In the Eurozone, every member state has its own central bank, but there is also a common central bank called the European Central Bank (ECB) with its headquarters in Frankfurt, Germany. This is the institution responsible for the currency of the European Union, the Euro. This is however not the only responsibility of the ECB. So what does the ECB do then?

The responsibilities of the ECB

As the central bank of the Eurozone and the de facto central bank of the European Union, the ECB carries a lot of responsibility for the European economy and financial markets. The responsibility of the ECB is laid out in article 127(1) of the Treaty of the Functioning of the European Union (TFEU). This is where the mandate of the ECB is given. The mandate is a way of giving the ECB a goal and restricting how it may achieve said goal.

The specific goal, set out in the TFEU, specifies that the central banking system is to maintain price stability, and “support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union as laid down in Article 3 of the Treaty on European Union”. As there is no definition of price stability given, the ECB is free to interpret this how it pleases. In 2021, the ECB decided on a 2% inflation target. This can however be changed if the Governing Council of the ECB so pleases. Another thing to note is that the central bank also has to contribute to the goals of the European Union, as stated in Article 3 of the Treaty on European Union (TEU). In practice, this means that the ECB not only has to ensure price stability and full employment. It also has to factor in things like climate change, equality or social progress. This is unlike the Federal Reserve in the United States, which only has to ensure price stability and full employment.

Being the central bank of the European Union, the ECB naturally also has other responsibilities. The one, most visible to the citizens of the Union, is overseeing the production and flow of the Euro. But the ECB also oversees tasks not so present in everyday life. These are however important f or the European economy. When the ECB oversees and implements measures to ensure financial stability, it means less strain on the family finances. Or when the ECB attempts to support the value of the Euro against foreign currencies, it translates to securing the purchasing power of the internal European market. Another responsibility of the ECB is to serve as an advisory organ, not only to the European Union and its institutions, but also to the central and private banks of Europe. In general, the ECB is responsible for overseeing the fiscal and economic stability of the European Union and the Eurozone.

Where did the ECB originate?

The ECB was originally established in 1998 with the ratification of the Treaty on European Union (TEU). It was to be the central bank, managing the Euro and the economic policy of the Eurozone. The Euro was set to be introduced to the financial markets the following year, as the common currency of the European Union.

Before the ECB, there was the European Monetary Institute (EMI). It was the precursory organ to the ECB, created to help member states with the initial problems and queries that arose with the creation and adoption of the new currency. But one of the first steps to the new currency of the European Union was the introduction of the European System of Central Banks (ESCB). In general, the EMI took a lot of steps to prepare the Union for a common currency. The EU, for example, had to improve the cross-border payment systems and coordinate monetary policy even more closely than what had been done before.

The aforementioned European System of Central Banks, was established around the same time as the ECB. Its purpose was to create a system and forum for the central banks of the Union to discuss and create monetary policy – the member states still retained their own central banks. Unlike the ECB, the ESCB is not limited to the Eurozone, but includes all members of the Union. The objective of the ESCB is to ensure price stability, not just in the Eurozone, but throughout the European Union.

The organisation and governing of the ECB

The organisation of the ECB is a large and complex entity, but there are four main decision-making bodies. They each have their own area of expertise and responsibility, with some only overseeing the Eurosystem and others the Union as a whole. The boards and councils are as follows, in no particular order.

The Executive Board is responsible for implementing and overseeing the monetary policy of the ECB, as defined by the Governing Council. It is also responsible for the day-to-day operation of the ECB. It can also issue decisions to the central banks of the member states, as well as executing powers given to it by the Governing Council. The members of the board include the President and Vice-President of the ECB and an additional four members, all elected by the European Council for eight year non-renewable terms.

The Governing Council is the main decision-making body of the ECB with regard to the Eurosystem. This is where the monetary policy of the Eurozone is made. It decides the objectives of the Eurozone, its interest rates, supply of reserves, and so on. It also presents the general guidelines and framework of the ESCB. The council is composed of the governors of the national central banks of the Eurosystem as well as the members of the executive board. The members do not represent their individual countries, but are expected to make decisions benefitting the Eurozone as a whole. Voting rights in the council rotates between members.

The Supervisory Board is responsible for planning and carrying out the supervisory tasks of the ECB. This could be the supervisory functions of the ECB with regard to the national banks or the institutions of the European Union. The board is, however, not an ultimate decision-making body, as it only proposed decisions to the Governing Council. Its members are made up of a chair, vice-chair, four ECB-members, and representatives from the national supervisors.

The General Council is a transitional body in the sense that it advises on the transition from a national currency to the Euro. It also reports on the convergence of member states towards the adoption of the Euro. Given its function, it will also cease to exist, when all member states have switched to the Euro. It is made up of the President and Vice-President of the ECB and all governors of the European Central Banking System, meaning all EU-member states, also those without the Euro.