Teacher's booklet - the Generation ?uro Students' Award

Annex
INtroduction to
central banking
and monetary policy
within the Euro area
This annex 2 provides a brief overview of the European
System of Central Banks (ESCB), the Eurosystem and an
introduction to the monetary policy of the ECB. More
detailed information to help you prepare your students for
the competition is available in the section entitled “About
the Eurosystem” on the Generation €uro website.
The European System of Central Banks,
the Eurosystem and the euro area
Since 1 January 1999 the ECB has been responsible for
conducting monetary policy for the euro area – the world’s
largest economy after the United States. The euro area
consists of the 17 countries in the European Union that use
the euro. It came into being when responsibility for
monetary policy was transferred from the national central
banks of the (then) 11 countries to the Governing Council
of the European Central Bank (ECB) in January 1999. Greece
joined in 2001, Slovenia in 2007, Cyprus and Malta in 2008,
Slovakia in 2009 and Estonia in 2011. The launch of the
euro area and the creation of the ECB were milestones in
the ongoing process of European integration. To join the
euro area, all 17 countries had to fulfil the convergence
criteria, as will other EU Member States prior to adopting
the euro. The criteria set out the economic and legal
preconditions for countries to participate successfully in
Economic and Monetary Union.
The legal basis for the single monetary policy is the Treaty
on the Functioning of the European Union and the Statute
of the European System of Central Banks (ESCB) and of the
European Central Bank. The ECB was established as the
core of the Eurosystem and the ESCB. The ECB and the
national central banks (NCBs) together perform the tasks
that they have been assigned.
The ESCB comprises the ECB and the NCBs of all EU Member
States, irrespective of whether they have adopted the euro
or not. The Eurosystem comprises the ECB and the NCBs of
those EU Member States whose currency is the euro.
The Eurosystem and the ESCB will coexist for as long as there
are EU Member States outside the euro area.
European Central Bank
The ECB is the central bank for Europe’s single currency,
the euro.
Objectives
According to the Treaty, the main objective of the ESCB
is to maintain price stability. Without prejudice to this
objective, the ESCB should support the general economic
policies in the EU, such as full employment and sustainable
development.
The objective of monetary policy
according to the Treaty
The Treaty establishes a clear hierarchy of objectives for the
Eurosystem, assigning overriding importance to price
stability. It also makes clear that ensuring price stability is the
most important contribution that monetary policy can
make to achieving a favourable economic environment and
full employment.
These Treaty provisions reflect the broad consensus that the
benefits of price stability are substantial. Maintaining stable
prices on a sustained basis is a crucial precondition for
increasing economic welfare and the growth potential of an
economy; the natural role of monetary policy in an economy
is to maintain price stability. Monetary policy can affect real
economic activity in the shorter term, but ultimately can
only influence the price level in an economy.
The Treaty provisions also imply that, in the actual
implementation of monetary policy decisions aimed at
maintaining price stability, the Eurosystem should also take
into account the broader economic goals of the EU. In
particular, given that monetary policy can affect real activity
in the shorter term, the ECB typically should avoid generating
excessive fluctuations in output and employment if this is in
line with the pursuit of its primary objective.
Basic tasks
According to the Treaty the basic tasks to be carried out
through the ESCB are:
■■
to define and implement the monetary policy of the
Union;
■■
to conduct foreign-exchange operations;
■■
to hold and manage the official foreign reserves of the
euro area countries;
■■
to promote the smooth operation of payment systems.
Further ESCB tasks
The ESCB is also responsible for a number of additional tasks
in the following fields.
■■
Banknotes: the ECB and the NCBs are responsible for
issuing euro banknotes in the Eurosystem.
■■
Statistics: in cooperation with the NCBs, the ECB collects
the statistical information it needs to fulfil its tasks, either
from national authorities or directly from economic
agents.
■■
Financial stability and supervision: the ESCB contributes
to the smooth conduct of policies pursued by the
relevant authorities in matters relating to the prudential
supervision of credit institutions and the stability of the
financial system.
■■
International and European cooperation: the ECB
maintains working relations with relevant institutions,
bodies and forums both within the EU and
internationally in respect of tasks assigned to the ESCB.
The ECB’s Governing Council
The Governing Council is the main decision-making body of
the ECB. It consists of:
■■
the six members of the Executive Board;
■■
the governors of the NCBs of those Member States
whose currency is the euro.
Its responsibilities include:
■■
adopting the regulations and taking the decisions
necessary to ensure the performance of the tasks
assigned to the ESCB;
■■
formulating monetary policy for the euro area. This
includes taking decisions relating to monetary
objectives, key interest rates and the supply of reserves
in the Eurosystem, and establishing guidelines for the
implementation of those decisions.
Meetings and decisions of the ECB’s
Governing Council
The Governing Council usually meets twice a month at the
Eurotower in Frankfurt am Main, Germany. At its first meeting
of each month, the Governing Council assesses economic
and monetary developments and takes its monthly
monetary policy decision. At its second meeting, it mainly
discusses issues related to the other tasks and responsibilities
of the ECB and the Eurosystem.
Although the minutes of the meetings are not published,
the monetary policy decision is explained in detail at a press
conference held shortly after the first meeting of each
month. The President, assisted by the Vice-President, chairs
the press conference, which is divided into two parts:
the President first reads out the Introductory Statement,
which provides the rationale for the monetary policy
decision taken by the Governing Council and then answers
the journalists’ questions.
2
This chapter is based on information available on the ECB’s website
(www.ecb.europa.eu).
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