ORIGINAL ARTICLE: The European Central Bank in time of crisis | eu-magazine.com.
The Eurozone economic crisis has drastically shaped the European Central Bank’s policies. The need to face the strong shock of the financial markets and the limits in monetary policies imposed by the treaty, lead the ECB to use a series of less conventional tools. In September 2008 the failure of Lehman Brothers caused the catastrophic fall of the global trade volumes (about 18%) and in the euro-zone the real GDP rate decreased by 4.5%. This event caused a dramatic trauma to the banking sector, paralyzing the interbank market and affecting the entire operation of credit. Banks suffered indeed both the fear of counterparty default and the “deleveraging”. The following development of the crisis constitutes the first real challenge for the ECB since its establishment in June 1998.
The first response is between October 2008 and June 2009. In seven months, the European Central Bank (ECB) reduced the key interest rates from 4.25% to 1.0%. Later, it introduced a number of non-standard measures to support credit provisions by banks to the euro-zone: the access of the European Investment Bank (EIB) to the Eurosystems operations; the commitment of the Eurosystem to acquire 60 billion euros of covered bonds; and the introduction of refinancing operations of one year at 1% interest.
Despite the previously mentioned measures, the economies of the Eurozone suffered an increase of public deficit, of debt and of unemployment. To face the first two problems, and given that the treaties prohibit the ECB to purchase government bonds on the primary market, the ECB developed in May 2010 the Securities Markets Program (SMP) to permit the acquisition of Greek, Irish and Portuguese bonds in the secondary market. Afterwards, the SMPs have also been developed for the acquisition of Spanish and Italian bonds. At the end of 2011, the ECB acquired about 190 billion euros.
Between December 2011 and February 2012, the ECB provided loans to banks for an amount of 1,020 billion euros with a 1% interest rate. This action was taken in the framework of the Long Term Refinancing Operations (LTRO) and aimed to help banks with refinancing issues.
In 2012 and 2013, the ECB decided again to reduce the key interest rate to a historic minimum of 0.25%. In addition, to answer to the deterioration of the Eurozone banks system, it creates the Single Supervisory Mechanism, allowing the ECB to monitor the financial stability of the banks based in the Eurozone.
Nowadays, even if in the first quarter of 2015 the Eurozone’s GDP growth rate is positive, many economies of the area still suffer of high deficit, debt and, in particular, unemployment rates. After the announcement of the “seed money” from the new President of the European Commission, Jean-Claude Junker, the ECB declared that a new programme, called quantitative easing (QE), will be introduced. The QE will provide 60 billion euros per month (until September 2016) to the Euro-area banks to buy government bonds.
Author: Vania Putatti, Alternativa Europea (Italy)
Photo credits: www.surysur.net/
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