally, the chapter looks at the EUs fiscal and monetary response to the COVID-19 pandemic. Does it mark a permanent change that may lead to a more sustainable economy, or, as the pandemic recedes, will the EU return to its constitutional and ideological straitjacket? We fear it will be the latter.

The ECB started its QE called the PSPP in 2015 as a new monetary policy measure. By purchasing vast monthly amounts of main Member State government bonds, the ECB aimed to force investors towards riskier assets, which in turn, was to increase asset prices and support bank lending, and ultimately lead to growth and inflation. Constitutionally, QE was a new type of complication for the European Macroeconomic Constitution. The ECB became the largest creditor of Member States it was prohibited to finance. The constitutional assessment of the PSPP combines the analysis of the CJEU’s Weiss case that contains very limited constraints for the ECB, and more economic-constitutional and thus substantive analysis. One key question is whether the PSPP is monetary policy, which can be analysed through its objectives, its economic content and examples of other central banks that mostly support an affirmative conclusion. The euro area constitutional structure adds further complications that were also raised in the FCC’s Weiss judgment. The PSPP has arguably broader implications for other areas of economic policy, as it facilitates Member States public finances and increases wealth differences by increasing asset prices, as well as making the ECB deeply dependent on Member States public finances.

Banks can become illiquid when wholesale funding markets to not function for extended periods of time. Illiquidity quickly transforms into insolvency if liquid assets or cash flows cannot cover banks’ maturing liabilities. Since the 2008–9 global financial crisis, a new financial stability consensus has emerged whereby central banks began implementing unconventional liquidity tools. This chapter comparatively analyzes Hong Kong’s sectoral supervision with the integrated, functional, and Twin Peaks models when implementing unconventional liquidity tools. The macro- and micro-prudential characteristics of unconventional liquidity tools necessitate systemic supervision by central banks and banking supervisors. Effective systemic supervision of unconventional liquidity tools cannot be presumed merely by the presence of a systemic supervisory agency. Underlap can weaken systemic risk objectives and mandates when implementing unconventional liquidity tools because supervisory roles can become uncertain. In this context, Hong Kong’s composite systemic supervisor, the Financial Stability Committee, may not be able to properly coordinate member financial supervisors. Uncertainty can lead to tensions between Financial Stability Committee members, impeding systemic supervisory effectiveness. Tensions coupled with uncertainty can produce macro-prudential and systemic supervisory flaws when managing funding and market liquidity, heightening banking system instability.

Choosing the optimum supervisory model to manage financial stability requires a consideration of country-specific preferences based on the level of market development and the configuration of the financial system. The choice of model, its structural design, and the regulatory mandates will influence a supervisor’s effectiveness for managing financial stability. This Chapter analyzes the sectoral models in Mainland China, the United States, and Hong Kong to showcase institutional design elements and variations across different financial systems. The chapter assesses the advantages and disadvantages of the unified central bank and banking supervisory design of the Hong Kong Monetary Authority. Understanding how monetary policies affect banking institutions can be critical for maintaining banking sector stability. A unified structure creates a supervisory synergy when calibrating the lender of last resort and unconventional liquidity tools because coordination tensions are eliminated. The Hong Kong Monetary Authority is compromised because of the Linked Exchange Rate System and the Interest Rate Adjustment Mechanism inhibits its ability to set and control interest rates which can destabilize the banking sector.

This chapter provides a case study analysis of the operation of public finance law concerning sovereign debt and monetary finance in the UK and Australia between 2005 and 2016. The legal and financial mechanics of sovereign borrowing and monetary finance are closely examined by reference to the authority of central banks and treasuries to finance the state beyond the point of fiscal deficit. The very broad powers delegated to treasuries over sovereign debt are scrutinised in the context of vastly different economic conditions, and their capacity to shrink the financial authority held by parliaments is observed. Special attention is then given to the monetary financing powers of central banks, particularly the Bank of England. The emergency monetary finance provided by the Bank of England during the financial crisis is surveyed, and the public financing aspect of 'unconventional' monetary policy, particularly quantitative easing, is examined. The chapter closes by observing the absence of meaningful legislative governance of debt and monetary finance in the context of financial or economic emergencies.

This chapter describes the monetary policy of the European Central Bank (ECB). Since the start of the monetary union in 1999, the ECB has been responsible for monetary policy making in the euro area. The ECB and the national central banks of eurozone countries make up the Eurosystem. The Maastricht Treaty defines the ECB’s primary objective as achieving ‘price stability’. The ECB specifies this objective as inflation ‘below but close to’ 2 per cent in the euro area in the medium term. The ECB has an array of instruments available to realise this objective. The chapter analyses several non-standard (or unconventional) policy measures in response to the financial crisis, the euro crisis and the low inflation. Policy decisions are the outcome of the monetary policy strategy. The ECB has a ‘two-pillar’ strategy that pairs the discussion of a broad-based analysis of the risks to price stability in the short to medium run (‘economic analysis’) with monetary factors (‘monetary analysis’).

In the wake of the recent financial crisis, Federal Reserve Chairman Ben Bernanke argued repeatedly that fostering healthy growth and job creation required legislative action. He warned that continued political battles over fiscal and monetary policy, financial regulation and the debt ceiling were “deeply irresponsible” and would have “catastrophic consequences for the economy that could last for decades.” At the same time, like Alan Greenspan before him, Bernanke joined secretaries of the Treasury and other technocrats in guiding and enabling legislation, helping presidents outmaneuver critics and compensating for political uncertainty when political battles between the President and Congress stalled economic legislation. Far from being apolitical actors, these technocrats manipulated authority, exploited deference from politicians and business leaders, and alternately bolstered and challenged national politicians in order to shape US economic policy, manage market behavior and coordinate global activities before, during and after the recent financial crises.