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Peter Praet: Managing financial crises – the role of the European Central Bank
Address by Mr Peter Praet, Member of the Executive Board of the European Central Bank, at the 40th Economics Conference of the Central Bank of the Republic of Austria “European Monetary Union – lessons from the debt crisis”, Vienna, 10 May 2012. * * *

I would like to thank Fédéric Holm-Hadulla for his contribution to the preparation of this speech.

Ladies and Gentlemen, It is a real pleasure for me to share my thoughts on the role of the European Central Bank (ECB) in managing financial crises at the 40th Economics Conference of the Oesterreichische Nationalbank. 1. Introduction

We meet here to discuss this subject at a time when it has already preoccupied us for almost half a decade. And yet it could not be more topical today. What started as a liquidity crisis in the money market in 2007 quickly morphed into a full-blown financial crisis following Lehman’s collapse in autumn 2008, and finally into a sovereign debt crisis starting in May 2010. We have been facing a situation in which all these elements rapidly and profoundly reinforce each other, thus combining to create a challenge far bigger than the sum of its individual parts. Since the onset of the crisis, financial market turbulence and the associated deterioration in credit conditions and overall economic confidence have dragged down the real economy. The resulting downward impact on economic activity has led to an erosion of tax bases and taken a massive toll on public finances. The concomitant threats to debt sustainability, in turn, have required several governments to adopt ambitious fiscal consolidation measures during the downturn to regain control of their fiscal positions. Furthermore, the financial and economic crisis forced many governments to intervene in domestic banking sectors, again placing severe strains on fiscal positions in several cases. Vice versa, fiscal sustainability concerns have rapidly spilled...

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