7. Distressed European Central Bank and Financial Instability

Following the recommendation by Euro-monetarists, the European Central Bank’s major responsibility is to secure price stability in the Eurozone by inflation targeting. In reality, the European Central Bank (ECB) had little impact on developments in money supply (M3) and price inflation. Banks behaviour, financial markets and the euro exchange rate were dominated by market forces, which led to financial stress. When the financial crisis hit in 2008/2009 countries with balance-of-payments deficits and large foreign debt had increasing difficulties to get access to capital markets. First, EU set up rescue funds providing emergency loans, later the ECB started to act as lender of last resort. In both cases, debtor countries had to accept strict conditionalities, which prolonged the stagnation within the Eurozone as a whole.