The European Central Bank

The European Central Bank (ECB) was set up in 1998, under the Treaty on European Union and it is based in Frankfurt (Germany). Its job is to manage the euro – the EU’s single currency. The ECB is also responsible for framing and implementing the EU’s economic and monetary policy.

To cary out its role, the ECB works with the ”European System of Central Banks” (ESCB), which covers all 27 EU countries. However, only 13 of these countries have so far adopted the euro. The 13 collectively make up the ”euro area” and their central banks, together with the European Central Bank, make up what is called the ”Eurosystem”.

The ECB, working closely with the national central banks, prepares and implements the decisions taken by the Eurosystem’s decision-making bodies – the Growing Council, the Executive Board and the General Council.

Jean-Claude Trichet, from France, became President of the ECB in November 2003.

TASKS

The tasks of the ESCB and of the Eurosystem are laid down in the Treaty establishing the European Community. They are specified in the Statute of the European System of Central Banks (ESCB) and of the European Central Bank (ECB). The Statute is a protocol attached to the Treaty. The Treaty text refers to the ‘ESCB' rather than to the 'Eurosystem'. It was drawn up on the premise that eventually all EU Member States will adopt the euro. Until then, the Eurosystem will carry out the tasks.

OBJECTIVES

"The primary objective of the ESCB shall be to maintain price stability". And: "without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2." (Treaty article 105.1) The objectives of the Union (Article 2 of the Treaty on European Union) are a high level of employment and sustainable and non-inflationary growth.

BASIC TASKS

According to the Treaty establishing the European Community (Article 105.2), the basic tasks 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.

One of the ECB’s main tasks is to maintain price stability in the euro area, so that the euro’s purchasing power is not eroded by inflation. The ECB aims to ensure that the year-on-year increase in consumer prices is less than 2%.

It does this in two ways:

- First, by controlling the money supply. If the money supply is excessive compared to the supply of goods and services, inflation will result.

- Second, by monitoring price trends and assessing the risk they pose to price stability in the euro area.

Controlling the money supply involves, amongst other things, setting interest rates throughout the euro area. This is perhaps the Bank’s best-known activity.

FURTHER TASKS

- Banknotes: the ECB has the exclusive right to authorise the issuance of banknotes within the euro area.

- Statistics: in cooperation with the NCBs, the ECB collects statistical information necessary for fulfilling the tasks, either from national authorities or directly from economic agents.

- Financial stability & supervision: the Eurosystem contributes to the smooth conduct of policies pursued by the authorities in charge related to the prudential supervision of credit institutions and the stability of the financial system.

- International and European cooperation: the ECB maintains working relations with relevant institutions, bodies and fora both within the EU and internationally in respect of tasks entrusted to the Eurosystem.

How is the Bank’s work organised?

The European Central Bank’s work is organised via the following decision-making bodies.

1. The Governing Council

2. The Executive Board

3. The General Council

1. 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 (NCBs) from the 13 euro area countries.

Members of the Governing Council

Responsibilities

- to adopt the guidelines and take the decisions necessary to ensure the performance of the tasks entrusted to 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.