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The ECB and the financial crisis: Rigid theory vs a pragmatic approach

Written by Cemal Karakas
© iQoncept / Fotolia

The European Central Bank’s (ECB) main objective is stable inflation in the Economic and Monetary Union (EMU). During the financial crisis, the ECB decided to face the economic slump by, amongst other actions, increasing and then decreasing interest rates and the money supply. In addition, it launched a quantitative easing (QE) programme which aims to stabilise some Member State economies. The ECB’s monetary decisions evoked mixed reactions in the euro area and triggered a debate on the relevance of price stability, austerity and deficit spending.

The ECB’s monetary policy is broadly in line with Monetarist economic theory, according to which, changes in money supply are the main determining factor for business fluctuation – in both a positive and a negative sense. During the crisis, however, the very different Keynesian economic model – notably increasing public spending and fiscal policy measures to stimulate the economy – experienced a revival.

Beyond the debate on the right theories and their practical application in combating economic downturn, the ECB demonstrated more pragmatism than before the crisis by, for example, adjusting and expanding its toolkit. The ECB, along with some experts, argue that only the combination of monetary and fiscal measures can end deflation and recession in the EMU.

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