The Euro in Crisis

The European Central Bank, Monetary policy and Measures taken in

Response to 2008 – 2010 Financial crisis.

The European Central Bank (ECB) is the central bank for the Euro, which is official currency for the eurozone. The eurozone is the ‘economic and monetary union of sixteen European Union member states.’ (1) Along with the central banks of those member nations, the ECB represents the central banking system of the eurozone called the Eurosystem. The main objective, collectively, of the Eurosystem and European Central Bank’s monetary policy, is “to maintain price stability,” (2) thus protecting the values of the Euro. Achievement of the maintenance of price stability can be attributed to defining the monetary policy of the Eurozone. This policy is defined in the Treaty of the Functioning European Union, Article 127. The treaty states, "Without prejudice to the objective of price stability the European System of Central Banks (Eurosystem) shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union." (3) The desired result of this defined monetary policy (maintaining stability) should be low unemployment and well economic environment.

Formed in 1998, the European System of Central Bank’s (ESCB) defined stability as “a year-on-year increase in the Harmonized Index of Consumer Prices for the euro area below 2%.” (4) To ensure stability, the ECB guides the economy by ‘loosening policy when growth is slow and tightening as enthusiasm builds.” (4) The ECB put this in to action as a response to the financial crisis occurring from 2008 to 2010.

As a result of the sub-prime mortgage lending crisis in the United States, the European markets also faced uncertainty. On August 9, 2007, the ECB ‘loosened policy’ when it “announced it would meet all funding requests from financial institutions in the eurozone.” (4) This aggressive action was to promote lending between banks. Seven months...