European Banking System

The European System of Central Banks (ESCB) is composed of the European Central Bank (ECB) and the national central banks (NCBs) of all 27 European Union (EU) Member States. The primary objective of the Euro system is to maintain price stability The basic tasks to be carried out by the Euro system are: to define and implement the monetary policy of the euro zone; to conduct foreign exchange operations. To hold and manage the official foreign reserves of the Member States; and To promote the smooth operation of payment systems. The ECB as an advisor. European system contributes to the smooth conduct of policies.

 Organization: The process of decision-making in the Eurosystem is centralized through the decision-making bodies of the ECB, namely the Governing Council and the Executive Board. The Governing Council comprises all the members of the Executive Board and the governors of the NCBs of the Member States without a derogation, i.e. those countries which have adopted the euro. The General Council performs the tasks which the ECB took over from the EMI and which, owing to the derogation of one or more Member States, still have to be performed in Stage Three of Economic and Monetary Union (EMU). The General Council also contributes to: the ECB's advisory functions. The Euro system is independent. When performing Euro system-related tasks, neither the ECB, nor an NCB, nor any member of their decision-making bodies may seek or take instructions from any external body

Euro Debt & Banking Crises

Europe has been beset by two interrelated crises: (i) a banking crisis, stemming from losses in capital market securities (including US subprime and other structured products), as well as home-grown, boom-bust problems in the property markets of some EU countries (ii) a sovereign debt crisis exacerbated by recession, transfers to help banks, and in some cases very poor fiscal management over a number of years. From late 2009, fears of a sovereign debt crisis developed among investors concerning rising government debt levels across the globe together with a wave of downgrading of government debt of certain European states. In late 2010, the sovereign debt crisis worsened on market concerns about the difficulty of budget consolidation Greece and Ireland have faced very significant adverse movements in their yield spreads relative to euro-area benchmark bonds, and to a lesser extent this is also the case for Portugal, and Spain. Markets are concerned that the prospect of very weak growth and high unemployment resulting from fiscal consolidation, and years of painful structural adjustment, will make the temptation to restructure sovereign debt too great to be ignored.

 The marginal borrowing rate exceeds the average rate on the outstanding stock of debt.

 Policies to deal with unsustainable debt dynamics There are a number of ways to deal with the problem of explosive debt scenarios: Cutting spending and raising taxes: to bring the budget balance to the point where it offsets the debt-service burden, after allowing for the growth of the economy. Causing inflation to rise a great deal, noting that here g refers to the nominal growth of GDP (i.e. the sum of real growth and inflation). Inflation surprises essentially reduces the real burden of the debt. Carrying out structural reforms to improve the real component of the rate of nominal growth. Labour market, pension and competition reforms will improve growth over the longer run