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Organisation chart of the ECB

In its discussions of future risks to price stability, the ECB — like the Fed — takes full account of labor markets trends and output gaps. In addition to setting key interest rates, we also conduct open market operations. Lagarde will also have to navigate new tensions with the United States.

The most startling difference between the eurozone on the one hand and the United States and the UK on the other is not their respective fiscal situations. In fact, public debt in the eurozone amounts to 87% of its GDP, well below the 98% in the United States. Now that it is seeing enough progress on reforms in Spain and Italy, the ECB is finally planning to intervene more forcefully.

  1. Instead, the major difference between the eurozone and other regions of the Western world lies in the reaction function of the central bank to financial turmoil and economic problems.
  2. The absence of a fiscal union, including a eurozone-wide treasury to pool debt, has also complicated the ECB’s potential role as lender of last resort.
  3. This would likely favor EURUSD’s weakness as an initial reaction out of the meeting.
  4. Member states can issue euro coins, but the volume must be approved by the ECB beforehand.
  5. The 1992 Maastricht Treaty created the European System of Central Banks (ESCB), which comprises the ECB and the twenty-eight national central banks of the European Union (EU), including those from countries that do not use the euro.

The sterilization rule was meant in part to soften opposition to the program among German policymakers. According to Guntram Wolff, director of the Brussels-based think tank Bruegel, German conservatives, including Bundesbank chief Jens Weidmann, argued that OMT amounted to “monetary financing” of governments, which is proscribed by EU treaty. Weidmann was the only member of the ECB Governing Council to vote against OMT.

How does the ECB work?

The so-called European debt crisis began after Greece’s new elected government uncovered the real level indebtedness and budget deficit and warned EU institutions of the imminent danger of a Greek sovereign default. Since 1 January 1999 the European Central Bank (ECB) has been responsible for conducting monetary policy for the euro area – the world’s largest economy after the United States. That is why we have introduced new monetary policy instruments in recent years. These additional instruments have served us well and will remain part of our toolbox. They give our monetary policy more space to act against the risk of low inflation or deflation. The rate on the deposit facility and the rate on the marginal lending facility define a floor and a ceiling for the overnight interest rate at which banks lend to each other.

An economic government could for example enable it to have a common budget, common taxes and borrowing and investment capacities. Such a government would then make the euro area more democratic and transparent by avoiding the opacity of a council such as the Eurogroup. The debate on the independence of the ECB finds its origins in the preparatory stages of the construction of the EMU.

The ECB first exercised its full powers on 1 January 1991 after the introduction of the Euro as the official currency for the Euro area. During this time, the national central banks of the 11 EU member states transferred their monetary policy function to the ECB. Other states within the EU joined later on, with Greece, Slovenia, Cyprus, gann fan indicator Malta, Slovakia, Estonia, Latvia, and Lithuania joining the EU between 2001 to 2015. The expansion enlarged the bank’s scope and marked a milestone in the complex process of EU integration. As the eurozone struggled through the global financial crisis, European leaders debated the ECB’s ability to support ailing economies.

The Bank’s Response to the Debt Crisis

The ECB directly supervises 124 significant banks that hold 82% of the banking assets in the Euro area. The ECB was created in June 1998, following the Treaty of Amsterdam that amended the Treaty on the European Union. The bank succeeded the European Monetary Institute (EMI) which had been formed at the second stage of the Economic and Monetary Union (EMU) to handle transitional issues of adopting the Euro as the common currency of the European Union.

Universal & Diversified Institutions

Moreover, they argue that monetary policy might have minimal influence on the global demand for energy. Draghi’s presidency started with the impressive launch of a new round of 1% interest loans with a term of three years (36 months) – the Long-term Refinancing operations (LTRO). Under this programme, 523 Banks tapped as much as €489.2 bn (US$640 bn).

Its mandate is to maintain price stability by setting key interest rates and controlling the union’s money supply. The ECB was instrumental in organizing a response to the euro-zone debt crisis that started in 2009 after the spillover effects of the financial crisis of 2007–08 hit Europe. The ECB lowered interest rates to ensure a steady supply of euros into the Eurosystem. Later, the fact that the loans given out required recipient governments to implement severe budget cuts and other austerity measures led to widespread protests and public outrage in the recipient countries, which resulted in major political changes in some countries, particularly Greece.

Payments across the euro area rely on a vast infrastructure that ensures funds and assets get safely from one place to another. Explore our cartoons on the different workstreams and read more on why they matter for monetary policy. The Treaty states that the ECB shall also contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system. Only 16 counterfeits were found per million genuine euro banknotes in circulation in 2023. While it’s highly unlikely you will ever receive a fake, you can always use the “feel, look, tilt” method to check for security features like raised print, watermarks and reflective effects.

Weaker job growth could also invite increased rate-cut expectations for March’s policy meeting

The ECB Executive Board enforces the policies and decisions of the Governing Council, and may direct the national central banks when doing so.[3] The ECB has the exclusive right to authorise the issuance of euro banknotes. Member states can issue euro coins, but the volume must be approved by the ECB beforehand. The ECB is the only institution that can authorize the printing of euro banknotes. Every week, the ECB announces a specified amount of cash funds it wishes to supply and sets the lower limit for the acceptable interest rate. Eligible banks—which are euro-zone national central banks and commercial banks that have provided collateral and meet certain balance-sheet criteria—then start to bid for the ECB funds via an auction mechanism. Sometimes, instead of an auction, the ECB specifies the interest rate it is willing to accept and allows member banks to request as much funding as they wish at the allotted rate.

They explain key topics to help you understand central banking better. We regularly seek input on decisions and initiatives affecting financial markets. This direct engagement lets us benefit from the insights of people involved or interested in these markets. We investigate financial innovation and how it is changing, or could change, the way financial markets work. We also want to make sure that technological disruption does not come at the cost of integration or stability. The €STR is the new interest rate benchmark launched in October 2019.

Think of a toolbox full of different tools that are used, also in combination, to help us steer inflation. Interest rates are the primary instrument that we use for our monetary policy. In recent years we have added new instruments to our toolbox in response to big changes and large shocks in the economy that have made our task of maintaining price stability more challenging. Each monetary policy decision by the Governing Council is based on an assessment of the monetary policy stance. The assessment of the monetary policy stance determines whether monetary policy is contributing to economic, financial and monetary developments in a way that maintains price stability over the medium term. The appropriate monetary policy stance is delivered by choosing and calibrating the appropriate monetary policy tools, both individually and in combination.

Finally, it states that the ECB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources. There are four decision-making bodies of the ECB that are mandated to undertake the objectives of the institution. These bodies include the Governing Council, Executive Board, the General Council, and the Supervisory Board.

The primary responsibility of the ECB, linked to its mandate of price stability, is formulating monetary policy. Monetary policy decision meetings are held every six weeks, and the ECB is transparent about the reasoning behind the resulting policy announcements. It holds a press conference after each monetary policy meeting, and later publishes the meeting minutes.

nicvosOrganisation chart of the ECB