It is in this context that the ECB decided to reduce its key interest rates by 25 basis points in early November 2011. Dysfunctional government bond markets in several euro area countries hamper the single monetary policy because the way this policy is transmitted to the real economy depends also on the conditions of the bond markets in the various countries.
An impaired transmission mechanism for monetary policy has a damaging impact on the availability and price of credit to firms and households. This is the very important monetary policy reason for the ECB’s non-standard measures. But of course, such interventions can only be limited. Governments must – individually and collectively – restore their credibility vis-à-vis financial markets.