European Central Bank Explained

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Bank Name In Local:

European Central Bank

Европейска централна банка
Banc Central Europeu
Evropská centrální banka
Den Europæiske Centralbank
Europese Centrale Bank
Euroopa Keskpank
Euroopan keskuspankki
Banque centrale européenne
Europäische Zentralbank
Ευρωπαϊκή Κεντρική Τράπεζα
Európai Központi Bank
Banc Ceannais Eorpach
Banca Centrale Europea
Eiropas Centrālā banka
Europos centrinis bankas
Bank Ċentrali Ewropew
Europejski Bank Centralny
Banco Central Europeu
Banca Centrală Europeană
Európska centrálna banka
Evropska centralna banka
Banco Central Europeo
Europeiska centralbanken

Image Width 1:246
Image Title 1:The current headquarters building in Frankfurt, Germany
Headquarters:Frankfurt, Germany
President:Jean-Claude Trichet
Leader Title:President
Established:1 January 1998
Currency:Euro
Currency Iso:EUR
Borrowing Rate:2.50%
Deposit Rate:1.00%
Website:ECB.eu

The European Central Bank (ECB) is one of the world's most important central banks, responsible for monetary policy covering the 16 member States of the Eurozone. It was established by the European Union (EU) in 1998 with its headquarters in Frankfurt, Germany.

History

The predecessor to the ECB was the European Monetary Institute (EMI). It was established at the start of the second stage of the EU's Economic and Monetary Union (EMU) to handle the transitional issues of states adopting the euro and prepare for the creation of the ECB and European System of Central Banks (ESCB). The EMI itself took over from the earlier European Monetary Co-operation Fund (EMCF).[1]

The ECB formally replaced the EMI on 1 June 1998 by virtue of the Maastricht Treaty, however it did not exercise its full powers until the introduction of the euro on 1 January 1999, signalling the third stage of EMU. The bank was the final institution needed for EMU, as outlined by the EMU reports of Pierre Werner and President Jacques Delors.[1] It was established on 1 June 1998.[2]

The first President of the Bank was Wim Duisenberg, the former president of the Dutch central bank and the European Monetary Institute. While Duisenberg had been the head of the EMI (taking over from Alexandre Lamfalussy of Belgium) just before the ECB came into existence, the French government wanted Jean-Claude Trichet, former head of French central bank, to be the ECB's first president. The French argued that since the ECB was to be located in Germany, its President should be French. This was opposed by the German, Dutch and Belgian governments who saw Duisenberg as a guarantor of a strong euro.[3] Tensions were abated by a gentleman's agreement in which Duisenberg would stand down before the end of his mandate, to be replaced by Trichet. An event which occurred in November 2003.

There had also been tension over the ECB's Executive Board, with the United Kingdom demanding a seat even though it had not joined the Single Currency. Under pressure from France three seats were assigned to the largest members, France, Germany and Italy. Spain demanded and was awarded the same treatment with the final seat going to Finland. Despite such a system of appointment the board asserted its independence early on in resisting calls for interest rates and future candidates to it.[3]

When the ECB was created, it covered a Eurozone of eleven members, since then Greece joined in January 2001, Slovenia in January 2007, Cyprus and Malta in January 2008, and Slovakia in January 2009, enlarging the bank's scope and the membership of its Governing Council.[1]

Powers and objectives

The primary objective of the ECB is to maintain price stability within the Eurozone, or in other words to keep inflation low. The Governing Council defined price stability as inflation (Harmonised Index of Consumer Prices) of below, but close to, 2%.[4] . Unlike for example the United States Federal Reserve Bank, the ECB has only one primary objective with other objectives subordinate to it.

The key tasks of the ECB are to define and implement the monetary policy for the Eurozone, to conduct foreign exchange operations, to take care of the foreign reserves of the European System of Central Banks and promote smooth operation of the money market infrastructure under the Target payments system.[5]

Furthermore, it has the exclusive right to authorise the issuance of euro banknotes. Member states can issue euro coins but the amount must be authorised by the ECB beforehand (upon the introduction of the euro, the ECB also had exclusive right to issue coins[5]). The bank must also co-operate within the EU and internationally with third bodies and entities. Finally it contributes to maintaining a stable financial system and monitoring the banking sector.[6] The latter can be seen, for example, in the bank's intervention during the 2007 credit crisis when it loaned billions of euros to banks to stabilise the financial system.[7] In December 2007 the ECB decided in conjunction with the Federal Reserve under a program called Term auction facility to improve dollar liquidity in the eurozone and to stabilise the money market.[8]

Borrowing rate

On 5 March 2009, ECB decided the lowest borrowing rate ever: 1.5%.On July 2008 the borrwing rate was 4.25%.The highest borrowing rate was from October 2000 to May 2001: 4.75%.

Organization

The design of the ECB was modelled on the German Bundesbank, in particular on its political independence.[9] It is governed by a Governing Council and the Executive Board. There is also a General Council. The bank is independent from any European or national institution and also holds financial independence by means of a separate budget drawn from national central banks. These bodies also govern the European System of Central Banks (ESCB), which is the ECB plus all the national central banks in the Eurozone.[10]

The Governing Council is the supreme decision making body of the ECB. It is composed of the members of the executive board and the governors of the national central banks which have adopted the euro. The Council is responsible for taking decisions on monetary policy, interest rates and the reserves of the ESCB. It is also responsible in other matters, such as authorising of the issue of banknotes and advising other EU institutions on draft legislation. It meets twice a month and meetings can only be attended by members and the Council President and Commission President. Each member has one vote (the Council and Commission presidents do not vote) and decisions are taken by a simple majority.[10] [11] [6] Governing Council members are not meant to represent their countries, but rather the interests of the Eurozone as a whole.

The Executive Board is responsible for the implementation of monetary policy defined by the Governing Council and the day-to-day running of the bank. In this it can issue decisions national central banks and may also exercise powers delegated to it by the Governing Council. It is composed of the President of the Bank (currently Jean-Claude Trichet), a vice president and four other members. They are all appointed by common accord of the eurozone member states for non-renewable terms of eight year.

The General Council is a body dealing with transitional issues of euro adoption, for example fixing the exchange rates of currencies being replaced by the euro, (continuing the tasks of the former EMI). It will continue to exist until all EU Member States adopt the euro, at which point it will be dissolved. It is composed of the President and Vice President together with the governors of all of the EU's national central banks.[11] [12]

Independence and future

The ECB is designed to be independent of political interference. It also has financial independence by virtue of its having its own budget, separate from the EU's budget, sourced from national central banks.[13] Its political independence was an attribute taken from the bank it was modelled after, the German Bundesbank[9], due to a consensus amongst economists that an independent central bank was the best way to avoid manipulation of the macroeconomy for political purposes.[14] Furthermore, not only must the bank not seek influence, but EU institutions and national governments are bound by the treaties to respect the ECB's independence by not seeking to influence its decision-making bodies.[13]

This is also aided by the members of the bodies having security of tenure. For example, the minimum term of office for an national central bank governor is five years and members of the executive board have a non-renewable eight-year term.[13] To offer some accountability, the ECB is bound to publish reports on its activities and has to address its annual report to the European Parliament, the European Commission, the Council of the European Union and the European Council.[15] The European Parliament also gets to question and then issue its opinion on candidates to the executive board.[16]

The bank's independence has notably come under intense criticism since the election of Nicolas Sarkozy as French President. Sarkozy has sought to make the ECB more susceptible to political influence, to extend its mandate to focus on growth and job creation, and has frequently criticised the bank's policies on interest rates.

Concerns have also been raised over the Lisbon Treaty which, like the European Constitution, will make the ECB a formal institution of the EU and which does include - contrary to what is often said - an article ensuring the bank's independence (article 282 (3) TFEU). Trichet has expressed that without such a guarantee the bank would be bound by the same code as the other institutions, to cooperate and pursue a common agenda. This may encourage leaders to put political pressure on the bank's decisions.[17]

Location

See main article: European Central Bank Headquarters.

The bank is based in Frankfurt, the largest financial centre in the Eurozone. Its location in the city is fixed by the Amsterdam Treaty along with other major institutions.[18] In the city, the bank currently occupies Frankfurt's Eurotower until its purpose-built headquarters are built.

In 1999 an international architectural competition was launched by the bank to design a new building. It was won by a Vienna-based architectural office called Coop Himmelbau. The building will be approximately 180m (590feet) tall (the present building is 148m (486feet)) and will be accompanied by other secondary buildings on a landscaped site on the site of the former wholesale market (Grossmarkthalle) in the eastern part of Frankfurt am Main. The main construction work will commence in October 2008, with completion scheduled for before the end of 2011.[19] [20] It is expected that the building will become an architectural symbol for Europe and is designed to cope with double the number of staff who operate in the Eurotower.[21]

See also

External links

CSDB

Notes and References

  1. Web site: European Central Bank. European NAvigator. 15 October 2007.
  2. http://www.ecb.int/ecb/history/emu/html/index.en.html ECB: Economic and Monetary Union
  3. Web site: The third stage of Economic and Monetary Union. European NAvigator. 16 October 2007.
  4. Web site: Powers and responsibilities of the European Central Bank. Website ECB. 15 October 2007.
  5. Web site: Fairlamb. David. Rossant, John. The powers of the European Central Bank. BBC News. 12 February 2003. 16 October 2007.
  6. Web site: The European Central Bank (ECB). Europa (web portal). 16 October 2007.
  7. Web site: Lander. Mark. Credit Squeeze Puts Europe's Bank in Spotlight. New York Times. 14 August 2007. 16 October 2007.
  8. Web site: ECB press release on dollar liquidity. ECB.
  9. Web site: John Schmid. The ECB Passes First Big Hurdle. the International Herald Tribune. 10 December 1998. 15 October 2007.
  10. Web site: Organisation and operation of the European Central Bank. European NAvigator. 15 October 2007.
  11. Web site: Composition of the European Central Bank. European NAvigator. 15 October 2007.
  12. Web site: The General Council. European Central Bank. 15 October 2007.
  13. Web site: Independence. European Central Bank. 15 October 2007.
  14. Web site: Central bank independence. New Palgrave Dictionary. 2005. PDF. 15 October 2007.
  15. Web site: Accountability. European Central Bank. 15 October 2007.
  16. Web site: Executive Board. Banque de France. 2005. PDF. 15 October 2007.
  17. Web site: Buck. Tobias. Central bank chief urges change to EU treaty. Financial Times. 11 August 2007. 2 September 2007.
  18. Web site: Consolidated versions of the treaty on European Union and of the treaty establishing the European Community. Eur-lex. PDF. 12 June 2007.
  19. Web site: Winning design by Coop Himmelb(l)au for the ECB's new headquarters in Frankfurt/Main. 6 January 2003. European Central Bank. 2 August 2007.
  20. Web site: Launch of a public tender for a general contractor to construct the new ECB premises. 6 January 2003. European Central Bank. 2 August 2007.
  21. Web site: Dougherty. Carter. In ECB future, a new home to reflect all of Europe. International Herald Tribune. 16 November 2004. 2 August 2007.