European Central Bank: Monetary Policy and Structure

The European Central Bank and Monetary Policy

Institutional Organization

• The European Central Bank (ECB) and the European System of Central Banks (ESCB) were created on January 1, 1998, under the Treaty establishing the European Community and the Statute annexed to the Treaty.
• The ESCB comprises the ECB and the national central banks (NCBs) of all Member States of the European Union (EU).
• The NCBs of EU members that have not adopted the euro are part of the ESCB but do not participate in making monetary policy decisions regarding the euro area or in the execution of those decisions.
• For this reason, the term "Eurosystem" has been adopted to describe the mechanism by which the ECB and the NCBs of participating Member States play the roles of the ESCB in the Eurozone.

Objective of the Single Monetary Policy in the Eurosystem

• The main objective of the ESCB is to maintain price stability. Without prejudice to this objective, it supports the general economic policies of the Community to contribute to achieving the objectives set in the Treaty, most notably a high level of employment, sustainable non-inflationary growth, and a high degree of competitiveness and convergence of economic performance.
• The basic tasks conducted within the Eurosystem are:
  • Define and implement monetary policy in the euro area.
  • Conduct foreign exchange operations.
  • Hold and manage the official foreign reserves of the Member States.
  • Promote the smooth operation of payment systems.
• The ECB has the exclusive right to authorize the issuance of banknotes within the euro area.

Bodies of the ECB

• The ECB's governing bodies, responsible for the formulation and implementation of the single monetary policy, are the Governing Council and the Executive Committee.
• The Governing Council is composed of the six members of the Executive Committee and the governors of the NCBs of the euro area. Both the General Council and the Executive Committee are chaired by the President of the ECB.
• The responsibilities of the Governing Council are:
  • Adopt guidelines and decisions necessary to ensure the performance of the functions entrusted to the Eurosystem.
  • Formulate monetary policy in the euro area.