Did European Central Bank (ECB) monetary policies bring calm in Europe?

A few short years ago, mass demonstrations across Europe protested cuts in wages, pensions and other benefits. When Greece, Italy, Spain and other European countries could not cover their debt payments after the 2008-2009 global economic crisis, a number of E.U. governments imposed harsh — and unpopular — austerity measures. While the Great Recession seems to have ended in the United States, it lingers in Europe.

A 2010 pamphlet, Indignez vous (Time for Outrage!), rallied many to action, both in Europe and for the Occupy Wall Street movement in the U.S. Its author, Stéphane Hessel, a 93-year-old French concentration camp survivor and retired diplomat, urged people to get angry at the injustices of the capitalist world. The booklet sold more than 4 million copies worldwide, yet the movement soon ebbed. Why?

Our research shows that ECB measures and statements actually defused some of the anti-austerity sentiment across Europe. The ECB after 2011 began to implement new and old Keynesian monetary measures to stimulate Europe’s faltering economy. For non-economists, this means policy interventions through low or negative interest rates and careful policy announcements. While the former and more traditional instruments force banks to give credits to struggling firms, the latter creates the confidence that the central bank does the utmost to stimulate the economy.

Unlike the U.S. Federal Reserve, the ECB in 2011 could not adopt quantitative easing — when central banks effectively buy financial assets to create money and to encourage banks to lend more, and stimulate the economy. Our research shows that, rather than these unorthodox measures, the ECB instead used conventional interest rate policies combined with repeated announcements aimed at reassuring markets and voters about the sustainability of the euro. In 2012, this culminated in Mario Draghi’s famous reassurance that the ECB would do “whatever it takes to preserve the Euro. And believe me, it will be enough.”

Here’s how we gauged whether or not this calmed social unrest

We compiled data on monthly political protests and information on ECB press releases and the ECB deposit rates — the lower this rate, the more commercial banks will want to lend out money rather than to sit on it. The following figure shows the protest trends between September 2008 and December 2013, in addition to the value of the deposit facility interest rate and a selection of ECB announcements. We found that the number of political protests did indeed correlate to ECB interest rate adjustments and announcements.

Noticeably, mass mobilization began to increase as the ECB decided against further slashing its deposit rate in early 2009. The non-action of the European politicians and the ECB created thus a belief among businessmen and trade union leaders that Europe would only try to get out of the crisis through anti-austerity measures. This wave of protests, however, stopped in December 2010 when the ECB established the E.U. Risk Board, which aimed to identify and mitigate possible risks to E.U. fiscal stability.

There was only one political protest in the first half of 2011, though the summer Banking Stress Test in July likely triggered political demonstrations. The Stress Test involved an adverse economic scenario in which banks stopped lending to households and business — an exercise designed to test how 90 banks in 21 countries would manage under adverse conditions. The bad performance from the stress test seemed to drop people’s confidence in the banking system and the monitoring institutions.

In July 2012, ECB President Mario Draghi’s “whatever-it-takes” speech seems to have further calmed public attitudes. E.U.-wide strikes in November 2012 were staged as a protest against the international disagreement over shared liability and the German veto on E.U. bonds — in other words, signals that would seem to oppose Draghi’s maneuvers instead of supporting them.

The ECB’s words matter as much as the numbers

The next figure shows how key words in ECB news releases changed after the 2008 crisis. The graph demonstrates that, after the outbreak of the crisis, the average ECB press release talked less about financial risk — in line with the new Keynesian macroeconomics emphasis that, after crises, countries should embrace instead of shy away from strong monetary action in order to maintain spending and boost economic output. Additionally, the ECB began to use words such as “governance” and “European” more frequently, topics that Europeans cared most about at the time.

We interpret this finding as evidence that ECB words mattered, and helped the Bank inject confidence not only in the euro but in the entire E.U. system.

Here’s what we think happened: The careful ECB rhetoric combined with action on the interest rate effectively influenced social mobilization in the euro zone. In the crisis-ridden countries, the public was persuaded that the ECB would take any action to stabilize the common currency and the struggling national economies.

There’s some irony here. According to the 1992 Maastricht criteria, the conditions countries must fulfill to accede to the euro zone require member countries to have strict fiscal controls. That means indebted euro zone nations cannot adopt traditional Keynesian measures and borrow more to stabilize their economies.

As ECB critics from both Europe’s right and left have contended, flooding the financial markets with cheap assets — the ECB turned to quantitative easing in 2015 — and keeping interest rates low might lead to another financial crisis in some years. Current ECB policies may as a consequence overly benefit shareholders and banks over workers, savers and other economic agents. Thus, the crisis management of boosting liquidity risks helping one of the main culprits for the crisis in the long term again — the financial industry.

We do not know whether the ECB’s interest rate or other policies will work again if there are new threats to the  euro zone. As explained here in the Monkey Cage, the ECB has been using quantitative easing since 2015, but with mixed results. Yet, our empirical evidence suggests that somewhat paradoxically, the very institution behind the euro — which several E.U. member states believe has caused their profound financial troubles — prevented the struggling economies from tipping over into prolonged social unrest.

Federica Genovese is a postdoctoral fellow in government at the University of Essex, United Kingdom.

Gerald Schneider is professor of international politics at the University of Konstanz, Germany.

Pia Wassmann is a doctoral student in economics at the Leibniz University Hannover, Germany.