The European Central Bank and Implications of the Sovereign Debt Crisis

Since the onset of financial turmoil in August 2007, the main central banks worldwide have implemented extraordinary standard and non-standard monetary measures. Accommodative fiscal measures were also implemented on a large scale. These measures have questioned the sustainability of public finances in various euro area countries, which led to the current sovereign debt crisis. The current sovereign debt crisis is even more challenging as it affects the value of banks’ assets and their collateral, and therefore increases risks to the economic outlook. Against this background, this chapter describes the actions of the European Central Bank (and their rationale) while discussing the necessary separation between the responsibilities of central banks and government. Finally, some lessons about the possible adjustment of the roles of central banks and fiscal authorities in the euro area are also addressed.