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 federic 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 over to the financial sector, thus giving rise to a vicious cycle that is difficult to break. disentangling this web of mutually reinforcing risk factors is the number one challenge that we, as economic policy - makers, are facing. as i will show, the ecb has played an important role in confronting this challenge. by cutting its main policy rates and introducing additional measures to directly address liquidity and funding constraints in the banking sector, it has bought time to facilitate the structural adjustment of the financial industry. it belongs to governments to continue their efforts to ensure fiscal discipline, restore competitiveness and to remove remaining short

. the safety nets that have been put in place in recent years are playing their part. i ’ m referring to the european stability mechanism ( esm ), the banking union and the different european central bank programmes. but we must be vigilant. the ecb clearly stated on sunday that it was monitoring economic and market developments closely. should risks arise, we are ready to use the instruments we have at our disposal – quantitative easing and the omt programme – and we are even ready to use new instruments within our mandate. what could these new instruments be? the governing council of the ecb is monitoring the situation in real time. we have already said that we are ready to do more in terms of monetary policy, if necessary. until now, the ecb has always found answers to crises, within its mandate. the court of justice of the european union has validated the omt programme that was put in place in 2012 [ a bondbuying programme for countries receiving financial assistance, which has not yet been used, ed. ]. it was the court ’ s judgment that the ecb should be allowed broad discretion when choosing its instruments. in the long term, wouldn ’ t “ grexit ” risk putting on record that a country can, in fact, leave the euro area, and thus that the euro is not irreversible? if greece had to leave the euro area, that would risk casting doubt on the nature and functioning of the monetary union. that would create fragility. it would be a tragedy for greece and, moreover, for its economy. it would be a challenge that europe would have to rise to as quickly as possible, by substantially reinforcing its institutional framework. the stability of the euro area depends on a balance between responsibility and solidarity. in order to be stronger and more convincing, concrete initiatives are required to reinforce these two dimensions. what would you say to the greeks to convince them not to leave? it is vital to put greece back on a growth path, to reach a consensus in order to recreate a viable economic model for the country. total factor productivity in greece grew at a rate of only 1 % per year between 1981 and 2014, against 2 % per year in the euro area, and that happened despite the sizeable transfers greece has benefited from. to achieve this, the greek economy must remain within the single european market and be able to rely on its institutions. what ’ s more, were greece to leave, auster