The role of the European Central Bank

The European Central Bank (ECB) based in Germany, was established in 1998; it is the central bank for Europe’s single currency that is the euro (Ecb. europa. eu 2015). It consists of 19 European member states out of 28 European union countries, where they all adopt the euro currency, which is also known as the Eurozone (Howarth & Loedel 2003). Only two European Union states are not in the Eurozone, Denmark and United Kingdom. The role of the European central bank is to implement and framing the EU’s monetary policy and economic policy (Allsopp & Vines 1999). The European Central Bank (ECB) is one of the most important factors in the financial crisis and the sovereign debt crisis in the Euro- Zone. The ECB has an important role to play to resolve these issues during this crisis.

During the financial crisis, some members of the European Union viewed this crisis as an American phenomenon (Jackson 2009). But this view that people had, has changed as the EU has declined at a very fast pace. Matters went worse when the global trade started to decline sharply when it started eroding prospects for European exports giving safety valve for local industries that are reducing output (Gojinetchi 2012).

Moreover the rise in unemployment and having a lot of concerns over the growing financial turmoil, are making the political stakes to increase for the EU government and for the leaders (Nanto 2009). The more the economic crisis persist the more will pressure mount on the governments The ECB clearly did not see this crisis coming in 2007 and they did not know the dimension and depth of this crisis until it was summer 2008. In fact, what they did, is that they increased the target rate to 4. 1 to 4. 25% in July 2008 by following the principle of inflation targeting (Annual report 2008).

It was only when the Lehman Bros collapsed that the ECB understood that there was an exceptional crisis. The ECB started to change its policies, and let’s not forget that the ECB role is to make monetary policies. They also started to decrease the interest rate until it reached a historic 1% in May 2009 (C? ure 2015). But these are not enough the ECB had to start inserting liquidity into the system. Therefore they started a program called the “Enhanced credit program”. This helped to encompass purchases of bonds, relaxed criteria for collateral. They started to act as a lender as they started giving liquidity to all banks.

In 2010, as the sovereign debt crisis in Greece came to a head, the ECB initiated another program called “Securities Market Program” (Alessi 2012). They started to buy the Greek government bonds. But, as the debt crisis engulfed other Eurozone states, the ECB started to extend the program to Portugal, Ireland, Spain, and Italy. The banks bonds purchase helped to bring down rising borrowing cost. To increase liquidity and bank lending they initiated the Long Term Refinancing Operation program where they made available $640 billion in inexpensive, three-year loans to 523 EU banks.

According to me, the ECB started to deviate from its ideology where they had strict monetary policies. This global financial crisis has unleashed a lot of pressure. It is a very complex issue of monetary prices and central banking roles. Moreover, the European Central Bank does not have any obligations on the countries that have not adopted the Euro as the other countries have a strong currency and looking at the crisis that the other countries are going through its better for them not to enter into the Eurozone. Moreover, UK and Denmark were permitted to opt-out as a way to get them to help the Maastricht Treaty (Francis n. d. ).

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