European Central Bank

The European Central Bank (ECB), based in Frankfurt am Main, is an institution of the European Union. It is the common monetary authority of the Member States of the European Monetary Union, established in 1998, and together with the national central banks (NCBs) of the EU Member States forms the European System of Central Banks (ESCB).

The ECB's work and tasks were first defined in the Maastricht Treaty in 1992; since the Lisbon Treaty in 2007 it has formally had the status of an EU institution (Article 13 of the EU Treaty). The main provisions governing its functioning are set out in Article 282 et seq. of the Treaty on European Union. TFEU; its Statute is annexed to the Treaty as Protocol No. 4. In November 2014, the ECB was additionally entrusted with the supervision of systemically important banks in the euro area under the Single Supervisory Mechanism (SSM). The ECB is a supranational institution with its own legal personality.

From 1998 to 2014, the Frankfurt Eurotower was the headquarters of the European Central Bank. In November 2014, the headquarters were moved to the new building of the European Central Bank. This was opened on 18 March 2015 amid protests accompanied by severe riots after four years of construction in Frankfurt's Ostend district.

Background

A central bank is an institution responsible for supervising the banking system and regulating the money supply in an economy. In the euro area, the European Central Bank (ECB) performs these tasks. As part of European unification, some countries decided to introduce a common currency, the euro. When the single currency was created, it was also necessary to create the conditions for a common monetary policy. For this purpose, the European System of Central Banks (ESCB) was founded. This system comprises the old national central banks (NCBs) of all EU states and the newly founded European Central Bank. Since not all EU states participate in monetary union, there is also the Eurosystem in addition to the ESCB, in which, apart from the ECB, only the NCBs of the states of the Eurozone in which the euro has actually been introduced participate. The bulk of the ESCB's tasks are performed by the ECB. Its main objective is price level stability. To the extent possible without prejudice to this objective, the ESCB supports the general economic policies in the European Union.

Tasks and goals

Since a central bank is no ordinary bank but has to conduct the monetary policy of a country, it is supposed to pursue two important objectives. The first objective, usually also the main objective, is price level stability. The aim is to avoid large fluctuations in the value of money. The target value is inflation (inflation rate). The second objective of a central bank is to achieve a balanced economic development of the respective country. This important secondary objective of monetary policy has the purpose of avoiding a recession. Economic development is measured by the capacity utilization of an economy. Central banks pursue these objectives by raising or lowering the price of money lent (changing the key interest rate), i.e. by influencing the economy. In this way, a central bank can influence both inflation and economic development.

The objectives and tasks of the ESCB and of its principal institution, the ECB, were laid down in the Treaty establishing the European Community. They are set out in detail in the Statute of the European System of Central Banks (ESCB) and of the European Central Bank (ECB), which is annexed to the Treaty on the Functioning of the European Union as Protocol No 4. The primary objective is to maintain price level stability in the euro area, specified as a year-on-year increase in the harmonised index of consumer prices (HICP) for the euro area of below, but close to, two percent. A further objective is to support economic policies in the European Community with a view to achieving a high level of employment and sustainable growth, insofar as this can be achieved without jeopardising price stability.

The basic tasks are set out in Article 127(2) of the TFEU:

• The formulation and conduct of monetary policy (see "Monetary policy instruments"),
• Execution of foreign exchange transactions,
• Management of the official foreign reserves of the Member States (portfolio management),
• Supply of money to the national economy, in particular the promotion of smooth payment transactions.

The ECB also has other tasks:

• Authorisation of the issue of euro paper money - the issue itself is carried out by the national central banks,
• Supervision of credit institutions and contribution to financial stability,
• Advice to the Community and national authorities, cooperation with other international and European bodies,
• collecting the statistical data necessary for the performance of its tasks,
• Preparation of a central bank balance sheet.