The role of monetary policy in addressing the crisis in the euro area

Yet, the varying emphasis on instruments and the approaches used by central banks around the globe are tailor-made to the particular challenges of their economies. The particular challenge of the ECB is to operate in a multi-country environment: one monetary policy for 17 countries that constitute our currency union.

Unlike economies with a single fiscal authority or with a fully-fledged federal structure, the euro area comprises multiple sovereign states. The debt of each of these states has different liquidity and risk characteristics. In such a set-up there is no uncontroversial way to define the term structure of the risk-free rate. As a matter of fact, this means that there is no univocal measure of the term premium for the euro area as a whole.

At the same time, during the crisis, normal heterogeneity has turned into detrimental fragmentation: a landscape with natural diverse scenery has turned into a dangerous surface with jagged cliffs and stumbling blocks. Liquidity risk, which was a widespread concern for banks throughout the euro area at the start of the crisis, has become more concentrated as the crisis has progressed. Fault lines between banking sectors with structural funding surpluses and banking sectors still suffering from a precarious access to credit run across national borders.

The banking sector and the financial market of the euro area has become fragmented. This is harmful as the euro area is a bank-based economy. Around three quarters of firms' financing comes from banks. So if banks in some countries will not lend at reasonable interest rates, the consequences for the euro area economy are severe.

Although we see a decrease in fragmentation on the funding side, our very accommodative monetary policy stance is only partly passed on to the financing conditions faced by firms and households in some euro area countries. Companies headquartered in stressed countries face worse borrowing conditions than equally risky competitors in non-stressed countries. And, within the same stressed economy, Small and Medium-sized Enterprises (SMEs) suffer relatively more than large companies that have easier access to capital markets and are less dependent on the banking system. This is especially disconcerting given that SMEs account for about three quarters of euro area employment.

Our non-standard monetary policy measures have, therefore, the task of removing these stumbling blocks to ensure that our single monetary policy in fact reaches all parts of the euro area. This is crucial for fulfilling our mandate.

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