In the wake of rising inflation rates, you have probably heard of the ECB or the European Central Bank. This is a body within the European Union with the aim of conducting a common monetary policy. In this article, you will find out what exactly the ECB is, how it came into being, what its tasks are and which instruments are used to achieve predetermined goals.
ECB definition
The abbreviation ECB stands for "European Central Bank". It has its headquarters in Frankfurt am Main. The basic function of the ECB is to Monetary policy of the European single currency. This includes ensuring price stability within the European Union.
It is important that the European Central Bank independent central bank is. Although it is part of the European Union, it has its own budget and therefore guarantees financial independence. It is one of the seven EU institutions, but is independent in its actions.
In this context, the Independence from political or other external influences should be mentioned. The ECB can decide which methods are to be used to achieve the objectives (operational independence). The term "institutional independence" means that the European Central Bank may not be politically influenced.
In the spirit of personal independence legal framework conditions prevent an excessive concentration of power. This is achieved by prohibiting secondary employment and limiting terms of office, which could lead to conflicts of interest.
History of the ECB
The European Central Bank was founded on June 1, 1998. The eleven founding member states of the EU were Spain, Germany, Italy, France, Belgium, the Netherlands, Finland, Luxembourg, Austria, Portugal and Ireland. Since then, Greece, Slovenia, Malta and Cyprus, Slovakia, Estonia, Latvia and Lithuania have joined.
The first step towards establishing the ECB was taken back in 1988, when it was decided that a Economic and monetary union with free movement of capital within Europe is to be created. A common monetary authority and an associated monetary policy were established.
In 1990, the first decisive step was taken: new regulations were introduced for a completely free movement of goods between the members of the European Economic Community.
The second step was taken in 1994. The forerunner of the European Central Bank was founded: the European Monetary Institutecalled the EMI. The preparatory work at this time was already concerned with establishing a common economic policy and making the necessary preparations. The purpose of the EMI was, Cooperation and coordination of national central banks and monetary policy to promote.
The year 1999 marks the third step, in which the ECB was given responsibility for a uniform monetary policy and the exchange rates of the currencies of the original member states of the monetary union were fixed.
What are the ECB's tasks?
The fundamental task of the European Central Bank is to common monetary policy of the European currency. This includes the following aspects:
- Execution of foreign exchange transactions
- Determination and implementation of monetary policy regulations
- Safekeeping of the reserves of all member states
- Ensuring that national authorities supervise financial markets and related institutions
- Ensuring stability and security in the European banking system
- Authorizations to issue banknotes to the various euro area countries
- Guarantee secure, functioning payment systems
The following two objectives of the European Central Bank can be roughly distinguished:
- Guarantee price stabilityThis task includes preventing sharp fluctuations in the value of money. The most important benchmark for this is inflation.
- Maintain stable economic developmentThe economies of the member states are to be protected from a recession. The utilization of economic capacities is important here.
In addition to the main objectives, there are also a number of secondary objectives. For example, a certain level of economic growth is to be ensured. Work is also being done to ensure high employment figures.
What instruments does the ECB use?
- InterestThe best-known instrument is the key interest rate. The key interest rate specifies the interest rate charged to banks when they borrow money from the European Central Bank. The key interest rate is set directly by the ECB. Private banks pass on the interest charged to their customers. If inflation rates are high, the European Central Bank uses the key interest rate as an instrument and raises it.
- Amount of reservesThe ECB stipulates how high the minimum reserves on the current accounts of the national central banks must be.
- Open market transactionsThe European Central Bank's money is lent to commercial banks in the member states at interest.
- Unconditional monetary policy transactionsThe European Central Bank has the option of making unlimited short-term purchases of bonds from EU member states. At present, no member state has made use of this option.
- Securities tradingThe ECB is active in the purchase of securities, such as corporate or government bonds.
- Participation in the foreign exchange marketThe European Central Bank can participate in the foreign exchange market. This participation can be an instrument with the aim of ensuring stability in the area of monetary policy.
- Permanent facilitiesThe European Central Bank can grant loans to refinance commercial banks.
How is the ECB structured?
The European Central Bank is made up of three decision-making bodies:
- Governing Council of the ECBThis is the central decision-making body, consisting of the members of the Executive Board and the respective governors of the national central banks of all member states. This ECB body performs important tasks, such as setting the key interest rate or fundamental regulations for a common monetary policy. It is also responsible for assessing economic developments.
- Board of DirectorsThis body oversees the day-to-day operations of the European Central Bank and implements monetary policy regulations. It consists of the President, Vice-President and four other members. The latter are appointed every eight years by the heads of government of the participating countries.
- Extended CouncilThe enlarged Council acts in an advisory and coordinating capacity. For example, it takes over the preparations when a new country is to join the euro area. It consists of the President, Vice-President and all the governors of the national central banks of the member states.
In addition to these three bodies, there is the Presidents of the European Central Bank. He represents the ECB and chairs the Executive Board. The Council elects the President every eight years, whereby re-election is excluded.
Conclusion: What is the ECB?
The ECB, or European Central Bank, is one of the seven institutions of the EU. It acts independentto avoid conflicts of interest and has financial independence. Its overriding task is to manage and implement a common monetary policy for the member states.
This includes tasks such as holding reserves, ensuring appropriate supervision of national authorities over financial markets and guaranteeing security and stability in the banking system. The ECB can be active on the foreign exchange market and determines the rules of monetary policy.
An important objective of the ECB is to Guarantee of price stability. Stronger fluctuations in the value of money should be prevented. The second fundamental objective is to Maintaining stable economic development and thus protection against a recession in the participating countries.
To achieve these goals, the ECB uses various instruments, such as the Key interest rate, Determination of the Reserve level, Open market transactions or unconditional monetary policy transactions. In addition, trading with Securitiesparticipation in the Foreign exchange market or Permanent facilities be used to achieve important goals.