Economic Policies Adopted by the European Central Bank

Day 3 Group 4MinhPhuong, Yu-Hin, ChingHung, Powen

What is the ECB

The euro area comprises the 18 European Union countries that have introduced the euro

The ECB is the central bank for Europe's single currency, the euro

The ECB’s main task is to maintain price stability in the euro area; inflation rate close to 2% over the medium term

Current Situation of the Eurozone Recovering from

Financial crisis 2007 - 2008 Crisis of sovereign debt defaults

Economic Growth Positive and low growth rate; growing slower than US

or Japan Unemployment Rate

Very High; risk of generation lost Inflation

Rapidly decline in early 2014: deflation or dis-flation

ECB Approaches

Provide incentives for banks to loan companies got financed for investing and hiring

Control the possibility of deflation loosen monetary policies to increase money supply and in turn increase price

Policies Taken by ECB

Interest Rate rate on the main refinancing operations rate on the deposit facility rate on the marginal lending facility

June 2014: rate on the main refinancing operations:

from 0.25% to 0.15% (new record low) rate on the deposit facility: -0.1% rate on the marginal lending facility: from

0.75% to 0.4%

Polices Taken by the ECB

Non-standard measures Bank-based measures

Longer-term Refinancing Operations (LTRO) banks can use their illiquid assets as collateral for

cheap loans with terms of up to 36 months Early repayment

targeted LTROs" (TLTRO) expected to start this year

Polices Taken by the ECB Non-standard measures

2009 Purchase program for covered bonds Covered bonds: debt securities issued by

banks that are backed by mortgages or public sector loans.

2010 Securities markets program Allow ECB and national central banks to buy

government bonds from secondary market Ease the pressures from sovereign debt risk Terminated in 2012

Polices Taken by the ECB

Non-standard measures (con’t) Outright Monetary Transactions (OMTs)?? (20

12) ECB purchases short-term government bonds in

the secondary market prevent the interest rates that country faced from going to high (resulted from the fear of default)

Conditions: undergo reform (ex. European Stability Mechanism programs) under the supervision of IMF

Conclusion

The effects of these measures are difficult to assess because the counterfactual is impossible to know

Some said that these measures are too conservative to promptly fix the problems