European Central bank – Functions, policies, members and the EURO

By | January 20, 2017

About the European Central bank

The European Central bank (ECB), established in June 1998, is the Central bank for the euro, comprising of 17 European Union (EU) member states with euro being their national currency since 1999.

The ECB was formed by the Treaty of Amsterdam and is headquartered in Frankfurt, Germany, with the shareholders comprising of the Central banks of the 27 Central banks of the member states of the European Union.

The main objective of the ECB is to maintain the purchasing power of the euro and price stability in the euro- area.

The ECB has been responsible for conducting monetary policy measures since 1st January 1999, on behalf the countries representing the euro- zone. The legal basis for the single monetary policy is the Treaty establishing the European community and the Statute of the European system of Central banks (ESCB) and the ECB.

The ESCB comprises of the ECB and the national central banks (NCB’s) of EU member countries and also includes those that have not adopted the euro while the euro-system includes the ECB and the NCB’s of the euro countries that have adopted the euro.

The Governing Council is the main decision making body of the ECB and comprises of six members of the Executive board in addition to the governors of the national central banks of the 17 countries constituting the euro- zone. The governing council meets twice a month to chart out its monthly monetary policy and other issues related to the ECB and the euro-system.

The euro- system is functionally independent and the ECB and the NCB’s are prohibited from seeking and taking instructions from other EU institutions and governments of EU- member states. The ECB has its own budget and all financial arrangements of the Central bank are maintained separately from those of the European Union. The euro- system is prohibited from granting loans to EU bodies and public sector entities to prevent the system from any influence of public authorities.

The ECB is highly transparent and shares information about its assessments, policy decisions and strategies with the markets and prioritises effectively communicating the framework openly. In addition, the Central bank facilitates public scrutiny of its monetary policy actions, its policy strategies and assessment of the economic developments.

The accountability of the ECB is characterized by its decision to go beyond statutory obligations by publishing monthly bulletins rather than the expected quarterly report, press conferences of the ECB’s assessment of the prevailing economic climate, rationale beyond monetary policy decisions and publicly discussing general concerns related to the economy.

Present and past Presidents of the ECB-

The European Central bank has been governed by three presidents till date

Wim Duisenberg- 1998- 2003

Was the first President of the ECB and took over the role during the transition of the European Monetary Institute (EMI) where he was serving as the President

A former Dutch politician in the labour party, he was a successful economist who later went on to become the President of the Central bank of Netherlands, before presiding over the ECB.

Jean- Claude Trichet- 2003- 2011

Trichet took over the reins of the ECB in 2003 after charges of irregularities at Credit Lyonnais, when he was in charge of the French treasury. His term at the ECB was contentious and was criticised for his policies by none other than the French President Sarkozy, who wanted the ECB to adopt a growth- oriented policy. He was also targeted for purchasing Government bonds of the member states of the European states during the financial crises.

Mario Draghi- November 2011- till date

Is currently the President of the ECB. He earlier served as an Italian banker and the Executive Director at the World Bank. As the governor for the Bank of Italy, Draghi was a member of the Governing and general councils of the ECB in addition to being on the board of Directors for the Bank of International Settlements (BIS)

Member states of the European Union

  • Austria
  • Belgium
  • Bulgaria
  • Cyprus
  • Czech Republic
  • Denmark
  • Estonia
  • Finland
  • France
  • Germany
  • Greece
  • Hungary
  • Ireland
  • Italy
  • Latvia
  • Lithuania
  • Luxembourg
  • Malta
  • Netherlands
  • Poland
  • Portugal
  • Romania
  • Slovakia
  • Slovenia
  • Spain
  • Sweden
  • United Kingdom

ECB monetary policy and the outcome of the EURO

The chart below illustrates the monetary policy action of the European Central bank over the years and the corresponding EUR/ USD exchange rates.

ECB monetary policy and the outcome of the EURO

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