The European Central Bank

ECB – located in Frankfurt

Co-exist with national central banks to create the euro system.

Main goal of ECB: define and implement monetary policy of the Euro area. This means maintain price stability keeping inflation below but close to 2%.


Why 2 %?

  • Adequate margin to risk of deflation
  • Low enough for users of the Euro to make accurate long-term economic and financial decisions.


Tools: interest rates + buying government bonds


Important decisions are made by governing council of the ECB:

  • Made up of the governors of the national central banks of the Eurozone + the members of the ECB executive board.
  • The governors do not represent their own countries but votes to represent the interest of the Euro area as a whole.



  • Ensuring the smooth operation of payment systems.
    • Cash-less payments to make transactions faster
  • Holding reserves of foreign currencies
  • Authorizing the issuance of Euro banknotes
  • Set the rules for national banks´ reserve levels – 10% standard.
  • Act as the bank of the national banks – provide loans to national banks – now they to it with very low interest rates to banks that need it in their regular operations.



What have they done since the crisis started?

  • Lowered interest rates
  • Bought sovereign debt from Greece, Spain, and Italy in 2010-2012, and covered bonds in 2009-2012.
  • Quantitative Easing introduced on March 9th. Planned to buy public and private bonds worth €60 billion each month and a total worth of €1.1 Trillion by September next year. Compare to US GDP of $16.77 Trillion. An effort to stimulate the economy and increase the inflation rate. Experienced deflation in late 2014.
  • The ECB has an emergency liquidity assistance program that provides liquidity assistance in emergencies, in form of central bank money, to solvent financial institutions that are facing temporary liquidity problems. Greek banks have gotten this assistance.
  • They created the banking union in 2012 to create financial stability. They created a rulebook that would supervise the larger banks in each Eurozone country (approximately 6000). They monitor the banks in order to tackle problems early on. This is due to the crazy lending and borrowing the occurred prior to the crisis.
  • Created a single resolution fund financed by the banking sector to save European banks that are close to going bankrupt.
  • Countries lost even more sovereignty by joining the banking union.
  • The ECB does not allow governments to issue unlimited T-bills that National banks can buy, to avoid more debt in the system. This is what is going on in Greece now. Tsipras is pissed at the ECB for not letting their government issue more Treasury bills.
  • In Greece´s case, the ECB might not even let the Greek banks extend the current bonds that are about to mature.
  • The ECB has made loans to Greece worth €100 billion – 70% of their GDP.
  • ECB has run stress tests on European banks and all four major banks in Greece passed it, but the ECB also recognized that without deferred tax credits, the banks core capital falls to about 5%, which is far below the required 10%.
  • The ECB is not the only source of funding for Greece. There are major funds held by the European Stability Mechanism that can be made available to safeguard financial stability. It raises funds by issuing long-term debt with maturities.