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Since the beginning of 2022, monetary policy in the euro area has been gradually normalizing. As a result, bond yields of highly indebted countries such as Italy and Greece are rising more sharply than those of countries with less debt, such as Germany, a development referred to as bond market fragmentation. To ensure the coherent effectiveness of monetary policy on economic developments and, ultimately, price developments in all euro area Member States, the Governing Council of the European Central Bank announced the Transmission Protection Instrument (TPI) in July 2022. The TPI intends to make it possible to selectively purchase government bonds from countries whose interest rate increases are not considered to be justified by macroeconomic fundamentals, thus preventing a disorderly divergence in interest rate levels between countries. This Weekly Report analyzes the economic and legal aspects of this new monetary policy instrument. Estimates from the empirical model show that current yield spreads between government bonds of euro area member states cannot yet be justified as disorderly; rising yields can be explained by a worsening of macroeconomic fundamentals and stricter general risk assessments. Therefore, the requirements for activating the TPI have not yet been fulfilled. In addition, TPI raises concerns from a legal perspective.

We analyse the first twenty years of the euro both from an economic and an institutional perspective. We find that in particular during the period since the financial crisis, convergence as measured by a variety of indicators has not improved. Design flaws in the Eurozone institutional architecture have contributed importantly to this lack of convergence. This is why further reforms are urgently needed. This policy contribution was prepared for the European Parliament Committee on Economic and Monetary Affairs ahead of the European Parliament's Monetary Dialogue in January 2019.

There is widespread concern that the bonus culture for senior managers in limited liability companies is having adverse effects, e.g. on risk-taking, leverage and lower longer-term investment. The moral hazard of limited liability was appreciated in the 19th century, when unlimited or multiple liability, especially for bankers, was widely adopted. Whereas outside, notably retail, investors still need the protection of limited liability, we advocate moving towards a two-tier equity system, primarily for banks, with insiders, senior managers and others with influence over corporate decisions, becoming subject to multiple liability. But the transition costs of doing so suddenly would be great, so our proposal is to start by applying this initially just to Systemically Important Financial Intermediaries.

In August 2007 the United Kingdom experienced its first bank run in over 140 years. Although Northern Rock was not a particularly large bank (it was at the time ranked 7th in terms of assets) it was nevertheless a significant retail bank and a substantial mortgage lender. In fact, ten years earlier it had converted from a mutual building society whose activities were limited by regulation largely to retail deposits and mortgages. Graphic television news pictures showed very long queues outside the bank as depositors rushed to withdraw their deposits. There was always a fear that this could spark a systemic run on bank deposits. After failed attempts to secure a buyer in the private sector, the government nationalised the bank and, for the first time, in effect socialised the credit risk of the bank. It is now a fully state-owned bank...