The Role that European Central Bank Play in the Current European Financial Debt Crisis - Essay Example

What Role Should The European Central Bank Play In The Current European Financial Or Public Debt Crisis? The European Union’s central bank is the organization that should be responsible for the administration of the monetary policies of the seventeen member countries in the Euro zone. 1 Its main responsibility should be the maintenance of price stability within the member states of the union which in other terms refers to the maintenance of low inflation rates. 2Its primary duties should involve the tasks of defining and implementing the financial policy within the euro zones, conducting operations concerning foreign exchanges, taking care for the foreign reserves in their possession while ensuring the financial markets are running smoothly. 3 The present European economic crisis has built up as a result of the countries within the continent struggling to pay up the debts they have been building up in the past few decades. Several countries within the union have failed to record an economic growth in turn failing to pay the bondholders their required guarantees. These countries include Spain, Italy, Portugal, Greece and Ireland. 4The crisis was exposed by the American recession of the year 2007-2008 that made many countries in Europe experience slow financial growths due to the unsustainable fiscal policies that most European countries were utilizing.5 The countries that had not made financial reforms such as Greece were the first to feel the pain of the crisis when they experienced very high deficits in their budgets which were also unsustainable. 6 Investors who had interests within the countries that were experiencing financial difficulties in turn demanded superior yields on their bonds raising the costs of these countries debts.7 The union’s central bank should resist the idea of printing more money so that they can buy out the union’s distressed debts.8 In the month of December 2011, the central bank availed credit facilities to the troubled financial institutions that were within the region. This move that the central bank has been putting much effort in has not helped in solving the continents problems, however, it helped in boosting the confidence of potential investors who now perceive the economies that were largely in debt as experiencing slow growths in their activities. This move has additionally helped in preventing the collapse of the economies of some member countries along with keeping the European currency stable in the global monetary markets.9 The union’s central bank should establish legal instruments such as the European monetary stability facility with the cooperation of the union’s member states. They should aim at preserving the monetary stability within the continent by ensuring that the countries that are experiencing financial difficulties get assistance.10 Through these instruments, bonds can be issued on the financial markets to assist in raising more funds for bailing out the countries that are experiencing financial difficulties. 11The issuance of the bonds should be guaranteed by the member countries being bailed out in equal proportion to their shares of paid up funds at the union’s central bank.12 As a result of this move, the prices of various stocks around the globe will surge after the union has established the legal instruments. The instruments help in easing the fears concerning the debt crisis that countries such as Greece are experiencing spreading along with the prices of their stocks rising to an all time high.13 The European market will make tremendous gains during this period with the commodities of prices across the globe also rising sharply. The European bail out by their central bank caused great drops in the yields of Asian bonds and bonds in countries such as Greece. The central bank should in future perform their operations in the open markets by purchasing government and private money owed along with absorbing their liquidities to avoid the issues of inflation from affecting the member countries. 14The bank should also change its policies concerning the credit ratings for deposits of loans while accepting as collaterals new instruments of debt that are guaranteed by the respective governments. In addition, the central bank should always ensure that the financial markets within the union are supervised properly to ensure that their monetary systems remain stable at all times. The bank’s management should always ensure that there is adequate cooperation between the regions central banks for the purpose of regulating the inflation within the continent. 15 The bank’s governing council should be absolutely involved in the determination of the regions monetary policies while fixing the rates of interest that the commercial institutions within the region will be charging and this will be for the purpose of controlling the inflation within the union. The central bank should additionally incorporate the services of their general councils in evaluating the prospects and the ability of new countries joining the union. This is because their advisory along with coordination efforts should best be utilized in making the best decisions as some countries that want to join do not meet the standards required within the union. 16Finally, the central bank of the European Union should offer efficient supervisory services that will help them in ensuring that the monetary markets along with the financial organizations in their systems function smoothly. References Aslund, A, 2010, The Last Shall Be The First: The East European Financial Crisis, 2008-10, Peterson Institute, London. Duthel, H, 2011, European Debt Crisis 2011, Epubli, Vienna. Eichengreen, B, Feldman, R, Liebman, J, Hagen, J., V, & Wyplosz, C, 2011, Public Debts: Nuts, Bolts and Worries, CEPR, Brussels. Gill, I.S. & Raiser, M, 2012, Golden Growth: Restoring the Luster of the European Economic Model, World Bank Publications, Washington. Haan, J. D, Eijffinger, S.C.W, & Waller, S, 2005, The European Central Bank: Credibility, Transparency, And Centralization, MIT Press, London. International Monetary Fund, 2010, World Economic Outlook: Rebalancing Growth, International Monetary Fund, New York. Organization for Economic Co-Operation and Development, 2010, QECD Economic Survey: Euro-Area 2010, OECD Publishing, Brussels. Whalen, R. C, 2010, Inflated: How Money And Debt Built The American Dream, John Wiley & Sons, London. Read More