European Central Bank

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The European Central Bank (ECB) is the central bank of the European Union. [1]

Structure

The Governing Council of the ECB is the main decision-making body of the Eurosystem. It comprises

  • all the members of the Executive Board of the ECB, and
  • the governors/presidents of all the national central banks (NCBs) of the Euro area, that is those EU Member States that have adopted the euro.

The Governing Council has the power to take the most important and strategically significant decisions for the Eurosystem, on monetary policy and on other tasks. Each member of the Governing Council has one vote and, unless otherwise provided for in the ESCB Statute, it acts by simple majority. The proceedings of the meetings are confidential, but the outcome is made public, primarily those about setting the key interest rates. Since December 2004 decisions taken by the Governing Council other than those setting interest rates have also been published every month on the websites of the Eurosystem central banks.

The Executive Board is the operational decision-making body of the ECB and of the Eurosystem, it is comprised of

  • the President of the ECB,
  • the Vice-President of the ECB, and
  • four other members.

All Executive Board members are appointed by common accord of the governments of the participating Member States at the level of the Heads of State or Government, on a recommendation from the EU Council after it has consulted the European Parliament and the Governing Council of the ECB.

The General Council is a body dealing with transitional issues of euro adoption, it comprises of

  • the President and Vice-President of the ECB, and
  • the governors/presidents of the national central banks of all 27 EU Member States.

The General Council is primarily responsible for reporting and advisory functions.[1]

History

In the aftermath of the fall of the Bretton Woods system and the oil crisis, the European Monetary System (EMS) was created in 1979, with adjustable exchange rates between the currencies of the partner countries. The Maastricht Treaty in 1992 established the European Union (EU) and laid the foundations of EMU. The European Monetary Institute was established in the 1994 as a predecessor of the European Central Bank (ECB), which was established in June 1998. On 1 January 1999 were the conversion rates of the currencies of the 11 Member States irrevocably fixed and the euro was introduced as the single currency. From then on has the Governing Council of the ECB been responsible for a single monetary policy for the euro area. In 2001 Greece joined the euro area. On 1 January 2002 were introduced euro banknotes and coins. Slovenia became the 13th member of the euro area in January 2007. Cyprus and Malta joined on 1 January 2008, and Slovakia on 1 January 2009.

Denmark and the United Kingdom were granted the exceptional right to choose whether or not to participate in the monetary union.[1]

Convergence criteria

The Treaty establishing the European Community sets criteria which must be met by each EU Member State before taking part in the Euro Zone and using the Euro as official currency.

  • The Member State must not have an excessive budget deficit, as decided by the EU Council;
  • There must be a sustainable degree of price stability and an average inflation rate, observed over a period of one year before the examination; which does not exceed by more than one and a half percentage points that of the three best performing Member States in terms of price stability;
  • There must be a long-term nominal interest rate which does not exceed by more than two percentage points that of the three best performing Member States in terms of price stability;
  • The normal fluctuation margins provided for by the exchange rate mechanism must be respected without severe tensions for at least the last two years before the examination.
  • Each Member State should ensure that its national legislation, including the statute of its national central bank (NCB), is compatible with Articles 108 and 109 of the Treaty and with the Statute of the European System of Central Banks (ESCB Statute).

The convergence criteria for government deficit and government debt must continue to be met.[1]

The European System of Central Banks

The central banking system (ESCB) comprises the ECB and the national central banks (NCBs) of all 27 EU Member States.

The Eurosystem comprises the ECB and the national central banks (NCBs) of 16 EU Member States whose common currency is the Euro. The NCBs may perform non-Eurosystem functions on their own responsibility, unless the Governing Council finds that such functions interfere with the objectives and tasks of the Eurosystem.

The shares of the national central banks (NCBs) in the ECB's capital key reflect the shares of the Member States in the total population and gross domestic product of the EU, in equal weightings. Eurosystem NCBs are required to pay up their subscribed capital in full. The non-euro area NCBs only have to pay up a minimal percentage of their subscribed capital as a contribution to the operational costs of the ECB, currently 7%.[1]

Largest share owners are central banks of Germany (18.9%), France (14.2%), Italy (12.5%) and Spain (8,3%).

Profits (of which up to 20% can go into the reserve fund) will be divided to shareholders in the euro area in proportion to their paid-up shares.[2]

Independence

Article 108 of the EC Treaty and Article 7 of the ESCB Statute prohibit the ECB, the NCBs and members of their decision-making bodies from seeking or taking instructions from Community institutions or bodies, from any government of a Member State or from any other body. In addition, they also prohibit such institutions, governments and bodies from seeking to influence the members of the decision-making bodies of the ECB or the NCBs. NCB governors have a minimum term of office of five years for (renewable), and a non-renewable term of office of eight years for the members of the ECB's Executive Board. Furthermore, members of the decision-making bodies may not be dismissed for reasons other than those stipulated in the ESCB Statute.

The ECB has its own capital, subscribed and paid up by the NCBs. It also has its own budget independent from that of the other European institutions. As regards the NCBs, Member States may not put their NCBs in the position of not having sufficient financing resources to carry out their ESCB-related and own national tasks.

At the same time, the ECB is held accountable to the citizens and their democratically elected representatives, in order to balance the substantial degree of independence that it has been granted. The ECB has to create an annual report, a quarterly report and a weekly consolidated financial statement to appearances before the European Parliament, on the decisions taken in the field of monetary policy and on its other tasks. The ECB and the national central banks are subject to the audit review by independent external auditors approved by the EU Council, who have the full power to examine all their books and accounts and obtain full information on their transactions.[1]

Monetary policy

The primary objective of the Eurosystem is to maintain price stability, as defined by "a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%", to be maintained "over the medium term". The indices are published by the Eurostat.

The Eurosystem is required to act "in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources".

The Eurosystem requires credit institutions to hold minimum reserves on accounts with the national central banks.[1]

See also: Money supply

References

  1. ↑ 1.0 1.1 1.2 1.3 1.4 1.5 1.6 European Central Bank. "FACTS", educational presentation of the ECB, referenced 2010-05-16.
  2. ↑ European Central Bank. "Capital subscription", as of 1 January 2009, referenced 2010-05-16.

Links

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