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The European Central Bank (ECB) (also in other languages) is one of the world's largest central banks, being in charge of monetary policy for the 12 member countries of the Eurozone. The ECB was established on June 1, 1998. The headquarters are located in Frankfurt am Main, Germany.
Structure and organisation The organisation of the ECB is modelled on that of the German Bundesbank and Landesbanken. The ECB is governed by a board of directors, headed by a President, and a board of governors, consisting of the members of the board of directors and representatives of the local central banks within the European System of Central Banks (ESCB). Executive Board of Directors The Executive Board consists of six members which are elaborating the strategies for the bank's policy. Four of these six seats are reserved for the Eurozone's four big central banks of France, Germany, Italy and Spain. President of the European Central Bank In 1999 Wim Duisenberg, the former president of De Nederlandsche Bank, and former finance minister of the Netherlands became the first president of the ECB. In November 2003 Jean-Claude Trichet followed and is still president today. European System of Central Banks The European System of Central Banks (ESCB) is comprised of the European Central Bank (ECB), and the local central banks of the 25 member-states of the European Union. Only governors from national banks inside the eurozone take part and are responsible for the decision-making process. Goals and instruments The ECB holds reserves of over €4.0 billion of which just over 30% are gold reserves of the Bundesbank and around 20% from the Banque de France. The goal of the ECB is to provide liquidity to the banking system while keeping the inflation low. It has three tools for this purpose: Each of these tools works with a different interest rate. At October 2006 they are 3.25% for the refinancing operations, 2.25% for deposits and 4.25% for lending. Objectives The primary objective of the ECB, and the wider ESCB, is "to maintain price stability" within the euro area, i.e., to keep inflation low. The present target is to keep inflation below, but close to, 2%. In addition, and without prejudice to the objective of price stability, the bank has to support the economic policies of the European Union. These are designed to foster a high level of employment and sustainable and non-inflationary growth under Article 2 of the Maastricht Treaty - formally known as the Treaty of Europe. Tasks The major task of the ECB is to maintain a monetary policy for the euro area in pursuit of the objectives set out above. The current monetary policy is published on the ECB website. In addition, according to article 105.2 of the Treaty of Rome which established the European Community, the other basic tasks are: The following are described by the ECB as 'further tasks': Criticism of the ECB
Independence Critics focus on the independence of the institution. The ECB was established as a central bank designed to operate independently of political intervention. Its objectives and powers were politically established, but the decisions as to how those powers should best be used to achieve the objectives were left in the hands of the ECB itself. However, as many national banks in the EU are outside the eurozone and independent (the Danmarks Nationalbank or the Bank of England for instance), this argument could also apply to them. Some see this independence as undemocratic and therefore criticise the decision making process and objectives of the ECB, asserting that the economic goals of the ECB are hard-wired to be secretive and independent from most citizens of the European Union, and to be isolated from feedback mechanisms regarding the influence of the money economy on human rights violations or the natural environment. The ECB does not publish or invite comments on its proposed decisions. After publication of its actions and decisions, ECB web pages do not solicit direct comments by citizens. It is thought that details of internal meetings are not made public in order not to reveal internal splits in the board of governors. European citizens may influence the policy decisions of the ECB very indirectly via the formal, national democratic electoral process. However, even if changes in economic assumptions are expressed via formal democratic means, elected politicians have very little power to transmit these changes to the ECB. Still, the ECB is accountable to the European Parliament and the council of ministers. It appoints the ECB president and vice-president and other members of the ECB's executive board. The nominees must be approved by Parliament first, and then by the council of ministers before they can assume their roles in the institution. Also, it is required by law for the ECB president to present an annual report to the plenary sitting of Parliament. Furthermore, the ECB president and other members of the executive board are present in the Parliament's monetary affairs committee who meet regularly. These meetings take place four times a year, but can be more frequent if any side would want to. It is important to add that it is generally accepted by economists that the independence of the Central Bank is the best way to avoid selfish manipulation of the macroeconomy for political purposes. Inflation targets Some critics feel that the objectives given to the ECB are inappropriate. The ECB sets interest rates in order to control inflation, but does not take into account objectives such as employment and exchange rate stability. Some feel this as a too narrow set of objectives, leading to decisions on interest rate that are inappropriate given the wider needs of the economy. Many British economists have stated that the ECB should adopt a symmetrical target rate, much like the one that the Bank of England follows. The unusually low interest rates set by the ECB have been criticized as being inappropriate for regions of Europe with property bubbles. These low interest rates are a factor of the Irish Property Bubble. Although it must be said that it has an economic reason, to avoid recession in many important countries of the eurozone (France, Germany and Italy mainly) that would slow the growth of the rest of the European countries. Diluted buying power Money can indeed only maintain its buying power when an increase in the money supply is matched by an equivalent increase of the supply of real goods and services. Central Banks often set interest rates at artificially low levels supposedly to stimulate growth. These low interest rates cause demand for loans to increase excessively and the money supply to expand at a faster rate than the real economy. This results in fast growing amounts of money chasing slowly growing quantities of goods causing the price levels to rise. Inflationary money such as bankers create from thin air obviously does not increase the real buying power of a country, as their increase of the money supply is not accompanied by an increase of real goods or services. The nominal buying power such money provides to borrowers is merely diluted buying power, diluted from the real buying power of someone else. It is indeed buying power stealthy robbed from people having earned theirs through hard labour or in exchange for real goods and services. Obviously the stealthy devaluation of peoples' labour and savings progressively discourages the producers of real wealth. Eventually they tend to reduce their productive contribution, resulting in slowdown of growth; just the opposite easy money was supposed to do. So contrary popular belief and to bankers' claims, excessive money supply can never cause real growth, but merely creates a nominal illusion of progress. In the end real wealth can only be increased through increasing the availability of real goods and services, and the only way to increase production of tangible services and commodities is by working more or by producing more efficiently. Efficiency can only be improved to a substantial extend through investment in better machines, superior techniques or improved infrastructure. So a policy aiming real growth must therefor promote saving and investment, and certainly should not stimulate consumption. Easy money does the opposite: it promotes consumption, discourages saving, investment and productive contribution, in the long run all slowing down real growth; exactly the opposite it was set up to do. Inflation and diverted resources Artificially low interest rates merely enlarge borrowing margins. They do not increase earnings or possession. This easy access to loans therefor merely creates an illusion of wealth tempting borrowers into unsustainable debt. It is this illusion which temporarily causes an artificial excess of demand over supply, temporarily making everything saleable. Expensive consumer goods suddenly appear affordable. Outdated real estate turn into desirable investment objects, and so do unprofitable business projects whose life-cycle has since long gone by. Low interest rates and excessive money supply consequently cause asset prices tot rise unreasonably. As a consequence ever more buying power gets immobilised for far too long in outdated and low-return projects or in shares of outdated businesses. By doing so, easy money policy is diverting resources from productive investment, ultimately slowing down technological evolution, productivity gains and progress. Real estate in the end gets so expensive that house rent absorbs much of people's earnings, and acquiring a family house engages lifetime savings. The most devastating effect of easy-money however is that by penalising saving, it stimulates over-consumption, and slows down capital formation; ultimately the indispensable resource of all technological progress. ( Other languages The bank is known by various names across Europe: With Bulgaria and Romania acceding and Irish becoming an official EU language on 1 January 2007, it should also be known, as: Trivia The current ECB building in Downtown Frankfurt is only its temporary home. The ECB ran a large international architecture competition in 1999 for a new tower in Frankfurt, Eastend. At present the winning design scheme of Vienna based architects Coop Himmelbau is under construction. (Winning design by Coop Himmelb(l)au for the ECB's new headquarters in Frankfurt/Main) On January 5 2003, a man stole a small motor glider and flew it over downtown Frankfurt, circling skyscrapers and threatening to crash into the ECB. He landed safely after about two hours and was arrested. The man, a 31-year-old mentally disturbed German student named Franz Strambach, told a television station he wanted to call attention to Judith Resnik, a U.S. astronaut killed in the 1986 Space Shuttle Challenger disaster. See also | |||||||||||||||||||||||||||||||||||||||||
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