Understanding Monetary Policy in the Eurozone: ECB & Eurosystem
Monetary Policy in the Eurozone
Monetary policy is unique for all states members of the Economic and Monetary Union (EMU) and is defined and managed by the European System of Central Banks (ESCB), which includes the European Central Bank (ECB) and the central banks of EU Member States. The main objective of monetary policy is to ensure price stability in the EMU as a means of achieving credibility and stability of the single currency.
In developing the Monetary Act, the ESCB operates independently of any political power, both national governments and European institutions.
The European System of Central Banks (ESCB)
The ESCB comprises the ECB and national central banks of all EU countries. Its primary objective is maintaining price stability in the Eurozone. Its functions include:
- Defining and implementing monetary policy in the EU.
- Holding and managing the official foreign reserves of the Member States.
- Promoting the smooth operation of payment systems.
- Conducting foreign exchange operations.
The Eurosystem
The Eurosystem is the monetary authority of the Eurozone. The institution comprises the European Central Bank and national central banks of states of the European Union whose currency is the Euro.
The Eurosystem was established because not all member states of the European Union adopted the Euro.
For a state to be admitted into the Eurozone, and therefore participate in the Eurosystem, it must meet the convergence criteria laid down by the European Community Treaty.
The Organs of the ECB
The Governing Council
It is the supreme governing body of the ECB and is composed of all Executive Committee members and the governors of national central banks of countries that have adopted the euro.
Its main responsibilities are:
- Adopting the guidelines and decisions necessary to ensure compliance with the tasks entrusted to the ESCB.
- Formulating monetary policy in the euro area: decisions relating to intermediate monetary objectives, key interest rates and providing liquidity to the Eurosystem, and establishing the necessary guidelines for compliance.
The Governing Council meets every two weeks at the ECB headquarters in Frankfurt. Twice a year, meetings are held in a country outside the euro area.
The Executive Committee
It comprises the president and vice president of the ECB, along with four other members who have been appointed by common accord of the governments of the participating Member States.
Its main functions are:
- Preparing the meetings of the Governing Council.
- Implementing monetary policy in accordance with decisions taken by the Governing Council and in so doing, provide necessary instructions to national central banks of the Eurosystem.
- Managing the business of the ECB.
- Assuming certain powers delegated by the Governing Council, including some of a regulatory nature.
The Executive Committee meets at least once a week to decide on the implementation of monetary policy, prepare meetings of the Governing Council, and resolve the internal affairs of the ECB.
The General Council
It comprises the President, Vice President of the ECB, and all the governors of national central banks of the ESCB.
The General Council is responsible for those tasks performed by the European Monetary Institute (EMI), for example, reporting on progress made towards convergence by Member States not participating and advising on the necessary preparations for irrevocably fixing exchange rates of their currencies.
In addition, the General Council contributes to certain activities of the ESCB, such as the development of advisory functions and the collection of statistical information.
Convergence criteria: low inflation, sound public accounts.
Feedback System and Reform
Feedback system: Reform of the ECB’s governing council involves 3 groups with 4, 8, and 3 votes respectively.
Problems: The council is too large (21 votes, all participate); vote is secret, emphasizing the national character of the governors and potentially treating them differently according to their country.