European Central Bank

The European Central Bank (ECB) is the central bank of the European Union countries that use the euro as their currency. Together with the central banks of the other EU states outside the eurozone, it forms the European System of Central Banks. The European Central Bank was created in June 1998 as the body responsible for managing the Union's monetary policy. It is headquartered in Frankfurt am Main (Germany) and is chaired by Christine Lagarde. It is currently regulated in articles 282 to 284 of the TFUE. It was not until 2009 with the Treaty of Lisbon when it acquired the status of an Institution of the European Union.

The objective of the European Central Bank is price stability in the euro area, defined by the Governing Council as inflation (harmonized consumer price index) close to 2% in the medium term. Unlike other bodies, such as the US Federal Reserve, the ECB does not have goals such as economic growth or full employment.

The main tasks of the European Central Bank are to define and execute the monetary policy of the euro area, direct foreign exchange operations, take care of the international reserves of the European System of Central Banks and promote the proper functioning of the infrastructure of the financial market. In addition, it has the exclusive right to authorize the issuance of euro banknotes. Member states can issue euro coins, but the amount must be authorized in advance by the ECB.

The European Central Bank should also cooperate within the European Union and internationally with third party bodies and entities. Lastly, it contributes to maintaining a stable financial system and to monitoring the banking sector. This could be seen, for example, in the ECB's intervention during the 2007 credit crisis, in which millions of euros were lent to banks to stabilize the financial system.

Although the European Central Bank is directly governed by European Union law higher than commercial law applicable to private companies, its set-up resembled that of a public limited company in that the ECB has shares and capital stock. Its current capital is 10.760 million euros, which is in the hands of the central banks of the Member States acting as shareholders, although initially it had 5.760 million. The key (distribution) of the initial capital allocation was determined in 1998 based on the population of the states and the GDP, but that key is adjustable and has been modified six times. ECB shares are not transferable and cannot be used as collateral.

The headquarters of the European Central Bank is in Frankfurt am Main, the largest financial center in the Eurozone (although not in the European Union), and its location in that city was fixed in the Treaty of Amsterdam along with the from other major community institutions and agencies. Specifically, the bank initially occupied the one known as Eurotower as its physical headquarters, until it moved to its own headquarters in 2015.

History

The European Central Bank is the de facto successor to the European Monetary Institute, an institution that was created at the beginning of the second phase or stage of the European Union's Economic and Monetary Union to handle transition problems to the new currency by part of the countries that were going to adopt the euro and to prepare the creation of the ECB itself and the European System of Central Banks.

On May 2, 1998, the European Council, in its composition of Heads of State and Government, unanimously decided that eleven Member States (Belgium, Germany, France, Ireland, Italy, Spain, Luxembourg, the Netherlands, Austria, Portugal and Finland) fulfilled the necessary conditions for the adoption of the single currency, which would take place on January 1, 1999. These countries would therefore participate in the third phase of the Economic and Monetary Union Union (EMU).^{[citation needed]} The Heads of State or Government also reached a political agreement regarding the people who would be recommended as members of the Executive Committee of the ECB. Two countries, although they were able to adopt the euro as their currency, by popular referendum, did not join the euro zone: the United Kingdom and Denmark.^{[citation required]}

At the same time, the finance ministers of the member states that have adopted the single currency agreed, together with the governors of the national central banks of those countries, the European Commission and the European Monetary Institute (EMI), that the Bilateral central exchange rates of the European Monetary System (EMS) of the currencies of the participating Member States would be used to determine the irrevocable conversion rates of the euro.^{[citation needed]}

The European Monetary Institute was formally replaced by the ECB on June 1, 1998 under the Treaty on European Union (also called the Maastricht Treaty, after the city in which it was signed), however it did not make use of of its full powers until the introduction of the euro on January 1, 1999, beginning the third phase of EMU. The European Central Bank was the final institution needed for this monetary union, as indicated in the reports of the EMU itself, Pierre Werner and the former president of the European Commission Jacques Delors.

The first president of the ECB was Wim Duisenberg, who had been president of the Bank of the Netherlands, Minister of Finance of the Netherlands and president of the European Monetary Institute. Despite this, the French government preferred for this position Jean-Claude Trichet, who was Governor of the Bank of France; and that it would eventually happen to him.

There were also disputes over the executive board of the ECB as the UK demanded to be part of it despite its refusal to join the eurozone and not adopt the euro. Under pressure from France, three board posts they were assigned to the largest members (France, Germany and Italy), and Spain claimed a position which it ended up getting. Despite this appointment system that might seem subject to the directives of the member states, the leadership asserted its independence from the beginning with its resistance to calls for interest rates and future rate candidates by governments.

At the time of the creation of the European Central Bank, the euro area consisted of eleven members, which were joined by Greece in January 2001, Slovenia in January 2007, Cyprus and Malta in January 2008, Slovakia in January 2009, Estonia in January 2011, Latvia in January 2014, Lithuania in January 2015 and Croatia in January 2023, thus expanding the reach of the bank and the number of members of its board of directors.

With the entry into force, on December 1, 2009, of the Treaty of Lisbon, the European Central Bank obtained the status of an institution of the European Union.

Functions and objectives

Target

Coins and euro notes.

The main objective of the European Central Bank is to maintain price stability in the euro zone, that is, to keep inflation at low levels in order to safeguard the value of the euro. The Governing Council defines price stability as inflation (measured as the Harmonized Index of Consumer Prices) of around 2%. Unlike other bodies such as the United States Federal Reserve, the ECB only it has that main objective, with other objectives subordinate to it.

Basic functions

The main tasks of the Eurosystem, and therefore, of the European Central Bank, are to define and execute the monetary policy of the euro area, direct foreign exchange operations, take care of the external reserves of the European System of Central Banks and promote the proper functioning of payment systems and financial market infrastructure. In addition, the ECB has the exclusive right to authorize the issuance of euro banknotes. Member states can issue euro coins, but the amount must be authorized in advance by the ECB.

Other tasks include compiling the statistical information necessary to carry out its functions and contributing to the financial stability and prudential supervision of the financial system. In addition, whenever the functions assigned to the Eurosystem so require, the ECB maintains close cooperative relations with international institutions and at the European level.

Considerations on the execution of monetary policy

Unlike the style of central banking in the United States, in which liquidity is introduced to the economy through the purchase of Treasury bonds by the Federal Reserve (or Fed), the Eurosystem uses a different method in which there are about 1,500 eligible banks that can bid on short-term repo contracts ranging from two weeks to three months in duration.

In effect, banks borrow cash and must pay it back. The short periods of time in the loan term allow interest rates to adjust continuously. When the repo titles mature, the banks participate again. An increase in the number of titles offered in the bond auction allows an increase in liquidity in the economy, while a decrease has the opposite effect. The contracts are made on the assets of the balance sheet of the European Central Bank and the resulting deposits in the member banks are accounted for as liabilities. In simple terms, the responsibility of the Central Bank is that of money, and an increase in deposits in member banks carried as a liability of the Central Bank, means that more money has been put into the economy.^{[quote required]}

To be approved to participate in auctions, banks must be able to offer proof of collateral in the form of loans to other entities. These loans are usually in the form of purchasing the public debt of the member states, but a wide range of bank securities are also accepted.

Part of the strict requirements for accession to the European Union were designed, especially that of taking into account sovereign debt as a percentage of the gross domestic product of each member state, to ensure that the assets offered as collateral to the Bank Central European Union are, at least in theory, all equally good and protected against inflation risk.

The economic and financial crisis that began in 2008 revealed some weaknesses regarding the sovereign debt of certain member countries, such as Portugal, Ireland, Greece and Spain. These "weak values" They are not limited solely to the countries of debt issuance, but have been held by the banks of other member states. To the extent that banks authorized to borrow from the ECB have jeopardized the guarantee, their ability to borrow from the ECB, and thus the liquidity of the economic system, has been affected.

The threat of liquidity loss prompted the European Central Bank to carry out bailout operations. However, weak sovereign debt has not been the only source of fragility in ECB operations in recent years. So was the collapse of the US dollar market with so-called collateralized debt obligations, which led to large-scale interventions in collaboration with the Fed.

Bailout operations involving sovereign debt have included temporarily moving toxic or weak assets from the balance sheets of troubled banks to the balance sheet of the European Central Bank. Such action is considered an act of monetization and may result in an inflationary threat, whereby stronger countries would carry the burden of monetary expansion (and potential inflation) in order to save weaker member countries. Most central banks prefer to move weak assets off their balance sheets with some kind of agreement as to how the debt will continue to be maintained. This preference has generally led the ECB to argue that weaker member countries should on the one hand spend part of their national revenues to guarantee the debt and on the other reduce a wide range of national expenses to be able to face their pending payments that suffocate the economy.

Organization

Christine Lagarde, president of the ECB since November 1, 2019.

The work of the ECB is organized by the following governing bodies:

• The Executive Committee
• The Governing Council
• The General Council
• The Monitoring Council

Executive Committee

The Executive Board is made up of the President of the ECB, the Vice-President and four other members, all appointed by mutual agreement of the Presidents or Prime Ministers of the Eurozone countries. Its mandate is eight years, and non-renewable.

The Committee is responsible for applying the monetary policy defined by the Governing Council and giving instructions to the national central banks. It also prepares the meetings of the Governing Council and is in charge of the ordinary management of the ECB.

Governing Council

The Governing Council is the highest decision-making body of the ECB. It is made up of the six members of the Executive Committee and the governors of the 19 central banks of the euro zone. It is chaired by the President of the ECB. Its primary mission is to define the monetary policy of the Eurozone and, in particular, to set the interest rates at which commercial banks can obtain money from the central bank.

Since January 2015, the governing council of the European Central Bank, where monetary policies are taken, meets every 6 weeks (instead of every 4 as up to now) and publishes four weeks later on its website the minutes of the meeting with summaries of the meeting and the opinions of the board members anonymously.

General Advice

The General Council is the third decision-making body of the ECB and can be defined as a transitional body, since not all the Member States of the Union have yet adopted the euro. It is made up of the ECB President, Vice President and the Governors of the national central banks of the 27 EU Member States. It contributes to the consultative and coordination work and helps to prepare the future enlargement of the Eurozone.

Supervisory Board

The Supervisory Board meets twice a month to discuss, plan and execute the ECB's supervisory tasks. Likewise, it proposes draft decisions to the Governing Council in accordance with the no-objection procedure. It consists of: a president (appointed for a non-renewable five-year term), a vice-president (elected from among the members of the Executive Board of the ECB), four representatives of the ECB and representatives of national supervisors. If the national supervisory authority designated by a Member State is not a national central bank (NCB), the representative of the competent authority may be accompanied by a representative of its NCB. In such a case, the representatives will be considered a single member for the purposes of the voting procedure.

Following the development of a draft decision, the formal decision is issued by the Steering Committee. The Steering Committee's mission is to support the Supervisory Board and is in charge of preparing its meetings. It consists of: the Chairman of the Supervisory Board, the Vice-Chairman of the Supervisory Board, a representative of the ECB and five representatives of the national supervisors. The five representatives of the national supervisors are appointed by the Supervisory Board for a one-year term according to a rotation system that ensures an equitable representation of the countries.

A strict administrative separation is foreseen between the ECB's monetary policy and supervisory tasks. The final decision-making on both matters, however, is carried out in the same body (the Governing Council).

Capital subscription

Although the European Central Bank is governed directly by European Union law and therefore not by any national business law applicable to private companies, its start-up resembled that of a public limited company in the sense of that the ECB has shares and share capital.

The capital of the ECB amounts to 10,825 million euros (January 1, 2015), which comes from the national central banks (NCBs) of all the EU Member States that act as shareholders, although initially it had 5,760 million The key to the initial capital allocation was determined in 1998 taking into account two parameters: the population of each state and its GDP. This calculation is variable and adjustable every five years. It has been modified six times: five-year adjustments were made on January 1, 2004, January 1, 2009 and January 1, 2014, and new adjustments were made on May 1, 2004 (due to the accession of Cyprus, Slovakia, Slovenia, Estonia, Hungary, Latvia, Lithuania, Malta, Poland and the Czech Republic), on January 1, 2007 (when Bulgaria and Romania joined the EU) and on July 1, 2013 (when Croatia joined the EU). ECB shares are non-transferable and cannot be used as collateral.

In short, all the national central banks (NCBs) of the Member States of the European Union participate in the capital of the ECB. Non-euro area NCBs are required to pay only a small percentage. The capital disbursed to the ECB by the NCBs, as of January 1, 2015, was distributed as follows:

Independence

Political independence

The institutions of the European Union and national governments are bound by treaty to respect the independence of the European Central Bank. This implies that neither the ECB nor the national central banks (NCBs) can request or accept instructions from the institutions and bodies of the Union, nor from the governments of the States themselves.

To be accountable, the ECB publishes reports on its activities and has to present its annual report to the European Parliament, the European Commission, the Council of the European Union and the European Council. In addition, the Parliament is also consulted and issues his opinion on the candidates for the board of directors.

Despite this, and as a result of pressure from the French and Greek governments, some people believe that the ECB's independence has been limited in recent years.

Financial independence

On the other hand, in order for the institution to carry out its functions independently, the ECB is endowed with its own budget. Therefore, the financial mechanisms of the ECB are kept separate from those of the European Union. As already stated, the ECB's capital is subscribed and paid up by the central banks of the Eurozone.

Other provisions

The Eurosystem performs its functions on a day-to-day basis, that is, it operates independently.

Central bank governors and members of the Executive Committee are guaranteed the security of their positions. This is for various reasons, for example, to safeguard them from political maneuvering. Some provisions are as follows:

• Governors of a central bank have a minimum term of five years.
• The members of the ECB Executive Committee have an eight-year non-renewable mandate.
• Their cessation would only be given in case of inability or serious failure.

Transparency

Most central banks today consider transparency a priority. Transparency, in principle, contributes to a better understanding by the public and markets of the monetary policy carried out by the ECB.

The transparency of monetary policy is structured around three pillars. According to the ECB, it gives it greater credibility and effectiveness. They are:

• Credibility,
• Self-discipline, and
• Predictability.

The ECB, however, is subject to fewer transparency obligations compared to the standards of other EU institutions and other major central banks. As Transparency International points out, "The Treaties establish transparency and openness as principles of the EU and its institutions. However, they grant the ECB a partial exemption from these principles. According to Article 15(3) TFEU, the ECB is bound by the EU principles of transparency "only when performing [its] administrative tasks" (The exemption, which leaves the term "administrative tasks" undefined, applies equally to the Court of Justice of the European Union and the European Investment Bank.)) ".

Some examples that show that the ECB is less transparent than other institutions:

• Voting secret: while other central banks make their voting records public, decisions taken by the ECB Governing Council are taken with total discretion. However, since 2014, the ECB has published summaries of its monetary policy meetings, although these remain quite vague and do not include individual votes.
• Access to documentation: The obligation of EU agencies to make documents free after a 30-year embargo applies to the ECB. However, according to the ECB's internal regulations, the Governing Council may decide to keep individual documents classified beyond the 30-year period.

Headquarters

New headquarters of the European Central Bank, in Frankfurt when it was under construction.

The European Central Bank is headquartered in Frankfurt, the largest financial center in the eurozone. Its location in the city was fixed, along with other institutions, by the Treaty of Amsterdam. The bank first occupied the Eurotower building, until the construction of its new headquarters was completed on the site of the former wholesale market Großmarkthalle.

The design of the new building was decided on in an international architecture competition promoted by this institution in 1999 and was carried out by a Vienna-based studio called Coop Himmelb(l)au.

The new construction is approximately 180 meters high (the previous building is 148 meters high) and is accompanied by other secondary buildings in a landscaped area on the banks of the River Main. Upon its completion in 2014, the building was expected to become an architectural symbol for the European Union. It houses twice the number of staff that worked in the Eurotower.

The inauguration of the new building caused great public rejection in Frankfurt, due to the fact that the total cost of the new headquarters reached 1.3 billion euros, around 30% more than the initial budget, at a time of economic crisis in Europe and austerity policies.