European Central Bank

The European Central Bank (ECB) (also in other languages) is one of the world's largest central banks, being in charge of monetary policy for the European Union's official currency, the euro, which is used by over 300 million Europeans in 12 EU countries.

The ECB was established on June 1, 1998. The headquarters are located in Frankfurt am Main, Germany.

Structure and organisation

The organisation of the ECB is modelled on that of the German Bundesbank and Landesbanken.

The ECB is governed by a board of directors, headed by a President, and a board of governors, consisting of the members of the board of directors and representatives of the local central banks within the European System of Central Banks (ESCB).

Objectives

The primary objective of the ECB, and the wider ESCB, is "to maintain price stability" within the euro area, i.e., to keep inflation low. The present target is to keep inflation below, but close to, 2%.

In addition, and without prejudice to the objective of price stability, the bank has to support the economic policies of the European Union. These are designed to foster a high level of employment and sustainable and non-inflationary growth under Article 2 of the Maastricht Treaty - formally known as the Treaty of Europe.

Tasks

The major task of the ECB is to maintain a monetary policy for the euro area in pursuit of the objectives set out above. The current monetary policy is published on the ECB website.

In addition, according to article 105.2 of the Treaty of Rome which established the European Community, the other basic tasks are:

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.

The following are described by the ECB as 'further tasks':

Banknotes: the ECB has the exclusive right to authorise the issuance of banknotes within the euro area.
Statistics: in cooperation with the National Central Banks, the ECB collects statistical information necessary for fulfilling the tasks, either from national authorities or directly from economic agents.
Financial stability and 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.

European System of Central Banks

The European System of Central Banks (ESCB) is comprised of the European Central Bank (ECB), and the local central banks of the 25 member-states of the European Union. Only governors from national banks inside the eurozone take part and are responsible for the decision-making process.

Executive Board of Directors

The Executive Board consists of six members which are elaborating the strategies for the bank's policy. Four of these six seats are reserved for the Eurozone's four big central banks of France, Germany, Italy and Spain.

President of the European Central Bank

In 1999 Wim Duisenberg, the former president of De Nederlandsche Bank, and former finance minister of the Netherlands became the first president of the ECB.

In November 2003 Jean-Claude Trichet followed and is still president today.

Goals and instruments

The ECB hold reserves of over € 4.0 billion of which just over 30% are gold reserves of the Bundesbank and ca 20% from the Banque de France.

Criticism of the ECB

There are two main lines of criticism within the ECB.

Independence

Critics focus on the independence of the institution. The ECB was established as a central bank designed to operate independently of political intervention. Its objectives and powers were politically established, but the decisions as to how those powers should best be used to achieve the objectives was left in the hands of the ECB itself.

However, as many national banks in the EU are outside the eurozone and independent (the Danmarks Nationalbank or the Bank of England for instance), this argument could also apply to them.

Some see this independence as undemocratic and therefore criticise the decision making process and objectives of the ECB, asserting that the economic goals of the ECB are hard-wired to be secretive and independent from most citizens of the European Union, and to be isolated from feedback mechanisms regarding the influence of the money economy on human rights violations or the natural environment.

The ECB does not publish or invite comments on its proposed decisions. After publication of its actions and decisions, ECB web pages do not solicit direct comments by citizens. It is thought that details of internal meetings are not made public in order not to reveal internal splits in the board of governors.

European citizens may influence the policy decisions of the ECB very indirectly via the formal, national democratic electoral process. However, even if changes in economic assumptions are expressed via formal democratic means, elected politicians have very little power to transmit these changes to the ECB.

Still, the ECB is accountable to the European Parliament and the council of ministers. It appoints the ECB president and vice-president and other members of the ECB's executive board. The nominees must be approved by Parliament first, and then by the council of ministers before they can assume their roles in the institution.

Also, it is required by law for the ECB president to present an annual report to the plenary sitting of Parliament. Furthermore, the ECB president and other members of the executive board are present in the Parliament's monetary affairs committee who meet regularly. These meetings take place four times a year, but can be more frequent if any side would want to.

It is important to add that it is generally accepted by economists that the independence of the Central Bank is the best way to avoid selfish manipulation of the macroeconomy for political purposes.

Inflation targets

Some critics feel that the objectives given to the ECB are inappropriate. The ECB sets interest rates in order to control inflation, but does not take into account objectives such as employment and exchange rate stability. Some feel this as a too narrow set of objectives, leading to decisions on interest rate that are inappropriate given the wider needs of the economy.

Many British economists have stated that the ECB should adopt a symmetrical target rate, much like the one that the Bank of England follows.

The unusually low interest rates set by the ECB have been criticized as being inappropriate for regions of Europe with property bubbles. These low interest rates are a factor of the Irish Property Bubble. Although it must be said that it has an economic reason, to avoid recession in many important countries of the eurozone (France, Germany and Italy mainly) that would slow the growth of the rest of the European countries.

Other languages

The bank is known by various names across Europe:

Catalan/Valencian: Banc Central Europeu
Czech: Evropská centrální banka
Danish: Den Europæiske Centralbank
Dutch/Flemish: Europese Centrale Bank
Estonian: Euroopa Keskpank
Finnish: Euroopan keskuspankki
French: Banque Centrale Européenne
German: Europäische Zentralbank
Greek: Ευρωπαϊκή Κεντρική Τράπεζα
Hungarian: Európai Központi Bank
Italian: Banca centrale europea
Latvian: Eiropas Centrālā banka
Lithuanian: Europos centrinis bankas
Maltese: Bank Ċentrali Ewropew
Polish: Europejski Bank Centraly
Portuguese: Banco Central Europeu,
Slovak: Európska centrálna banka
Slovenian: Evropska centralna banka
Spanish/Castilian: Banco Central Europeo
Swedish: Europeiska centralbanken

Trivia

The current ECB building in Downtown Frankfurt is only its temporary home. The ECB ran a large international architecture competition in 1999 for a new tower in Frankfurt, Eastend. At present the winning design scheme of Vienna based architects Coop Himmelbau is under construction. (Winning design by Coop Himmelb(l)au for the ECB's new headquarters in Frankfurt/Main)

On January 5 2003, a man stole a small motor glider and flew it over downtown Frankfurt, circling skyscrapers and threatening to crash into the ECB. He landed safely after about two hours and was arrested. The man, a 31-year-old mentally disturbed German student named Franz Strambach, told a television station he wanted to call attention to Judith Resnik, a U.S. astronaut killed in the 1986 Space Shuttle Challenger disaster.

External links

Central banks | Banks of the European Union | Eurozone fiscal matters | European System of Central Banks | 1998 establishments

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