European Central Bank (ECB)

The European Central Bank (ECB) is the institution of the European Union (EU) which administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt, Germany. Further information: History of the euro The European Central Bank is the de facto successor of the European Monetary Institute (EMI). 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] 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.[3] 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, Slovakia in January 2009, and Estonia in January 2011, enlarging the bank's scope and the membership of its Governing Council.[1] On 1 December 2009 Treaty of Lisbon entered into force, ECB according to the article 13 of TEU, gained official status of an EU institution. 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 of below, but close to, 2%. 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

- promote smooth operation of the financial market infrastructure under the Target payments system and being currently developed technical platform for settlement of securities in Europe (TARGET2 Securities). - 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). -The bank must also co-operate within the EU and internationally with third bodies and entities. - it contributes to maintaining a stable financial system and monitoring the banking sector. 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 stabilize the financial system. 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 stabilize the money market. In U.S. style central banking, liquidity is furnished to the economy primarily through the purchase of Treasury bonds by the Federal Reserve Bank. Because the European Community does not have system-wide bonds backed by a system-wide taxation authority, it uses a different method. Member banks, of which there are several thousand, bid for short term repo contracts of two weeks' to three months' duration. The member banks in effect borrow cash and must pay it back; the short durations allow interest rates to be adjusted continually. When the repo notes come due the participating banks bid again. An increase in the quantity of notes offered at auction allows an increase in liquidity in the economy. A decrease has the contrary effect. The contracts are carried on the asset side of the European Central Bank's balance sheet and the resulting deposits in member banks are carried as a liability. In lay terms, the liability of the central bank is money, and an increase in deposits in member banks, carried as a liability by the central bank, means that more money has been put into the economy.[6] To qualify for participation in the auctions banks must be able to offer proof of appropriate collateral in the form of loans to other entities. These can be the public debt of member states, but a fairly wide range of private banking securities are also accepted. The fairly stringent membership requirements for the European Union, especially with regard to sovereign debt as a percentage of each member state's gross domestic product, are designed to insure that assets offered to the bank as collateral are, at least in theory, all equally good, and all equally protected from the risk of inflation. Organisation Although the ECB is governed by European law directly and thus not by corporate law applying to private law companies, its set-up resembles that of a corporation in the sense that the ECB has shareholders and stock capital. Its capital is five billion euros[20] which is held by the national central banks of the Member States as shareholders. The initial capital allocation key was determined in 1998 on the basis of the states' population and GDP,[21] but the key is adjustable.[22] Shares in the ECB are not transferable and cannot be used as collateral.[23]

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 nonrenewable 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.[24][25] Independence 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. For example, the minimum term of office for a national central bank governor is five years and members of the executive board have a non-renewable eight-year term.[26] 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.[27] The European Parliament also gets to question and then issue its opinion on candidates to the executive board.[28]