ECB and Euro

Since 1 January 1999 the European Central Bank (ECB) has been responsible for conducting monetary policy for the euro area - the world’s largest economy after the United States.

The euro area came into being when responsibility for monetary policy was transferred from the national central banks of 11 EU Member States to the ECB in January 1999.

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11 EU Member States

Greece joined in 2001, Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014 and Lithuania in 2015. 

And next…

 The creation of the euro area and of a new supranational institution, the ECB, was a milestone in the long and complex process of European integration.

To join the euro area, the 19 countries had to fulfil the convergence criteria, as will other EU Member States prior to adopting the euro.

The criteria set out the economic and legal preconditions for countries to participate successfully in Economic and Monetary Union.

ECB

ESCB

Eurosystem

Euro area

The basic definitions

The legal basis for the single monetary policy is the Treaty on the Functioning of the European Union and the Statute of the European System of Central Banks and of the European Central Bank.

The Statute established both the ECB and the European System of Central Banks (ESCB) as from 1 June 1998. The ECB was established as the core of the Eurosystem and the ESCB.

The ECB and the national central banks together perform the tasks they have been entrusted with. The ECB has legal personality under public international law.

ECB - European Central Bank

The ESCB comprises the ECB and the national central banks (NCBs) of all EU Member States whether they have adopted the euro or not.

ESCB - European System of Central Banks

The Eurosystem comprises the ECB and the NCBs of those countries that have adopted the euro.

The Eurosystem and the ESCB will co-exist as long as there are EU Member States outside the euro area.

Eurosystem

The euro area consists of the EU countries that have adopted the euro.

Euro area

The European Central Bank and the national central banks together constitute the Eurosystem, the central banking system of the euro area.

The main objective of the Eurosystem is to maintain price stability: safeguarding the value of the euro.

ECB mission

The European Central Bank is responsible for the prudential supervision of credit institutions located in the euro area and participating non-euro area Member States, within the Single Supervisory Mechanism, which also comprises the national competent authorities.

It thereby contributes to the safety and soundness of the banking system and the stability of the financial system within the EU and each participating Member State.

ECB mission

The Eurosystem, which comprises the European Central Bank and the national central banks of the Member States whose currency is the euro, is the monetary authority of the euro area.

In the Eurosystem have primary objective the maintenance of price stability for the common good.

Acting also as a leading financial authority, aim to safeguard financial stability and promote European financial integration.

In pursuing our objectives, we attach utmost importance to credibility, trust, transparency and accountability.

Eurosystem mission

Political independence

The independence of the ECB is conducive to maintaining price stability. This is supported by extensive theoretical analysis and empirical evidence on central bank independence.

The ECB's independence is laid down in the institutional framework for the single monetary policy (in the Treaty and in the Statute).

ECB Independence

Practical implications

Neither the ECB nor the national central banks (NCBs), nor any member of their decision-making bodies, are allowed to seek or take instructions from EU institutions or bodies, from any government of an EU Member State or from any other body.

EU institutions and bodies and the governments of the Member States must respect this principle and not seek to influence the members of the decision-making bodies of the ECB

(Article 130 of the Treaty)

ECB Independence

Other provisions The ECB's financial arrangements are kept

separate from those of the EU. The ECB has its own budget. Its capital is subscribed and paid up by the euro area NCBs.

The Statute foresees long terms of office for the members of the Governing Council. Members of the Executive Board cannot be reappointed.

ECB Independence

Governors of NCBs and members of the Executive Board have security of tenure:◦ NCB governors have a minimum term of office of

five years;◦ members of the Executive Board of the ECB have

a non-renewable term of office of eight years;◦ both can be removed from office only in the event

of incapacity or serious misconduct;◦ the Court of Justice of the European Union is

competent to settle any disputes.

ECB Independence

The Eurosystem is prohibited from granting loans to EU bodies or national public sector entities. This further shields it from any influence exercised by public authorities.

The Eurosystem is functionally independent. The ECB has at its disposal all instruments and competencies necessary for the conduct of an efficient monetary policy and is authorised to decide autonomously how and when to use them.

ECB Independence

Definition Transparency means that the central bank

provides the general public and the markets with all relevant information on its strategy, assessments and policy decisions as well as its procedures in an open, clear and timely manner.

Today, most central banks, including the ECB, consider transparency as crucial. This is true especially for their monetary policy framework. The ECB gives a high priority to communicating effectively with the public.

ECB Transparency

Transparency of the ECB's monetary policy

Transparency helps the public to understand the ECB's monetary policy. Better public understanding makes the policy more credible and effective. Transparency means that the ECB explains how it interprets its mandate and that it is forthcoming about its policy goals.

ECB Transparency

Credible The ECB fosters credibility by being clear about its

mandate and how it performs its tasks. When the ECB is perceived as being able and willing to achieve its policy mandate, price expectations are well anchored.

Regular communication about a central bank’s assessment of the economic situation is particularly useful. It is also helpful for central banks to be open and realistic about what monetary policy can do and, even more importantly, what it cannot do.

ECB Transparency

Predictable The ECB publicly announces its monetary policy strategy and

communicates its regular assessment of economic developments. This helps the markets to understand the systematic response pattern of monetary policy to economic developments and shocks. It makes policy moves more predictable for the markets over the medium term. Market expectations can thus be formed more efficiently and accurately.

If market agents can broadly anticipate policy responses, this allows a rapid implementation of changes in monetary policy into financial variables. This in turn can shorten the process by which monetary policy is transmitted into investment and consumption decisions. It can accelerate any necessary economic adjustments and potentially enhance the effectiveness of monetary policy.

ECB Transparency

Central bank independence has established itself over the past decades as an indispensable element of the monetary policy regimes of mature and emerging economies.

The decision to grant central banks independence is firmly grounded in economic theory and empirical evidence, both of which show that such a set-up is conducive to maintaining price stability.

ECB Accountability

The ECB is independent in carrying out its mandate and tasks. At the same time, it is a founding principle of democratic societies that any independent institution bestowed with a public function should be accountable to citizens and their elected representatives for the conduct of its policies. Accountability is therefore an important counterpart of central bank independence.

ECB Accountability

The ECB's commitment to accountability is illustrated by its decision to go beyond the statutory obligations in its regular reporting. For instance, the ECB publishes an Economic Bulletin every six weeks instead of the required quarterly report and

The members of the Governing Council deliver numerous speeches to address relevant topics of concern to the public.

ECB Accountability

Governing Council

Executive Board

General Council

Supervisory Board

Organisation of the ECB

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

It consists of◦ the six members of the Executive Board, plus◦ the governors of the national central banks of the

19 euro area countries.

Governing Council

Governing Council

Responsibilities to adopt the guidelines and take the decisions necessary

to ensure the performance of the tasks entrusted to the ECB and the Eurosystem;

to formulate monetary policy for the euro area. This includes decisions relating to monetary objectives, key interest rates, the supply of reserves in the Eurosystem, and the establishment of guidelines for the implementation of those decisions.

in the context of the ECB’s new responsibilities related to banking supervision, to adopt decisions relating to the general framework under which supervisory decisions are taken, and to adopt the complete draft decisions proposed by the Supervisory Board under the non-objection procedure.

Governing Council

Meetings and decisions The Governing Council usually meets twice a month at

the ECB’s premises in Frankfurt am Main, Germany. The Governing Council assesses economic and

monetary developments and takes its monetary policy decisions every six weeks. At the other meetings, the Council discusses mainly issues related to other tasks and responsibilities of the ECB and the Eurosystem. To ensure the separation of the ECB’s monetary policy and other tasks from its supervisory responsibilities, separate meetings of the Governing Council are held.

The monetary policy decision is explained in detail at a press conference held every six weeks. The President, assisted by the Vice-President, chairs the press conference.

Governing Council

The Executive Board consists of◦ the President,◦ the Vice-President and◦ four other members

All members are appointed by the European Council, acting by a qualified majority.

Executive Board

Executive Board

Responsibilities to prepare Governing Council meetings; to implement monetary policy for the euro

area in accordance with the guidelines specified and decisions taken by the Governing Council. In so doing, it gives the necessary instructions to the euro area NCBs;

to manage the day-to-day business of the ECB; to exercise certain powers delegated to it by

the Governing Council. These include some of a regulatory nature.

Executive Board

The General Council comprises◦ the President of the ECB;◦ the Vice-President of the ECB;◦ the governors of the national central banks

(NCBs) of the 28 EU Member States.

In other words, the General Council includes representatives of the 19 euro area countries and the 9 non-euro area countries.

General Council

General Council

The General Council contributes to:◦ the ECB's advisory functions;◦ the collection of statistical information;◦ the preparation of the ECB's annual report;◦ the establishment of the necessary rules for standardising

the accounting and reporting of operations undertaken by the NCBs;

In accordance with the Statute of the European System of Central Banks and of the European Central Bank, the General Council will be dissolved once all EU Member States have introduced the single currency.

General Council

Article 127(1) of the Treaty defines the primary objective of the Eurosystem:"The primary objective of the European System of Central Banks […] shall be to maintain price stability".

It continues as follows: "Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union."

Objectives ECB

The European Union has multiple objectives (Article 3 of the Treaty on European Union), which include the sustainable development of Europe based on balanced economic growth and price stability, and a highly competitive social market economy, aiming at full employment and social progress.

Consequently, price stability is not only the primary objective of the ECB’s monetary policy, but also an objective of the European Union as a whole. Thus, the Treaty on the Functioning of the European Union and the Treaty on European Union establish a clear hierarchy of objectives for the Eurosystem, making it clear that price stability is the most important.

The Governing Council of the European Central Bank aims to keep inflation below, but close to, 2% over the medium term.

According to Article 127(2) of the Treaty on the Functioning of the European Union, the basic tasks to be carried out through the Eurosystem are:

the definition and implementation of monetary policy for the euro area;

the conduct of foreign exchange operations; the holding and management of the official

foreign reserves of the euro area countries (portfolio management);

the promotion of the smooth operation of payment systems.

Basic tasks

Fiscal developments

Price developments

Exchange rate developments

Long-term interest rate developments

Convergence criteria

The ratio of the planned or actual government deficit to GDP do not exceed a reference value (defined in the Protocol on the excessive deficit procedure as 3% of GDP),

The ratio of government debt to GDP do not exceeds a reference value (defined in the Protocol on the excessive deficit procedure as 60% of GDP), 

Fiscal criteria

Average rate of inflation, observed over a period of one year before the examination, that does not exceed by more than 1 ½ percentage points that of, at most, the three best performing Member States in terms of price stability.

Price criteria

The observance of the normal fluctuation margins provided for by the exchange-rate mechanism of the European Monetary System, for at least two years, without devaluing against the euro.

Exchange rate developments

First, with regard to “an average nominal long-term interest rate” observed over “a period of one year before the examination”, the long-term interest rate is calculated as an arithmetic average over the latest 12-month period for which HICP data are available.

Second, the notion of “at most, the three best performing Member States in terms of price stability”, which is used for the definition of the reference value, is applied by using the unweighted arithmetic average of the long-term interest rates of the same three Member States used for the calculation of the reference value for the criterion on price stability.

Long-term interest rate developments

The ECB's monetary policy strategy The ECB has adopted a specific strategy to

ensure the successful conduct of monetary policy. The ECB has defined price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. In the pursuit of price stability, the ECB aims at maintaining inflation rates below, but close to, 2% over the medium term.

Monetary Policy

The operational framework of the Eurosystem consists of the following set of instruments:◦ open market operations,◦ Standing facilities,◦ minimum reserve requirements for credit

institutions.

The Eurosystem's instruments

The Eurosystem’s regular open market operations consist of one-week liquidity-providing operations in euro ( main refinancing operations or MROs ).

MROs serve to steer short-term interest rates, to manage the liquidity situation and to signal the monetary policy stance in the euro area.

Open market operations

The ECB requires credit institutions established in the euro area to hold deposits on accounts with their national central bank. These are called "minimum" or "required" reserves (MMR).

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Minimum reserves

The Governing Council of the ECB sets the key interest rates.

The key interest rates for the euro area set by the Governing Council are:

The interest rate on the main refinancing operations (MROs), which normally provide the bulk of liquidity to the banking system. The Eurosystem may execute its tenders in the form of fixed rate or variable rate tenders.

The rate on the deposit facility, which banks may use to make overnight deposits with the Eurosystem.

The rate on the marginal lending facility, which offers overnight credit to banks from the Eurosystem.

Key interest rates

A single currency offers advantages, such as eliminating fluctuating exchange rates and

exchange costs. It is easier for companies to conduct cross-border

trade and The economy is more stable, the economy grows

and consumers have more choice. A common currency also encourages people to travel and shop in other countries. 

At global level, the euro gives the EU more clout, as it is the second most important international currency after the US dollar.

The benefits of the euro

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The disadvantages of the euro