Find out more about the role of the European Central Bank (ECB), its activities and its decision-making bodies.
FTA Online News, Milan
Role and headquarters of the European Central Bank
The European Central Bank (ECB) is the Eurozone’s monetary policy institute, formed of the 19 EU member states, which decided to abandon their national currency in favour of the euro. Croatia will adopt the euro from 1 January 2023 onwards.
The ECB is located in Frankfurt am Main, Germany. Its headquarters, designed by the company Coop Himmelb(l)au, was completed in November 2014.
The main aim of the ECB is to maintain price stability within the single currency area. This target is essentially identified as an inflation level of around 2%. More recently, the ECB has also been assigned banking supervisory tasks, which it performs in coordination with national central banks.
The independence of the ECB
The European Central Bank, sometimes also known as the Eurotower, has its own legal personality on the basis of Article 282 of the Treaty on the Functioning of the European Union and, together with the national central banks, constitutes the European System of Central Banks (ESCB). The ESCB is governed by the decision-making bodies of the ECB. Member states of the ESCB that are not members of the Eurosystem will have an autonomous monetary policy until they decide to join the euro system.
A legal personality strengthens the ECB’s decision-making independence in achieving its goals and objectives, above all that of maintaining price stability.
The ECB has the exclusive right to authorise the issuance of euros.
The memorandum on the charter of the European System of Central Banks and of the ECB further specifies that: “Neither the ECB, nor a national central bank, nor a member of their decision-making bodies shall seek or take instructions from European Community institutions or bodies, from the governments of the Member States or from any other entity. The Community institutions and bodies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB or the national central banks in the performance of their tasks”.
It should nevertheless be noted that, within the above limits, the ECB reports directly to the European Parliament in an annual report, with four annual comparisons to the EU Parliament’s own (customary) annual Committee on Economic and Monetary Affairs, with the right of EU MPs to submit written questions to the Central Bank and the EU Parliament playing a role in the procedure for appointing members of the ECB’s Executive Board.
The ECB was established in 1998 by the Treaty on European Union. At the institution’s base [AH1]in Frankfurt, more than 3,500 people work in close collaboration with the national central banks and on banking supervision. The main function of the ECB is to manage the euro, the single currency of the Community. The ECB also plays a role in shaping and implementing monetary policy within the EU.
Scope and functions of the ECB
Since 1 January 1999, the date of irrevocable fixing of the exchange rates of the first 11 member states, the European Central Bank has become responsible for the monetary policy of the Eurozone.
The principal objective of the institution is to maintain price stability by safeguarding purchasing power within the Eurozone through the control of inflation. Inflation is considered to be under control if it moves towards a symmetric 2% target over the medium term.
The main functions of the ECB on the basis of the Treaty establishing the European Community include:
- defining and implementing the monetary policy of the Union;
- carrying out foreign exchange operations;
- holding and managing the official reserves of the Member States;
- promoting the smooth functioning of payment systems.
As stated, the ECB also has the exclusive right to authorise the issuance of banknotes within the Eurozone.
How does the Central Bank achieve its objectives?
In order to implement its monetary policy, the ECB has a toolbox with various tools, some of which have been developed to meet specific needs.
The main instrument of the ECB’s monetary policy is the interest rate, or rather three interest rates:
- the interest rate for principal refinancing operations (the rate which is generally cited);
- the marginal refinancing rate;
- the deposit rate with the central bank.
By acting on these three rates, which primarily set financing conditions for the banking world within the Eurozone, and consequently, general financing conditions for the economy, the central bank acts on the cost of money in order to stabilise the price level by defending it against excessive rises or falls.
To guide interest rates and control the liquidity in the financial system, the ECB and national central banks make use of open market operations. “Open Market Operations” are conducted with various instruments by the ECB, which decides on instruments and methods of intervention, from standard auctions to bilateral procedures, from debt certificate issues to foreign exchange swaps and more.
The ECB also offers lending institutions two main types of credit lines (marginal lending and deposit facilities), which provide or absorb short-term (overnight) liquidity and have specific interest rates.
The ECB also requires Eurozone lending institutions to hold accounts with their national central banks, where minimum or required reserves must be deposited.
The ECB may, if it considers it appropriate, make use of “forward guidance”, i.e. a brief prospective guide to the central bank’s future rate intentions. In general, this is a specific sentence included in the communiqué attached to periodic monetary policy decisions. Its aim is to provide greater clarity to operators when needed.
The financial and economic crises of recent years have led the ECB to add new instruments, termed unconventional monetary policy instruments, to these “tools”. These include forward guidance, which was introduced in June 2013.
Also of note are the introduction of negative rates, to encourage banks to finance the real economy, the OMT asset purchase programme (never used) for preventing the potential exit of member countries from the Eurozone and corporate bond purchases.
The 2014 APP (asset purchase programme), the 2020 PEPP (pandemic emergency purchase programme) and the 2022 TPI (transmission protection instrument) (also based on purchases of assets) are also well known.
TLTRO (targeted longer-term refinancing operations) are a slightly different case: these are long-term loans to banks at very favourable rates, although these are conditional on targeted investments in favour of people and businesses.
The decision-making bodies of the European Central Bank
The Governing Council
The Governing Council, which is chaired by the President of the ECB, is the main decision-making body of the European Central Bank. It consists of six members of the Executive Board, and the governors of the 20 central banks of the Eurosystem countries. It defines the guidelines, formulates monetary policy and adopts framework resolutions to incorporate supervisory decisions. In particular, every six weeks, it takes the monetary policy decisions which are then communicated and explained in depth during a press conference held by the President and Vice-President of the Council. Since 2015, a system of rotation of voting rights has been implemented.
The Executive Board
This consists of the President of the ECB, a Vice-President and four other members, chosen every eight years by the European Council by a qualified majority from persons with recognised authority and experience in monetary or banking matters. The Committee is concerned with the implementation of monetary policy, in accordance with the decisions and guidelines of the Governing Council, issuing instructions to national central banks. The Committee is also tasked with the preparation of meetings of the Governing Council and the ongoing handling of ECB business.
The General Council
Within the European System of Central Banks (ESCB), only eurozone countries participate in ECB decisions. Member countries of the ESCB that are excluded from the Eurosystem operate together with the other States in the General Council. In other words, the General Council includes the President and Vice-President of the ECB and all of the governors of the central banks of the European Union. The General Council is regarded as a transitional body with a view to the adhesion of all countries to the Euro. It works on the future enlargement of the single monetary area and collects statistical data, also carrying out consultative functions and drawing up the annual report of the central bank.
The Supervisory Board
Since 2014, a Single Supervisory Mechanism (SSM) has existed in Europe, comprising the ECB and national banking supervisory authorities. The aim is to defend the security and soundness of the European banking system, enhancing its integration and ensuring consistent supervision. This includes the Supervisory Council, the fourth decision-making body of the ECB, which consists of a President, a Vice-President (member of the Executive Board of the ECB), four representatives of the ECB and representatives of national supervisory authorities. The Supervisory Board is assisted by a specific Steering Committee.
