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Home  >  Fundamental analysis  >  Central banks  >  European central bank (ECB)


European central bank (ECB)



The European Central Bank (ECB) is one of the entities that constitute the central banking system of the Euro area and its prime objective is to maintain the price and stability of the Euro.

The European Central Bank was created by the Maastricht Treaty on European Union ratified in 1993, which established the European Monetary Union (EMU) and the Euro, the common currency of European countries. The ESCB's tasks are defining and implementing the monetary policy of the European Community, conducting foreign exchange operations to achieve price stability, holding and managing the foreign currency reserves of members states, and promoting stability in the overall financial system. The Bank was formed in Germany in June 1998 and works with the other national Banks of each of the EU members to formulate monetary policy that helps maintain price stability in the European Union.

To carry out its role, the ECB works with the European System of Central Banks (ESCB), which covers all 25 EU countries. However, only 12 of these countries have so far adopted the euro. The 12 collectively make up the euro area and their Central Banks, together with the European Central Bank, make up what is called the Eurosystem.

The ECB works in complete independence. Neither the ECB, the national Central Banks of the Eurosystem, nor any member of their decision-making bodies can ask for or accept instructions from any other body. The EU institutions and member state governments must respect this principle and must not seek to influence the ECB or the national Central Banks.

One of the ECBs main tasks is to maintain price stability in the euro area, so that the euros purchasing power is not eroded by inflation. The ECB aims to ensure that the year-on-year increase in consumer prices is less than 2%.

Inflation targets

Some critics feel that the objectives given to the ECB are inappropriate. The ECB sets interest rates in order to control inflation, but does not take into account objectives such as employment and exchange rate stability. Some feel this as a too narrow set of objectives, leading to decisions on interest rate that are inappropriate given the wider needs of the economy.

The unusually low interest rates set by the ECB have been criticized as being inappropriate for regions of Europe with property bubbles. These low interest rates are a factor of the Irish Property Bubble. Although it must be said that it has an economic reason, to avoid recession in many important countries of the eurozone (France, Germany and Italy mainly) that would slow the growth of the rest of the European countries.

This comprises the President of the ECB, the Vice-President and four other members, all appointed by common agreement of the presidents or prime ministers of the euro area countries. The Executive Board members are appointed for a non-renewable term of eight years.

The Executive Board is responsible for implementing monetary policy, as defined by the Governing Council, and for giving instructions to the national Central Banks.

The Governing Council is the European Central Bank's highest decision-making body. It comprises the six members of the Executive Board and the governors of the 12 Central Banks of the euro zone. It is chaired by the President of the ECB. Its primary mission is to define the monetary policy of the euro zone, and, in particular, to fix the interest rates at which the commercial Banks can obtain money from the Central Bank.

The General Council is the ECBs third decision-making body. It comprises the ECBs President and the Vice-President and the governors of the national Central Banks of all 25 EU member states. The General Council contributes to the ECB's advisory and coordination work and helps prepare for the future enlargement of the euro zone.

In summary

The European Central Bank was inaugurated in June 1998 and six months later assumed responsibility for implementing European monetary policy as defined by the European System of Central Banks (ESCB). Its main objective is to maintain price stability and thereby preserve the purchasing power of the euro. The ECB took over from its precursor, the European Monetary Institute (EMI), which had played a Central role in preparing for the launch of the euro on 1 January 1999.

The highest decision-making body of the ECB is the Governing Council, made up of the six members of the Executive Board and the governors of the 12 national Central Banks of the euro zone. Its primary mission is to define the monetary policy of the euro zone and fix the interest rates at which commercial Banks can obtain money (liquid funds) from the Central Bank.

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