The Euro in Crisis Decision Time at the European Central Bank essay

The Euro in Crisis Decision Time at the European Central Bank essay The Euro in Crisis: Decision Time at the European Central Bank essay The Euro in Crisis: Decision Time at the European Central Bank essayQ1. Evaluate the ECBs response to the financial crisis of 2008-2010. What was their analysis of the problem?The crisis of 2008-2010 which started in the United States later affected the whole international community, and had a particularly strong impact on Europe. The response of ECB to the first wave of the financial crisis was to inject money into the European economy without lowering interest rates (Trumbull, Roscini Choi, 2011). The next wave of crisis was further addressed by liquidity-stimulating measures; while these measures supported the position of the European banks and stabilized money markets in Europe, inflation went up. In addition, ECB reduced its MRO rate and changed the mechanisms of borrowing.In fact, ECB started performing the clearing functions which were previously performed by the money market (which became stagnant during crisis and no longer maintained clearing). ECB focused on maintaining l iquidity and protecting the euro, but it also experienced pressure from central European banks which were following the strategy of quantitative easing and expected ECB to follow that strategy as well (Trumbull, Roscini Choi, 2011). Eventually, ECB also became involved and announced the purchase of bonds, therefore energizing the market. However, the initial view of ECB was to deal with monetary aspects of the Eurozone, while the responsibility for fiscal measures should have remained with national governments.Q2. The ECB responded less aggressively than the US Federal Reserve to the crisis. Why?The US Federal Reserve acted quickly during the crisis: it reduced interest rates quickly and started the policy of quantitative easing (started the purchases of financial assets of commercial institutions ). The actions of the Fed were quick and aggressive, since the crisis was rapidly unfolding and the countrys financial system was at the threat of a total crash. At the same time, the act ions of ECB were different: it started increasing the monetary base using its traditional lending policy but did not reduce interest rates timely (it even increased them for a short period when the inflation was speeding up). Furthermore, ECB was reluctant to pursue quantitative easing and this reluctance to a certain extent contributed to the next wave of financial crisis in Europe.The differences between the actions of the Fed and the ECB were constituted mainly by different purposes of these institutions and different scopes of influence. The role of the Fed is to conduct monetary policy, to regulate and supervise banking institutions, to provide financial services of organizations and to maintain the stability of the U.S. financial system. The purpose of the ECB is to conduct monetary policy of the EU and to keep prices stable (Trumbull, Roscini Choi, 2011). Fiscal policies and policies aimed at increasing employment and maintaining the stability of national financial systems i n the EU belong to the responsibilities of governments. Therefore, the ECBs response was different from the Feds response to crisis since these organizations are different in purpose and have different spheres of impact.Q3. In May 2010, should the ECB agree to purchase Greek sovereign debt?Yes, in May 2010 the ECB should agree to purchase Greek sovereign debt. If the ECB does not participate in purchasing this debt, it will damage the financial system of the EU, affect prices and weaken the euro. Such stresses will likely lead other weaker European economies to another crisis and the economy of the EU will suffer. Therefore, by refusing to purchase Greek sovereign debt, the ECB will break its direct responsibilities and push the European economy into a new wave of crisis. However, the ECB should make steps to ensure that other countries with weak economies like Portugal do not follow the Greek scenario and do not dry the European bailout funds. Basing on the Greek precedent, the ECB should seek to create an aligned fiscal policy that would address the interests of all euro zone participants and would balance these interests, instead of letting the countries pursue non-aligned fiscal directions.