The sense of extreme disruption brought by Covid-19 led to the fast adoption of unprecedented containment policies. Central banks played a key role in this regard by adopting bold and unprecedented forms of financial stabilization as well as support for government debt in the bond markets. The overall effect has been the blurring of the boundary between monetary and fiscal policy, a key pillar of the “neoliberal” era. Furthermore, the Fed acted as a de facto lender of last resort in dollars of the global financial system, thus playing a global stabilization role even as the Trump administration worked to weaken traditional US ties to global economic governance.

A Crisis like No Other?

In March 2020 the US Federal Reserve, the European Union, and the International Monetary Fund expected most advanced economies to enter the most severe recession since the Great Depression. At the time of writing this study, that fear seems to have been exaggerated. However, anxieties about coordinated financial and fiscal collapses (rather than mere severe contractions) were widespread in the spring of 2020. This “end of times” atmosphere, complete with the harshest lockdowns in modern memory, precipitated the entry of economic management, almost overnight, into war economy conditions. The term “war economy” was not just a journalistic hyperbole but also a political and technocratic one, as evidenced by its use by elites as different as UN head António Guterres,1 French president Emmanuel Macron,2 Spanish prime minister Pedro Sánchez,3 and former ECB chairman Mario Draghi.4 In turn, many high-profile orthodox economists lined up behind the “act fast and do whatever it takes” campaign.5

And war it felt like over the next few months. The collapse of aggregate demand and international trade, as well as a sharp drop in the GDP of Organisation for Economic Co-operation and Development (OECD) countries, created panic, with disturbing dislocations of socioeconomic life brought into light by the lockdowns (Cosma, Ban, and Gabor 2021) in a sociopolitical landscape already battered by systemic socioeconomic problems (Lonergan and Blyth 2020). According to the OECD, the global economy shrank 7.8 percent in the second quarter of 2020. In the euro area, the corresponding figure was 12 percent,6 an unprecedented drop in peacetime (OECD 2020). Even worse, gross fixed capital formation shrank by 23 percent in Southern Europe and by 15 percent in Western and Northern Europe.7 The Global South experienced a $100 billion capital flight event in the spring of 2020, four times the damage caused by the Great Recession in the same time frame. It was at this juncture that Eurogroup president Mario Centeno junked “peacetime” moral hazard considerations: “The challenge our economies are facing today is in no way similar to the previous crisis. This is a symmetric external shock. Moral hazard considerations are not warranted here. We must bear this in mind when we consider coronavirus dedicated instruments.”8

This sense of extreme disruption led to the fast adoption of unprecedented containment policies based on the (unorthodox) coordination of monetary and fiscal responses and some extensive monetary coordination between the US Federal Reserve and fourteen other central banks. Indeed, this time, the central banks’ “infrastructural power” (Braun and Gabor 2019) was deployed with stabilizing effects while the usual suspects arguing for austerity as a growth strategy (Helgadóttir 2016) remained silent.

An Airbag, Not an Engine: The Case of Euro Area Central Banking

Although conventional economic theory and policy assigned virtues to monetary policy alone and were skeptical of fiscal stimulus as self-defeating (Helgadóttir and Ban 2021), the lessons of the 2008–12 crisis had softened this orthodox approach (Metinsoy, this collection). Indeed, central banks adopted bold and unprecedented forms of financial stabilization and support for government debt in the bond markets. Furthermore, acting as a de facto lender of last resort in dollars of the global financial system, the Fed lowered the rate on swap lines9 it maintained with five other central banks (the Bank of Canada, the Bank of England, the Bank of Japan, the ECB, and the Swiss National Bank) and opened new lines in the currencies of nine other countries (Australia, Brazil, Denmark, Mexico, New Zealand, Norway, Singapore, South Korea, and Sweden). This was extremely important because the swaps enabled financial institutions in the swap countries to continue borrowing in dollars from their central banks without worrying about currency risk (Bahaj and Reis 2020).

Most importantly, while from 2008 through 2011 there was a mosaic of reactions from central banks to sovereign bond market stress, this time around central bankers used massive firepower in unison. A recent Bank for International Settlements (BIS) report tabulating central bank interventions in the Fed, the ECB, the Bank of England, the Bank of Japan, and the Bank of Canada shows that while only the Fed went as far as giving outright fiscal backing to the US government in its lending operations, sovereign debt was backed by asset purchases in all of these central banks of systemic importance monitored by the BIS (Cavallino and Fiore 2020).

To illustrate, the ECB was no exception despite its being one of the most constrained and traditionally conservative central banks. As “master of the European masters of the universe,” to paraphrase Diessner and Lisi (2020), the ECB unleashed bond-buying programs to stabilize markets to an even wider spectrum of activities, with its rates running close to zero. Thus, following the “we are not here to close spreads” controversy in March 2020 started by Christine Lagarde, the ECB launched the €750 billion Pandemic Emergency Purchase Program (PEPP) aimed at national and regional government bonds as well as private sector bonds. PEPP managed to stabilize sovereign bond markets that came quickly under stress,10 and since then there has been no sovereign debt stress in the eurozone as a result (Fuller, this collection). One study predicted:

A fiscal stimulus at the national level backed by ECB financing reduces the output losses in the first year which would otherwise occur. The reduction in the output loss ranges from 0.5 per cent to 0.7 per cent depending on the mix of fiscal policies chosen by the State. The cumulative reduction in output loss over a five-year horizon could sum to 1.4 per cent to 2.2 per cent depending on the fiscal policy mix chosen.11

Less than three months later, on June 4, 2020, the ECB nearly doubled the PEPP (to €1,350 billion) and made bond purchases with the aim of removing states’ uncertainty over whether ECB purchases would continue throughout the cycles of the health crisis. In late 2020, the ECB increased the bond-buying program even further to €1,850 billion. These things happened despite criticism coming from the German Constitutional Court demanding evidence from the ECB that PEPP was proportional to the economic costs of COVID-19. The Karlsruhe court also threatened that if “proportionality” were not documented within three months, the Bundesbank would withdraw its participation from QE and reinvestments.

In total, PEPP increased the ECB’s balance sheet to more than half the pre-COVID-19 GDP in the euro area, making it more than twice as big as the Fed’s in terms of its GDP ratio. By late 2020, it became clear that the basic thrust of the ECB’s pandemic bond purchases was a form of “shadow monetary financing”—that is, financing conditions for the private sector obtained by easing financing conditions for the state (the so-called “targeting of spreads”), as Daniela Gabor put it. In fact, this veritable Keynesianism 2.0 seemed to be in full swing at the ECB in the depths of the COVID-19 crisis. ECB minutes stated that monetary policy was “in part operated by facilitating fiscal expansion through keeping financing costs affordable, and both policy domains working hand in hand,” further noting that PEPP purchases had been calibrated to match the pandemic-related increase in sovereign bond net supply.12

In early 2021, ECB president Christine Lagarde herself came forward with an explicit defense of monetary–fiscal policy coordination.13 Through this statement, the ECB did what some of its most astute critics would have liked it to do in the aftermath of the decision of the German Constitutional Court: stop “perpetuating the fiction of a neat separation between monetary and fiscal policy, thus making it possible for the German Constitutional Court to build its legal argument.”14 Bolstering Lagarde’s position, in March 2021 the Fed responded to market pressure on US government bonds by backing the massive $1.9 trillion fiscal stimulus of the Biden administration, a move that can, at least in part, be linked to the dislocation of New Keynesian thinkers by pragmatic “neoempiricist” technocrats in Washington’s corridors of power and beyond, in central banks, academia, and other fields of economic expertise (Helgadóttir and Ban 2021).

This neoempiricist thinking seems unconstrained by anxiety over “rigorous” models or twentieth-century intellectual loyalties (including Keynesian ones) and seems keen to embrace an economic analysis based on simpler mathematical observations of empirical data that can be deployed for immediate policy relevance without much concern for academic prestige costs. For example, as two ECB economists showed, when it comes to macroeconomic policy, neoempiricist thinking allows for monetary-fiscal coordination. Rather than get stuck in tired paradigmatic and methodological debates, they simply showed that most inflation in developed countries originates not in fiscal expansions but in price movements endogenous to the global supply chains of multinational firms (Ciccarelli and Mojon 2010). Small wonder, then, that Keynesian macroeconomist James Galbraith wondered aloud with more than a bit of schadenfreude: “Is there anyone who came down from Harvard to instruct the Biden Administration on how to run the economy?”15

But while the ECB showed that it had learned some of the right lessons from the previous crisis (Matthijs and Blyth 2018)—particularly in the repo markets—and had been successful at preventing a rerun on the euro periphery (Gabor and Ban 2016), its interventions have not been enough to stimulate a solid recovery, nor have they become committed to supporting a strong fiscal expansion in 2021. If the IMF’s World Economic Outlook projections are right (and often they are not), in 2025 the Euro area GDP will still be 3.2 percent below the trend predicted before COVID-19, with the situation in Southern Europe being particularly complicated.

To date, the European discretionary stimulus has been less than half of the EU output gap, in sharp contrast with the situation in the United States, where it has been more than twice as large as the output gap.16 Furthermore, while the Biden stimulus was already implemented in the spring of 2021, Europe’s stimulus (the debt-funded NextGen EU) was scheduled to be disbursed only in mid- to late 2021 and with conditionalities attached to structural reforms that some member states could fail to meet. Finally, while NGEU is sizable (though nearly half the size of the American stimulus) and well targeted (it effectively entails a €209 billion stimulus to heavily hit Italy), one wonders if it would be big enough for an 8.8 percent deficit across the European Union in 2020 and for the trimming of stimulus spending in 2021 to cut that deficit to 6.4 percent of GDP. Europe has also had a slower recovery than the United States, and with a slower vaccine rollout in the European Union, the gap was expected to grow bigger still in 2021. All of this amounted to greater pressure still on the ECB to walk deeper into unorthodox territory when it came to bolstering the EU economy with bond purchases to keep interest rates low, with the overall effect being that of managing yields.

To some observers, the chronically low inflation in the eurozone suggests that compared to the Fed, the ECB has not pressed on the gas hard enough and should consider doing this in 2021.17 The good news for the ECB was that with a strengthening euro and higher yields in the eurozone bond markets, the ECB had the policy space to do more. But complicating matters, however, is the concern in Europe that if mainstream economists are right and inflation in the United States stays slightly above 2 percent18 (a big if), this would incentivize global investors to buy euros to hedge against American inflation, further strengthening the euro against the dollar.19 Or, given that overall Europe is an export-led growth regime, a strong euro would dampen growth figures further still. In that case, the scissors of currency appreciation and deflation may cut further into the fabric of recovery, making even larger asset purchases and bolder yield management demanded by fiscal expansion increasingly inevitable. In this sense, the ECB may feel emboldened to choose this course of action by the fact that the Fed has already done this, with better consequences for the US economy in relative terms. But whether this neoempiricist turn happens or not depends as much on material factors as it does on the institutional and intellectual politics inherent to central banking (Moschella and Diodati 2020; Birk and Thiemann 2020).

Competing Interests

The author has no competing interests to declare.

Author Biography

Cornel Ban is associate professor of international political economy at Copenhagen Business School. Prior to this, he has been reader at City University of London, assistant professor at Boston University, and research fellow at Brown University. He is the author of two books and more than twenty articles on the politics of economic expertise in international settings, organizational shifts in international financial institutions, and capitalist diversity in Brazil, Spain, Hungary, and Romania. His most recent book, Ruling Ideas: How Neoliberalism Goes Local (Oxford University Press, 2016), received the 2017 political economy award of the British International Studies Association. He is currently working on growth regimes, the nexus between finance and the climate crisis, and the political economy of the entrepreneurial state.



Swap lines are mostly bilateral agreements between central banks to exchange their country’s currencies with one another. The basic idea is that the country with the weaker currency can use the swap lines to insure against investors driving down the currency’s value.


Benjamin Wallace-Wells, “Larry Summers versus the Stimulus,” New Yorker, March 18, 2021.


“For many years, inflation in the United States has run below the Federal Reserve’s 2 percent goal,” but “The Federal Open Market Committee (FOMC) judges that inflation of 2 percent over the longer run, as measured by the annual change in the price index for personal consumption expenditures, is most consistent with the Federal Reserve’s mandate for maximum employment and price stability. When households and businesses can reasonably expect inflation to remain low and stable, they are able to make sound decisions regarding saving, borrowing, and investment, which contributes to a well-functioning economy.” See


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