Der Europäische Zentral Bank

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ESCB (European System of Central Banks)

• Like the US Federal reserve system, the central banks of the individual euro member states will have the responsibility to implement the policy set by the ECB, but not have any power over interest & exchange rates
• This co-ordination of Central Banks is the method by which the euro has absolute credibility in the transition process, as the individual member currencies are merely non-decimal denominations of the euro itself
• In order to defend the fixed parity of the currencies from 1999-2002 the ESCB can convert between currencies at the fixed exchange rates at an infinite rate
• all Central Banks of EU Member States are members of the ESCB
• further information from the ECB

A common currency

• 1/1/1999 stage 3 of EMU – exchange rates fixed & euro launched, all new public debt issued in euro
• ECB controls exchange rate & monetary policy
• Legal status of old currencies is just non-decimal sub-divisions of the euro

Fixed exchange rates

• Within the Eurozone, but European Commission controls devaluations with external currencies, so this could undermine the ECB’s independence (cheap € could increase inflation within the Eurozone)

A central bank for all members of the Eurozone

The European Central Bank in Frankfurt, I took this photo in August 2001.

ECB objectives & aims as set out in The Maastricht Treaty

• price stability, and has shown its intention to be very hard-nosed about inflation
• price stability = Harmonised Index of Consumer Prices (HICP) < 2%
• aim is 2% inflation with 4.5% growth
• ‘support of the general policies of the EU as long as this can be done without prejudice to the price stability objective’

ECB Independence

• independent central banks keep inflation lower than government controlled ones (short-sighted politicians) in the LR this is beneficial for growth & low unemployment
• inflation target 2% which matches likely growth
• no bailouts of national debts

Lack of accountability?

• change to ECB strict anti-inflationary statutes requires a unanimous decision – difficult – but increases credibility
• ECB may not pay enough attention to Short Run output stabilisation

A common monetary policy

• MV=PY
• ECB uses interest rates to indirectly influence inflation
• 
• increased interest rates increase velocity
• May not be enough data on a EU-wide NAIRU
• EU-wide price index has just started
• Velocity is hard to measure with credit cards etc.
• Money stock may take weeks to calculate & is only an intermediate measure, real target is inflation
• ECB’s target is the inflation rate, its measure of price stability
• EMU will increase integration and thereby the suitability of a common interest rate
• United States has a common monetary policy over economically very varied States

Quick Links

The Official Website of the ECB

The euro pages of the ECB

Pictures of the euro banknotes and coins