In 2012, some economists and policymakers continued to worry about the state of the European financial system. An article in the Economist magazine commented on the actions of the European Central Bank (ECB): “The ECB’s role has steadily evolved and has in the process reduced the risk of an implosion of the banking system and contagion across sovereign debt markets.”

a. Why might any banking system face “implosion”?

What steps can a central bank take to keep a banking system from imploding?

b. What does the article mean by the risk of “contagion across sovereign debt markets”?

What steps did the ECB take to reduce the risk of contagion?