The Most Comprehensive Financial Dictionary with over 1000 Financial Terms Explained - Clear and Concise Article Style Description with Practical Examples

What is the European Central Bank (ECB)?

2016-12-02T09:52:50+00:00

The term 'European Central Bank (ECB)' is included in the Banking edition of the Financial Dictionary. It's available on mazon in Kindle or Paperback version. See more details here.

The European Central Bank is responsible for the European Union’s monetary system and for maintaining the euro currency. The EU created this central bank of European central banks in June of 1998. It works alongside the various national banks of the EU member states to come up with unified monetary policy. This policy is intended to help achieve price stability throughout the countries in the EU.

The ECB became responsible for the EU’s monetary police on January 1 of 1999. This was the point in time when the euro currency became adopted by the various EU nations. This landmark event was the culmination of 20 years of steps towards a currency union.

In 1979, eight of the EU nations created the EMS European Monetary System. It effectively fixed the exchange rates between the eight participating nations. By 2002, the ECB had become more entrenched. Twelve EU nations signed on to a common monetary policy and formed the European Economic and Monetary Union that year.

The European Central Bank is independent of political groups in the various institutions of the EU such as the European Commission, European Parliament, and European Council. It handles all EU monetary issues and policies. Maintaining price stability is the first goal of the central bank. It also sets the important interest rates for the Eurozone and area.

Besides creating monetary policy for the Eurozone block, the ECB also engages in foreign exchange, holds reserve currencies, and authorizes euro bank note issues. Euro currency is actually created, printed, and maintained by the European System of Central Banks, also known as the ESCB.

The ECB has become involved in some controversial activities which were beyond the scope of its original role. It has further expanded its mandate in recent years by buying up bonds of financial companies like banks and also sovereign countries whose bonds are not finding enough interested subscribers at competitive low rates.

They have been practicing this quantitative easing and injecting money into euro area economies in an effort to encourage growth and to increase financial liquidity in the banking system. Keeping the interest rates down on sovereign national bonds also improves the budgets and balance sheets of the euro area countries which are struggling. The result of these activities has led to negative real interest rates in Europe.

Individual EU countries collect their own taxes. They also determine their own national budgets. The ECB has nothing to do with these activities. National governments work together at the EU level to come up with uniform rules on public finances. This helps them to cooperate better on policies for employment, growth, and financial stability.

The financial crisis that broke out around the globe in 2008 hit some European countries especially hard. It created a need for the ECB to work closely with the European Commission and the national governments of the EU and Eurozone members in a series of coordinated, sustained actions.

These groups are continuing to strive together to promote employment and growth, keep credit flowing to consumers and businesses at affordable prices, safeguard savings, and to guarantee inter-European financial stability. This has led to the accusation of critics of the European institutions that they only work effective when there are crises, as in a management by crisis style.

Despite these ongoing and best efforts of the ECB and other European institutions, severe imbalances and problems remain in several Eurozone countries. As of 2016, unemployment in Spain still sat at over 25% and Greece teetered on the brink of yet another recession and potential insolvency.

The term 'European Central Bank (ECB)' is included in the Banking edition of the Financial Dictionary. You can get your copy on mazon in Kindle or Paperback version. See more details here.