2nd June 2011

F&C: The ECB's role in the European sovereign debt crisis

The ECB has played an active role in the debt crisis that has submerged the Eurozone since early in 2010. Together with the European Commission (EC) and the IMF it is one of the members of the troika that has been responsible for defining policy response as events have unfolded over the last year and a half.

This note looks at how the ECB's role has evolved and, more recently, how it has tried to take a more independent line. From a charitable point of view, this response can be regarded as the ECB wanting to return to a normalisation of its monetary policy but the truth is somewhat different. The reality is that, with the periphery countries it is trying to provide assistance to, the ECB has become so embroiled in the crisis that its own assets and capital have been severely weakened. The importance of this should not be lost on investors because it has, and will, limit the ability of the ECB to help shore up the periphery countries and, in the event of a default, the bank itself may need recapitalisation from the 17 Eurozone central banks.

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