Global Business Environment - the Role of European Central Bank

3. Discuss the role of the role of European central bank in resolving the current economic crisis that is sweeping through Europe. In your opinion, does the European central bank have an obligation to those countries that have not adopted euro?

Introduction to European union

The European union comprises of 27 states as members mostly from Europe. This union is economic and political union. All member states have agreed on laws set by European union, which has become a single market in global village. Out of 27 member states 17 have agreed to adopt euro as currency which in past was very strong in comparison to US dollar. The 17 member states that have adopted euro are called Eurozone. Euro in few member states varies in terms of exchange rate, as it has to keep in mind the economic and fiscal stability. There are few rules and regulation for Eurozone member states that they should maintain their debts by not exceeding 60% of GDP and state deficit should not exceed 3% of GDP.

Role of European central bank

The role of European central bank is to keep a stable economic and monetary policy running. It manages euro, which helps in economic growth and create employment opportunities. It sets interest rates for private banks of euro area thus controlling inflation. It balances exchange rate of currency and authorises the production of bank notes. ECB is made up of 3 decision-making bodies. First is governing council, which has the main authority of making a decision. Second is executive board that looks after day-to-day decision to run ECB. And the final one is general council that has more like of giving advise and coordinate ECB president and central bank of Eurozone. General council also helps in new countries to adopt euro.

European economic crisis

European economic crisis began with fall of Ireland’s banking system followed by Greece and Portugal in 2009 that were unable to pay their debts. One of the reasons of the economic crisis in these countries was the Great Recession of 2008-2012. When previous records of these countries were checked it unfolded that Greece has been violating the European union policy in past which caused budget deficit. The investor’s trust was broken which broke their confidence of new investors to invest in Greece. The fear of unsustainable debt level might be there in other Eurozone countries made investors demand more interest rates making it difficult for Eurozone countries to finance their budget deficits with low economic growth.

Role of European central bank in resolving economic crisis

European central bank is last resort lenders with keeping price stability in mind. On 6th September 2012, Mario Draghi introduced new policy of buying bonds of Eurozone in secondary market for unlimited amount. The