Understanding European Central Bank (ECB)

The European financial institution (ECB) is headquartered in Frankfurt am Main, Germany. It has been liable for monetary policy within the Euro area since 1 January 1999, when some EU members first adopted the euro currency. The ECB Governing Council is that the body within the ECB that takes decisions on euro-zone monetary policy. The Council consists of six executive board members and therefore, the governor (or equivalent) of every member’s national financial institution. As membership of the Euro area has expanded, so has the number of governors within the Governing Council. ECB has a system of rotating voting rights among the national bank governors (the executive board members have permanent voting rights), as the Governing Council is now too large for all members to vote at each meeting.

ECB Structure –ECB established the ECU financial institution in 1999. The Governing Council of the ECB is that the group that decides on changes to monetary policy. The Council consists of the six members of the chief board of the ECB, plus the governors of all the national central banks from the 19 euro area countries. As a central bank, the ECB does not like surprises. Therefore, whenever it plans to change interest rates, it’ll generally give the market ample notice of an impending move through comments to the press. The Governing Council meets twice a month, but policy decisions are usually only made at meetings with an accompanying news conference, and people take place every six weeks.

Mandate – The European Central Bank’s mandate is for price stability and sustainable growth. However, unlike the Federal Reserve System within the U.S., the ECB strives to take care of the annual inflation level (increase in consumer prices) below 2%. Moreover, as an export-dependent economy, the European Central Bank also features a vested interest in preventing excess strength in its currency because this poses a risk to its export market.

History of the European Central Bank

The ECB was created in June 1998, following the Treaty of Amsterdam that amended the Treaty on the European Union. The bank succeeded the ECU Monetary Institute (EMI), which had been formed at the second stage of the Economic and Monetary Union (EMU) to handle transitional problems with adopting the Euro because of the common currency of the ECU Union. It also prepared for the creation of the ECU System of Central Banks (ESCB). The ESCB includes the ECB and, therefore the national central banks of all the EU member states, including people who haven’t adopted the Euro.

The ECB first exercised its full powers on 1 January 1991 after introducing the Euro as the official currency for the Euro area. During this point, the national central banks of the 11 EU member states transferred their monetary policy function to the ECB. Other states within the EU joined later on, with Greece, Slovenia, Cyprus, Malta, Slovakia, Estonia, Latvia, and Lithuania joining the EU between 2001 to 2015. The expansion amplified the bank’s scope and marked a milestone in the complex process of EU integration.

The first President of the European Central Bank was Win Duisenberg, the former President of the EMI and the Dutch central bank. His proponents saw him as a guarantor of a strong Euro, and he had the support of the German, Dutch, and Belgian governments. However, the French government had opposed Duisenberg taking up the presidency of the ECB, instead opting to possess a French citizen because of the President. They resolved the disagreement through a gentleman’s agreement where Duisenberg agreed to step down before the top of his term for Trichet, a French national, to require over.

ROLES Of European Central Bank (ECB)

● The primary responsibility of the ECB, linked to its main goal of price stability, is formulating monetary policy. This involves making decisions about economic objectives, key interest rates, the supply of reserves in the Euro-system, and establishing guidelines for implementing those decisions. Monetary policy decision meetings are held every six weeks, and therefore the ECB is transparent about the reasoning behind its decisions. It has a news conference after each such meeting and later publishes the minutes of the meeting.

● The primary function of the ECU financial institution is to take care of price stability and safeguard the worth of the Euro. The Governing Council defined price stability as inflation of under but on the brink of 2%. Price stability is essential for spurring economic growth and job creation, which are core objectives of the EU.

● The ECB features a monopoly on the issuing of banknotes within the Euro area. It influences the quantity of cash within the market by controlling money available to eligible central and commercial banks in EU member states. Also, the ECB makes weekly announcements on the amount of money it wishes to supply and the minimum acceptable interest rate. Eligible banks that have provided collateral then place their bids for the ECB funds through an auction mechanism. Once the banks have obtained funds, they use them to advance loans to individuals and businesses.

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