Overview
- The European Central Bank is the central monetary authority of the Eurozone.
- It manages monetary policy for countries that use the euro (€).
- Headquartered in Frankfurt, Germany.
- Established in 1998; began full operations in 1999 with the launch of the euro.
Mandate and Objective
- Primary objective: Maintain price stability in the Eurozone.
- Price stability is defined as inflation close to but below 2% over the medium term.
- Supports general economic policies of the EU without compromising price stability.
Key Functions
- Monetary policy formulation for the Eurozone.
- Setting key interest rates, including:
- Main Refinancing Operations rate
- Marginal Lending Facility rate
- Deposit Facility rate
- Issuance of euro banknotes (exclusive authority).
- Management of foreign exchange operations.
- Holding and managing official foreign reserves of Eurozone countries.
- Ensuring smooth functioning of payment systems, including TARGET2.
- Banking supervision under the Single Supervisory Mechanism (SSM) for significant banks.
Institutional Structure
- Governing Council
- Main decision-making body.
- Comprises:
- ECB Executive Board members
- Governors of national central banks of Eurozone countries
- Executive Board
- President
- Vice-President
- Four other members
- Responsible for day-to-day operations and implementation of monetary policy.
- General Council
- Includes ECB leadership and central bank governors of all EU countries (including non-euro members).
- Transitional and advisory role.
Eurosystem vs European System of Central Banks (ESCB)
- Eurosystem
- ECB + national central banks of Eurozone countries.
- Conducts actual monetary policy.
- ESCB
- ECB + national central banks of all EU countries.
- Exists as long as some EU members have not adopted the euro.
Independence
- ECB is institutionally independent.
- Neither EU institutions nor national governments can influence its decisions.
- Independence is guaranteed under EU treaties to ensure credibility and inflation control.
Role in Financial Stability
- Supervises major banks through the Single Supervisory Mechanism.
- Plays a key role during crises via:
- Quantitative easing
- Emergency liquidity operations
- Coordination with the European Stability Mechanism (ESM)
Significance
- Central to the functioning of the Economic and Monetary Union (EMU).
- Ensures currency stability across multiple sovereign states.
- One of the most influential central banks globally alongside the US Federal Reserve.
