Understanding the European Central Bank's Role

The European Central Bank

The European Central Bank (ECB) was established on June 1, 1998, as an organ of the European Union's monetary policy sector and shift system. Headquartered in Frankfurt, its primary function is to maintain the purchasing power of the single currency and ensure price stability within the euro area.

Bodies of Government

Executive Committee

Implements monetary policy as defined by the Governing Council, working with national central banks.

Governing Council

The highest decision-making body for the ECB's monetary policy. It defines policy for the euro area.

General Council

Undertakes consultation and coordination tasks, particularly concerning the future expansion of the euro area.

Specific Functions

• Formulates the policies of the Eurosystem.
• Decides, coordinates, and oversees monetary policy operations.
• Adopts legal acts related to the issuance of euro banknotes.
• Authorizes the issuance of euro banknotes.
• Manages the Eurosystem's involvement in payment systems.
• Cooperates with European and international institutions.
• Monitors and reports on financial risks.
• Provides advice to EU institutions and national authorities.

Monetary Policy

Monetary policy refers to the set of measures used by economic authorities to manage changes in the money supply or the price of money (interest rate) to achieve specific macroeconomic objectives.

Inflation

Inflation is the general and continuous increase in prices over time. Causes include an increase in the money supply, leading to greater demand, or rising costs of production factors (raw materials, energy, wages). Persistent low prices are referred to as deflation.

Types of Inflation

• Moderate Inflation: Characterized by slowly increasing prices. When prices are relatively stable, people may be hesitant to spend, preferring to keep their money in bank accounts, which offer low yields, thus preserving their money's value over short periods.
• Hyperinflation: Describes when prices increase at two or three-digit rates, such as 30%, 120%, or 240% annually. Runaway inflation often signals significant economic changes, with contracts sometimes linked to price indexes or foreign currencies like the dollar.
• Hyperinflation (Abnormal Excess): An extreme form of inflation, potentially reaching 1000% per annum. This indicates a severe economic crisis, as money rapidly loses its value and purchasing power declines. People tend to spend money quickly to avoid total loss of value.
• Stagflation: A combination of inflation and economic recession.
• Deflation: A general fall in prices, often caused by a lack of demand.