EU as a Lender of

EU as a Lender of Last Resort The European Central Bank (ECB) is supposed to support the principle of moral hazard and not function as a lender of last resort. In actual practice, during the worldwide credit the ECB, along with Europe's national central banks infused liquidity to the EU's financial system (ECB: Objectives and tasks, 2008, Deutsch Bank, p. 3).

The ECB was not required to do so yet the Eurosystem's Emergency Liquidity Assistance program, according to its charter "embraces the support given by central banks in exceptional circumstances and on a case-by-case basis to temporarily illiquid institutions and markets" (ECB: Objectives and tasks, 2008, Deutsch Bank, p. 4). The ECB's only mandatory goal is to preserve price stability. Its non-required lending capability could put it in conflict with its official aim: by infusing additional lending capital into the market, it could conceivably drive up inflation.

This highlights the contraction inherent in the ECB's mission. By not forcing the bank to be a lender of last resort, while still stressing its need to maintain price stability, the ECB essentially is only bound to use one type of monetary tool. But no central bank within the current system can purely function as an inflationary 'brake' on price inflation without being able to have the 'gas pedal' of capital infusion when necessary. If banks default, the EU as a whole will become less stable.

Because of the severity of the current recession, the ECB's lending actions did little to destabilize prices and were relatively uncontroversial. This could change as some nations recover, however, and others flounder, given the piecemeal nature of the EU's economic recovery.

The fact that the ECB is not bound to act as a lender of last resort and is actively discouraged to do so could mean that charges of favoritism arise, if it does not bail out some of Europe's weaker economies, such as Greece, while it did engage in such actions when its stronger member nations were threatened with financial collapse.

Question 2: Exports One of the few 'good' things about an economic downturn is that it tends to increase the desirability of a country's exports and thus reduces the balance of payments to nations abroad in international trade. When a nation is spending at a deficit to stimulate its economy, this tends to decrease the value of that nation's currency. The cheapened value of the dollar, for example, means that the dollar is much less valuable in relation to other currencies in a flexible exchange rate system.

Interest rates also tend to be lowered during a period of economic contraction, as they are now, to act as an incentive for individuals to borrow and spend more. This makes it more attractive for foreign companies to invest money in a nation, and to borrow money from the nation's central bank. During an economic expansion, as citizens have more money, the balance of payments tends tip in the favor of imports, as wealthier workers buy more foreign as well as domestic goods.

The central bank will usually raise the interest rate, to stem the tendency towards inflation. As the deficit of.