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THE EUROPEAN CENTRAL BANK – TASKS OF THE ESCB AND EURO SYSTEM

The tasks of the ESCB and of the Euro system are laid down in the Treaty establishing the European Community. They are specified in the Statute of the European System of Central Banks (ESCB) and of the European Central Bank (ECB). The Statute is a protocol attached to the Treaty. The Treaty text refers to the ‘ESCB’ rather than to the ‘Euro system’. It was drawn up on the premise that eventually all EU Member States will adopt the euro. Until then, the Euro system will carry out the tasks.

Objectives

“The primary objective of the ESCB shall be to maintain price stability”.

And: “without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2.” (Treaty article 105.1)

The objectives of the Union (Article 2 of the Treaty on European Union) are a high level of employment and sustainable and non-inflationary growth.

Basic tasks

According to the Treaty establishing the European Community (Article 105.2), the basic tasks are:

  • the definition and implementation of monetary policy for the euro area;
  • the conduct of foreign exchange operations;
  • the holding and management of the official foreign reserves of the euro area countries (portfolio management)
  • the promotion of the smooth operation of payment systems

Further tasks

  • Banknotes: the ECB has the exclusive right to authorise the issuance of banknotes within the euro area.
  • Statistics: in cooperation with the NCBs, the ECB collects statistical information necessary for fulfilling the tasks, either from national authorities or directly from economic agents.
  • Financial stability & supervision: The Euro system contributes to the smooth conduct of policies pursued by the authorities in charge related to the prudential supervision of credit institutions and the stability of the financial system.
  • International and European cooperation: the ECB maintains working relations with relevant institutions, bodies and for both within the EU and internationally in respect of tasks entrusted to the Euro system.

Political independence

The independence of the ECB is conducive to maintaining price stability. Theoretical analysis and empirical evidence show this. The ECB’s independence is laid down in the institutional framework for the single monetary policy (in the Treaty and in the Statute).

Practical implications

Neither the ECB nor the national central banks (NCBs), nor any member of their decision-making bodies, are allowed to seek or take instructions from European Community institutions or bodies, from any government of an EU Member State or from any other body.

Community institutions and bodies and the governments of the Member States must respect this principle and not seek to influence the members of the decision-making bodies of the ECB (Article 108 of the Treaty).

Other provisions

The ECB’s financial arrangements are kept separate from those of the European Community. The ECB has its own budget. Its capital is subscribed and paid up by the euro area NCBs.

The Statute foresees long terms of office for the members of the Governing Council. Members of the Executive Board cannot be re-appointed.

Governors of NCBs and members of the Executive Board have security of tenure:

  • a minimum term of office for NCB governors of five years;
  • a non-renewable term of office of eight years for members of the Executive Board of the ECB;
  • removal of either from office only in the event of incapacity or serious misconduct;
  • the Court of Justice of the European Communities is competent to settle any disputes.

The Euro system is prohibited from granting loans to Community bodies or national public sector entities. This further shields it from any influence exercised by public authorities.

The Euro system is functionally independent. The ECB has at its disposal all instruments and competencies necessary for the conduct of an efficient monetary policy and is authorised to decide autonomously how and when to use them.

The ECB has the right to adopt binding regulations to the extent necessary to carry out the tasks of the ESCB and in certain other cases as laid down in specific acts of the EU Council.

Transparency Definition

Transparency means that the central bank provides the general public and the markets with all relevant information on its strategy, assessments and policy decisions as well as its procedures in an open, clear and timely manner.

Today, most central banks, including the ECB, consider transparency as crucial. This is true especially for their monetary policy framework. The ECB gives a high priority to communicating effectively with the public.

Transparency of the ECB’s monetary policy

Transparency helps the public to understand the ECB’s monetary policy. Better public understanding makes the policy more credible and effective. Transparency means that the ECB explains how it interprets its mandate and that it is forthcoming about its policy goals.

Credible

The ECB fosters credibility by being clear about its mandate and how it performs its tasks. When the ECB is perceived as being able and willing to achieve its policy mandate, price expectations are well anchored. Regular communication about a central bank’s assessment of the economic situation is particularly useful. It is also helpful for central banks to be open and realistic about what monetary policy can do and, even more importantly, what it cannot do.

Self-disciplined

A strong commitment to transparency imposes self-discipline on policymakers. It ensures that their policy decisions and explanations are consistent over time. Facilitating public scrutiny of monetary policy actions enhances the incentives for the decision-making bodies to fulfil their mandates in the best possible manner.

Predictable

The ECB publicly announces its monetary policy strategy and communicates its regular assessment of economic developments. This helps the markets to understand the systematic response pattern of monetary policy to economic developments and shocks. It makes policy moves more predictable for the markets over the medium term. Market expectations can thus be formed more efficiently and accurately.

If market agents can broadly anticipate policy responses, this allows a rapid implementation of changes in monetary policy into financial variables. This in turn can shorten the process by which monetary policy is transmitted into investment and consumption decisions. It can accelerate any necessary economic adjustments and potentially enhance the effectiveness of monetary policy.

Accountability Reporting obligations

To retain legitimacy, an independent central bank must be accountable to democratic institutions and the general public for its actions in the pursuit of its mandate. The ECB has precise reporting obligations. These are laid down in Article 15 of its Statute.

According to the Statute, the ECB is required to publish quarterly reports on the activities of the Euro system as well as a consolidated Weekly Financial Statement. In addition, it has to produce an Annual Report on its activities and on the monetary policy of the previous and the current year. The Annual Report has to be addressed to the European Parliament, the EU Council, the European Commission and the European Council. To fulfil the requirements of the Statute, the ECB publishes:

  • a Monthly Bulletin (in addition to a quarterly one),
  • a consolidated Weekly Financial Statement
  • Annual Reports

Besides that, the ECB produces a range of other task-related publications.

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