The European Central Bank Financial Crisis Response Strategies: Toward a Monetary Union for the Single European Market

Recent global financial crises have faced the international banking system and global financial markets with mounting challenges. The financial crisis of 2007 – 2008; the ensuing recession through 2012; as well as the European sovereign debt crisis of 2011 have caused loss of trust in the banking system internationally, due to the decline in the nominal value of financial asset prices; increasing insolvency of businesses and consumers; as well as liquidity shortages. While financial crises do not necessarily result in significant changes in real economy, their potential impact shall not be undermined: global finance may experience stock market crashes, currency crises and sovereign default. This paper examines the European Central Bank response strategy to recent financial crises. We address in particular the Bank’s management strategies adopted to (a) systemic risk; (b) sovereign debt. We argue, price stability is a necessary condition for financial stability. However the sufficient conditions rest with (a) the development of new monetary policy instruments; and (b) with the improvements in the overall European architecture of financial stability. We support the hypothesis discussing 1) the ECB’s the Securities Markets Programme (SMP, 2010) as well as 2) the Covered Bond Purchase Programme (CBPP1/ 2: 2009; 2011). Additionally, we review the European Stability Mechanism (ESM); and the European Systemic Risk Board (ESRB, 2011).