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European Monetary System

 
Hoover's Profile: European Central Bank
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Contact Information
European Central Bank
Kaiserstrasse 29
D-60311 Frankfurt, Germany
Tel. +49-69-1344-0
Fax +49-69-1344-6000

Type: Government-owned
On the web: http://www.ecb.int
 Employees: 750

The European Central Bank (ECB) is all about the euro. Established in 1999, ECB and the national central banks of the 16 European Union (EU) member states that use the euro as their primary currency make up the Eurosystem, whose foremost task is to maintain euro price stability. ECB is also responsible for setting the monetary policy of the EU (with the objective of sustained employment and non-inflationary growth), ensuring the smooth operation of payment systems, and managing the foreign reserves of member countries. Its revenue is derived from interest on investments in foreign-reserve assets, money-market instruments, and securities, as well as from the allocation of euro banknotes in the EU.

Key numbers for fiscal year ending December, 2008:
Sales: $229.2M

Officers:
President and Member, Governing Council: Jean-Claude Trichet
Director Internal Finance: Ian Ingram
Director General Information Systems: Hans-Gert Penzel

Competitors:
Bank of England
Bank of Japan
Federal Reserve

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Investment Dictionary: European Central Bank - ECB
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The central bank responsible for the monetary system of the European Union (EU) and the euro currency. The bank was formed in Germany in June 1998 and works with the other national banks of each of the EU members to formulate monetary policy that helps maintain price stability in the European Union.

Investopedia Says:
The European Central Bank has been responsible for the monetary policy of the European Union since January 1, 1999, when the euro currency was adopted by the EU members. The responsibilities of the ECB are to formulate monetary policy, conduct foreign exchange, hold currency reserves and authorize the issuance of bank notes, among many other things.

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Banking Dictionary: European Central Bank (ECB)
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Bank founded to oversee monetary policy in the European Community countries adopting the Euro common currency: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. The European Central Bank coordinates policy with the central banks of the 11 countries participating in the Euro zone. Collectively, the ECB and the central banks of the European countries make up the European System of Central Banks (ESCB). The ECB itself is run by a Governing Council, whose members are drawn from the bank's executive board and governors of the national central banks. The ECB executive board, consisting of the bank's president, vice president, and four appointed members, serve non-renewable terms of up to eight years.

The European Central Bank was created by the Maastricht Treaty on European Union ratified in 1993, which established the European Monetary Union (EMU) and the Euro, the common currency of European countries. The ESCB's tasks are defining and implementing the monetary policy of the European Community, conducting foreign exchange operations to achieve price stability, holding and managing the foreign currency reserves of members states, and promoting stability in the overall financial system.

The ESCB is governed by the decision-making bodies of the ECB: 1) the Executive Board; 2) the Governing Council, whose members are governors of the national central banks of European Union nations participating in the Euro and the ECB Executive Board; 3) the General Council, made up of the ECB president and vice president, and the governors of all national central banks.

The ECB, working jointly with the national central banks, operates the TARGET (Trans European Automated Real-Time Gross Settlement Express Transfer) funds transfer system for large-value Euro payments. The TARGET cross-border payment system is similar to the Federal Reserve Federal Wire (Fedwire) and provides immediately available transfers of funds.

 
Columbia Encyclopedia: European Monetary System
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European Monetary System, arrangement by which most nations of the European Union (EU) linked their currencies to prevent large fluctuations relative to one another. It was organized in 1979 to stabilize foreign exchange and counter inflation among members. Periodic adjustments raised the values of strong currencies and lowered those of weaker ones, but after 1986 changes in national interest rates were used to keep the currencies within a narrow range. In the early 1990s the European Monetary System was strained by the differing economic policies and conditions of its members, especially the newly reunified Germany, and Britain permanently withdrew from the system.

In 1994 the European Monetary Institute was created as transitional step in establishing the European Central Bank (ECB) and a common currency. The ECB, which was established in 1998, is responsible for setting a single monetary policy and interest rate for the adopting nations, in conjunction with their national central banks. Late in 1998, Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain cut their interest rates to a nearly uniformly low level in an effort to promote growth and to prepare the way for a unified currency.

At the beginning of 1999, the same EU members adopted a single currency, the euro, for foreign exchange and electronic payments. (Greece, which did not meet the economic conditions required until 2000, adopted the euro in 2001.) The introduction of the euro four decades after the beginings of the European Union was widely regarded as a major step toward European political unity. By creating a common economic policy, the nations acted to put a damper on excessive public spending, reduce debt, and make a strong attempt at taming inflation. However, the budget-deficit ceilings established in the process of introducing the euro have been violated by a number of countries since 2001, in part because of national government measures to stimulate economic growth. In 2003, EU finance ministers, faced with the fact that economic downturns had put France and Germany in violation of the ceilings, temporarily suspended the pact. The European Commission challenged that move, however, and the EU high court annulled the finance ministers' decision in 2004.

Euro coins and notes began circulating in Jan., 2002, and local currencies were no longer accepted as legal tender two months later. The European Currency Unit (ECU), which was established in 1979, was the forerunner of the euro. Derived from a basket of varying amounts of the currencies of the EU nations, the ECU was a unit of accounting used to determine exchange rates among the national currencies.

Of the European Union members-Denmark, Great Britain, and Sweden-that did not adopt the euro when it was introduced perhaps the most notable is Britain, which continues to regard itself as more or less separate from Europe. In all three nations there has been strong public anxiety that dropping their respective national currencies would give up too much independence. Danish voters rejected adoption of the euro in a referendum in 2000; the vote was seen as strengthening euro opponents in Britain and Sweden. Of the EU members admitted since 2004, four-Slovenia (2007), Cyprus and Malta (2008), and Slovakia (2009)-have adopted the euro.

Wikipedia: European Central Bank
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ECB LOGO.svg
European Central Bank
The current headquarters building in Frankfurt, Germany
The current headquarters building in Frankfurt, Germany
Headquarters Frankfurt, Germany
Coordinates 50°06′34″N 8°40′26″E / 50.1095°N 8.6740°E / 50.1095; 8.6740
Established 1 June 1998
President Jean-Claude Trichet
Central Bank of
Currency Euro
ISO 4217 Code EUR
Reserves
Base borrowing rate 1.75%
Base deposit rate 0.25%
Website ECB.int
Preceded by

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.

Contents

History

Technically the predecessor to the ECB was the European Monetary Institute (EMI). However the ECB is the de facto descendant of the German Bundesbank in both design and importance. The EMI 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 Treaty on European Union (TEU, Treaty of Maastricht), 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]

Wim Duisenberg (1935-2005), first President of the ECB.

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.[citation needed] Under pressure from France three seats were assigned to the largest members, France, Germany, Italy and Spain. 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 ECB has the exclusive right to authorise issuance of banknotes.

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 13 May 2009, ECB lowered the main refinancing rate to 1.0%, the lowest ever. On July 2008 the borrowing rate had been 4.25%. The highest borrowing rate was from October 2000 to May 2001: 4.75%.

Organisation

Jean-Claude Trichet, the current President.

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 President of the European Council and President of the European Commission. Each member has one vote (the Council and Commission presidents do not vote) and decisions are taken by a simple majority.[6][10][11] 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 to 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 years.

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

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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]

It recently announced that increased spending is not the cure for the 2009 financial crisis; contradicting current U.S. financial policy.[citation needed]

Location

Main article: European Central Bank Headquarters
Model of the ECB's new 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.[19]

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 180 metres (591 ft) tall (the present building is 148 m/486 ft) 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 during 2014.[20][21] 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.[19]

See also

United States penny, obverse, 2002.png Numismatics portal

References

  1. ^ a b c "European Central Bank". European NAvigator. http://www.ena.lu?lang=2&doc=8034. Retrieved 15 October 2007. 
  2. ^ ECB: Economic and Monetary Union
  3. ^ a b "The third stage of Economic and Monetary Union". European NAvigator. http://www.ena.lu?lang=2&doc=14950. Retrieved 16 October 2007. 
  4. ^ "Powers and responsibilities of the European Central Bank". European Central Bank. http://www.ecb.int/ecb/orga/tasks/html/index.en.html. Retrieved 10 March 2009. 
  5. ^ a b Fairlamb, David; Rossant, John. "The powers of the European Central Bank". BBC News. http://news.bbc.co.uk/1/hi/business/business_basics/86006.stm. Retrieved 16 October 2007. 
  6. ^ a b "The European Central Bank (ECB)". Europa (web portal). http://europa.eu/scadplus/leg/en/lvb/o10001.htm. Retrieved 16 October 2007. 
  7. ^ Lander, Mark. "Credit Squeeze Puts Europe's Bank in Spotlight". New York Times. http://www.nytimes.com/2007/08/14/business/worldbusiness/14euro.html?_r=1&n=Top/Reference/Times%20Topics/Organizations/E/European%20Central%20Bank&oref=slogin. Retrieved 16 October 2007. 
  8. ^ "ECB press release on dollar liquidity". ECB. http://www.ecb.int/press/pr/date/2008/html/pr080110_2.en.html. 
  9. ^ a b John Schmid (10 December 1998). "The ECB Passes First Big Hurdle". the International Herald Tribune. http://www.iht.com/articles/1998/12/10/secb.t.php. Retrieved 15 October 2007. 
  10. ^ a b "Organisation and operation of the European Central Bank". European NAvigator. http://www.ena.lu?lang=2&doc=8036. Retrieved 15 October 2007. 
  11. ^ a b "Composition of the European Central Bank". European NAvigator. http://www.ena.lu?lang=2&doc=8035. Retrieved 15 October 2007. 
  12. ^ "The General Council". European Central Bank. http://www.ecb.europa.int/ecb/orga/decisions/genc/html/index.en.html. Retrieved 15 October 2007. 
  13. ^ a b c "Independence". European Central Bank. http://www.ecb.int/ecb/orga/independence/html/index.en.html. Retrieved 15 October 2007. 
  14. ^ "Central bank independence" (PDF). New Palgrave Dictionary. 2005. http://people.ucsc.edu/~walshc/cbi_newpalgrave.pdf. Retrieved 15 October 2007. 
  15. ^ "Accountability". European Central Bank. http://www.ecb.int/ecb/orga/accountability/html/index.en.html. Retrieved 15 October 2007. 
  16. ^ "Executive Board" (PDF). Banque de France. 2005. http://www.banque-france.fr/gb/eurosys/telechar/europe/Directoire_GB.pdf. Retrieved 15 October 2007. 
  17. ^ Buck, Tobias. "Central bank chief urges change to EU treaty". Financial Times. http://www.ft.com/cms/s/0/2129d4a0-4775-11dc-9096-0000779fd2ac,dwp_uuid=70662e7c-3027-11da-ba9f-00000e2511c8.html. Retrieved 2 September 2007. 
  18. ^ "Consolidated versions of the treaty on European Union and of the treaty establishing the European Community" (PDF). Eur-lex. http://eur-lex.europa.eu/LexUriServ/site/en/oj/2006/ce321/ce32120061229en00010331.pdf. Retrieved 12 June 2007. 
  19. ^ a b Dougherty, Carter. "In ECB future, a new home to reflect all of Europe". International Herald Tribune. http://www.iht.com/articles/2004/11/16/ecb_ed3_.php. Retrieved 2 August 2007. 
  20. ^ "Winning design by Coop Himmelb(l)au for the ECB's new headquarters in Frankfurt/Main". European Central Bank. http://www.ecb.int/ecb/premises/html/image29.en.html. Retrieved 2 August 2007. 
  21. ^ "Launch of a public tender for a general contractor to construct the new ECB premises". European Central Bank. http://www.ecb.int/press/pr/date/2007/html/pr070710_3.en.html. Retrieved 2 August 2007. 

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