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LeoGlossary: European Central Bank (ECB)

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The European Central Bank (ECB) is responsible for managing the euro along with implementing European Union economic and monetary policy. Like most central banks, it seeks to keep prices stable, thereby supporting economic growth and job creation.

It covers the 19 nations that adopted the euro as their currency.

The ECB Governing Board is responsible for making the monetary policy for the EU. It also:

  • administers the foreign exchange reserves of EU member states
  • engages in foreign exchange operations
  • defines the intermediate monetary objectives and key interest rate of the EU

Carrying out theses tasks is the ECB Executive Board. This body enforces the policies and decisions of the Governing Council, and may direct the national central banks when doing so.

The ECB is the sole issuer of euro banknotes. While the individual states can mint euro coins, this has to be approved by the central bank.

History

The ECB replaced the European Monetary Institute (EMI). This was done through the Treaty of the European Union on June 1, 1998. The central bank did not take full control until January 1, 1999, with the introduction of the euro.

This was the final stage of the Economic and Monetary Union which phased into the European Union. It was designed 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).

Single Mandate

The Federal Reserve along with many other central banks operate under a dual mandate. They seek price stability as well as full employment. The ECB is different in that it only has a single mandate: price stability. Anything to do with jobs is a secondary focus.

According to Article 127(1) of the Treaty on the Functioning of the European Union, is to maintain price stability within the Eurozone. This does not specify how the bank is to get there, giving it some flexibility in this matter.

Over the years, the mandate focused upon 2% inflation. This has gone through different iterations as the ECB had issues with it. For many years, the rate was below the intended target. Since COVID-19, like the rest of the world, the rate far exceeded this level.

In July 2021, ECB President Christine Lagarde abandoned the "below but close to two percent" definition and adopted instead a 2% symmetric target.

Organization

The ECB decision making bodies:

  • The Executive Board,
  • The Governing Council,
  • The General Council
  • The Supervisory Board.

Monetary Policy Tools

The default for all lending at this level is collateralized. The goal is to only deal in high quality securities, mostly public debt. There is some private collateral that will be accepted.

General:

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