Sarajevo School of Science and Technology

Subject: Financial Markets

Professor Amir Hadiomeragi
Muli Adela

ECB- ORGANISATION, FUNCTIONS, EUROSYSTEM, CONDUCT

OF MONETARY POLICY
Research Paper

Sarajevo, December 2014

CONTENT
1. INTRODUCTION..........................................................................................................................3
2. ECB- ORGANISATION, FUNCTIONS, EUROSYSTEM, CONDUCT OF MONETARY
POLICY...............................................................................................................................................4
2.1 HISTORY...................................................................................................................................4
2.2 POWERS AND OBJECTIVE..................................................................................................6
2.2.1 OBJECTIVE.............................................................................................................................6
2.2.2 BASIC TASKS.........................................................................................................................7
2.2.3 CONSIDERATION ON ECB'S MONETARY POLICY..........................................................7
2.3 ORGANISATION......................................................................................................................8
2.3.1 THE EXECUTIVE BOARD....................................................................................................8
2.3.2 THE GOVERNING COUNCIL...............................................................................................9
2.3.3 THE GENERAL COUNCIL....................................................................................................9
2.3.4 SHAREHOLDERS...................................................................................................................9
2.4 INDEPENDENCE...................................................................................................................10
2.5 EUROPEAN SOVEREIGN DEBT CRISIS..........................................................................11
2.5.1 NEW SYSTEMS AND TOOLS AS A RESPONSE...............................................................11
2.5.2 CAUSES.................................................................................................................................12
2.5.3 RESPONSE TO THE CRISIS................................................................................................13
2.5.4 POWER AND OBJECTIVES DURING THE EUROPEAN BANKING CRISIS................14
3. CONCLUSION.............................................................................................................................16
4. SOURCES.....................................................................................................................................17

1. INTRODUCTION
The European Central Bank (ECB) is the central bank for the euro and administers monetary
policy of the Eurozone, which consist of 18 EU member states. It is one of the largest currency
areas in the world and one of the world's most important central banks. It is also one of the seven
institutions of the European Union listed on the Treaty on European Union (TEU).
The capital stock of the bank is owned by the central banks of all 28 EU member states. The
Treaty of Amsterdam established the bank in 1998, and it is headquartered in Frankfurt, Germany.
As of 2011 the President of ECB is Mario Draghi, former governor of the Bank of Italy. The bank
occupied the Eurotower while new headquarters were being built. The owners and shareholders of
the European Central Bank are the central banks of the 28 member states of the EU.
The primary objective of the European Central Bank, as mandated in Article 2 of the Statute of
the ECB1 is to maintain price stability within the Eurozone. The basic tasks, as defined in Article 3
of the Statute2, are to define and implement the monetary policy for the Eurozone, to conduct
foreign exchange operations, to take care of the foreign reserves of the European System of Central
Banks and operation of the financial market infrastructure under the TARGET2 payments system
and the technical platform (currently being developed) for settlement of securities in Europe
(TARGET2 Securities). The ECB has, under Article 16 of its Statute 3, the exclusive right to
authorise the issuance of euro banknotes. Member states can issue euro coins, but the amount must
be authorised by the ECB beforehand (upon the introduction of the euro, the ECB also had
exclusive right to issue coins).

1
2
3

Official Journal of the European Union. Protocol (No 4): On the Statute of the European System of Central Banks
and of the European Central Bank. (09 May .2008) page 1
Ibid, page 2
Ibid, page 8

2. ECB- ORGANIZATION, FUNCTIONS, EUROSYSTEM, CONDUCT OF MONETARY

POLICY
The ECB is governed by European law directly, but its set-up resembles that of a corporation in
the sense that the ECB has shareholders and stock capital. Its capital is five billion euro held by the
national central banks of the member states as shareholders. The initial capital allocation key was
determined in 1998 on the basis of the states' population and GDP, but the key is adjustable. Shares
in the ECB are not transferable and cannot be used as collateral

2.1 HISTORY
The European Central Bank is de facto successor of the European Monetary Institute (EMI).4 The
EMI was established at the start of the second stage of the EU's Economic and Monetary Union
(EMU) to handle the transitional issues of states adopting the euro and prepare for the creation of
the ECB and European System of Central Banks (ESCB). The EMI itself took over from the earlier
European Monetary Co-operation Fund (EMCF).5
The ECB formally replaced the EMI on 1 June 1998 by virtue of the Treaty on European Union
(TEU, Treaty of Maastricht), however it did not exercise its full powers until the introduction of the
euro on 1 January 1999, signalling the third stage of EMU. 6 The bank was the final institution
needed for EMU, as outlined by the EMU reports of Pierre Werner and President Jacques Delors. It
was established on 1 June 1998.
The first president of the bank was Wim Duisenberg, the former president of the Dutch Central
Bank and the European Monetary Institute. While Duisenberg had been the head of the EMI (taking
over from Alexandre Lamfalussy of Belgium) just before the ECB came into existence, the French
government wanted Jean-Claude Trichet, former head of the French Central Bank, to be the ECB's
first president. The French argued that since the ECB was to be located in Germany, its president
should be French. This was opposed by the German, Dutch and Belgian governments who saw
Duisenberg as a guarantor of strong euro.7
4
5
6
7

European
Central
Bank.
Economic
and
Monetary
Union
(EMU).
http://www.ecb.europa.eu/ecb/history/emu/html/index.en.html (23.12.2014.)
Knowing the past to build the future. European Central Bank. http://www.cvce.eu/obj/european_central_bank-enfc8d2e17-cbde-4ec8-8f79-46f06c471540.html (23.12.2014.)
European
Central
Bank.
Economic
and
Monetary
Union
(EMU).
http://www.ecb.europa.eu/ecb/history/emu/html/index.en.html (23.12.2014.)
Knowing the past to build the future. The third stage of Economic and Monetary Union.
http://www.cvce.eu/obj/the_third_stage_of_economic_and_monetary_union-en-e2e91dc0-3a6d-49fc-b3f8-

Tensions were abated by a gentleman's agreement in which Duisenberg would stand down before
the end of his mandate, to be replaced by Trichet. Trichet replaced Duisenberg as President in
November 2003.
There had also been tension over the ECB's Executive Board, with the United Kingdom
demanding a seat even though it had not joined the single currency. Under pressure from France,
three seats were assigned to the largest members, France, Germany and Italy; Spain also demanded
and obtained a seat. Despite such a system of appointment the board asserted its independence early
on in resisting calls for interest rates and future candidates to it.8
When the ECB was created, it covered a Eurozone of eleven members. Since then, Greece joined
in January 2001, Slovenia in January 2007, Cyprus and Malta in January 2008, Slovakia in January
2009, Estonia in January 2011 and Latvia in January 2014, enlarging the bank's scope and the
membership of its Governing Council.9
On 1 December 2009, the Treaty of Lisbon entered into force, ECB according to the article 13 of
TEU, gained official status of an EU institution. In September 2011, when German appointee to the
Governing Council and Executive Board, Jrgen Stark, resigned in protest of the ECB's bond
buying programme, Financial Times Deutschland called it the end of ECB as we know it reffering
to its perceived hawkis stance on inflation and its historical Bundesbank influence.10
On 1 November 2011, Mario Draghi replaced Jean-Claude Trichet as President of the ECB. In
April 2011, the ECB raised interest rates for the first time since 2008 from 1% to 1.25%, 11 with a
further increase to 1.50% in July 2011.12 However in 2012-2013 the ECB sharply lowered interest
rates to encourage economic growth, reaching the historically low 0.25% in November 2013. Soon
after the rates were cut to 0.15%, then on 4 September 2014 the central bank reduced the rates by
two thirds from 0.15% to 0.05%, the lowest rates on record. 13 In November 2014, the bank moved
into its new headquarters.
8
9
10
11
12
13

f96fb5f3addb.html (23.12.2014.)
Knowing the past to build the future. The third stage of Economic and Monetary Union.
http://www.cvce.eu/obj/the_third_stage_of_economic_and_monetary_union-en-e2e91dc0-3a6d-49fc-b3f8f96fb5f3addb.html (23.12.2014.)
Knowing the past to build the future. European Central Bank. http://www.cvce.eu/obj/european_central_bank-enfc8d2e17-cbde-4ec8-8f79-46f06c471540.html (23.12.2014.)
Proissl, von Wolfgang. Das ende der EZB, wie wir sie kannten. Kommentar, Financial Times Deutschland, 9
September 2011
Blackstone,
Brian.
ECB
raises
interest
rates.
(7
April
2011)
http://www.wsj.com/articles/SB10001424052748704013604576248374097070658 ( 23 December 2014)
European Central Bank. Key ECB interest rates. http://www.ecb.europa.eu/stats/monetary/rates/html/index.en.html
(23 December 2014)
Europe News.net. Draghi slashes interest rates, unveils bond buying plan. (4 September 2014)
http://www.europenews.net/index.php/sid/225407609 (23 December 2014)

2.2 POWERS AND OBJECTIVES

2.2.1 OBJECTIVE
The primary objective of the European Central Bank, as laid down in Article 127(1) of the Treaty
of the Functioning of the European Union, is to maintain price stability within the Eurozone. The
Governing Council in October 199814 defined price stability as inflation of around 2%, a year-onyear increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%
and added the price stability was to be maintained over the medium term. Unlike for the example
the United States Federal Reserve Bank, the ECB has only one one primary objective, but this
objective has never been defined in statutory law, and the HICP target can be termed ad-hoc.
The Governing Council confirmed this definition in May 2013 following a thorough evaluation
of the ECB's monetary policy strategy. On that occasion, the Governing Council clarified that in
the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the
medium term. All lending to credit institutions must be collateralised as required by Article 18 of
the Statute of the ESCB.15 The Governing Council clarification has little force in law. Without
prejudice to the objective of price stability, the Treaty also states that the ESCB shall support the
general economic policies in the Union with a view to contributing to the achievements of the
objectives of the Union.16

14 Scheller, K. Hanspeter. The European Central Bank history, role and functions: second revised edition. 2006. page
81
15 Ibid, page 87
16 European Central Bank. Tasks: Objective. http://www.ecb.europa.eu/ecb/tasks/html/index.en.html (23 December
2014)

2.2.2 BASIC TASKS

The basic tasks of the ECB are to define and implement the monetary policy for the Eurozone, to
conduct foreign exchange operations, to take care of the foreign reservers of the European Systems
of Central Banks and to promote smooth operation of the financial market infrastructure under the
TARGET2 payments system17 and being currently developed technical platform for settlement of
securities in Europe.
Further tasks, among others, include the exclusive right to authorise the issuance of euro
banknotes. Member states can issue euro coins, but the amount must be authorised by the ECB
beforehand. The ECB shall also collect statistical information to fulfill the tasks of the European
System of Central Banks, and contribute to financial stability and supervision.
2.2.3 CONSIDERATION ON ECB'S MONETARY POLICY
In U.S.-style central banking, the Federal Reserve System purchases Treasury securities in order
to inject liquidity into the economy; the Eurosystem, on the other hand, uses a different method.
There are about 1,500 eligible banks which may bid for short-term repo contracts of two weeks to
three months duration.18
The banks in effect borrow cash and must pay it back; the short durations allow interest rates to
be adjusted continually. When the repo notes come due the participating banks bid again. An
increase in the quantity of notes offered at auction allows an increase in liquidity in the economy. A
decrease has the contrary effect. The contracts are carried on the asset side the European Central
Bank's balance sheet and the resulting deposits in member banks are carried as a liability. In layman
terms, the liability of the central bank is money, and an increase in deposits in member banks,
carried as a liability by the central bank, means that more money has been put into the economy.
To qualify for participation in the auctions, banks must be able to offer proof of appropriate
collateral in the form of loans to other entities. These can be the public dept of member states, but a
fairly wide range of private banking securities are also accepted. The fairly stringent membership
requirements for the European Union, especially with regard to sovereign debt as a percentage of
each member state's gross domestic product, are designed to insure that assets offered to the bank as
collateral are, at least in theory, all equally good, and all equally protected from the risk of
inflation.19
17 Fairlamb David; Rossant, John. The powers of the European Central Bank (12 February 2003)
http://news.bbc.co.uk/2/hi/business/86006.stm (24 December 2013)
18 Cheun, Samuel et al. The collateral frameworks of the Eurosystem, the Federal Reserve System and the Bank of
England and the financial market turmoil. December 2009. page 34
19 Bertaut, Carol C. The European Central Bank and the Eurosystem. New England Economic Review (2nd quarter),
page 26

2.3 ORGANISATION
The ECB has three decision-making bodies, that take all the decisions with the objective of
fulfilling the ECB's mandate:
the Executive Board,
the Governing Council, and
the General Council.

2.3.1 THE EXECUTIVE BOARD

The Executive Board is responsible for the implementation of monetary policy (defined by the
Governing Council) and the day-to-day running of the bank.20 It can issue decisions to national
central banks and may also exercise powers delegated to it by the Governing Council. It is
composed of the President of the Bank (currently Mario Draghi), the Vice-President (currently Vitor
Constncio) and four other members. They are all appointed for non-renewable terms of eight years.
They are appointed from among persons of recognised standing and proffesional experience in
monetary or banking matters by common accord of the governments of the Member States at the
level of Heads of State or Government, on a recommendation from the Council, after it has
consulted the European Parliament and the Governing Council of the ECB. 21 The Executive Board
normally meets every Tuesday.
Jose Manuel Gonzalez-Paramo, a Spanish member of the Executive Board since June 2004, was
due to leave the bord in early June 2012 and no replacement had been named as of late May 2012.
The Spanish nominated Barcelona-born Antonio Sainz de Vicua, an ECB veteran who heads its
legal department, as Gonzalez-Paramo's replacement as early as January 2012 but alternatives from
Luxembourg, Finland, and Slovenia were put forward and no decision made by May. 22After a long
political battle, Luxembourg's Yves Mersch, was appointed at Gonzalez-Paramo's replacement.23

20 European
Central
Bank.
The
Governing
Council.
http://www.ecb.europa.eu/ecb/orga/decisions/govc/html/index.en.html (24 December 2014)
21 Article 11.2 of the ESCB Statute
22 Tag: Jose Manuel Gonzalez-Paramo, Financial Times Money Supply blog entries. (18-23 January 2012)
http://blogs.ft.com/money-supply/tag/jose-manuel-gonzalez-paramo/#axzz1wP9yAdBr (25 December 2014)
23 Neuger, James G.; Bodoni, Stephanie. Mersch named to ECB after longest euro appointment battle. (23 November
2012)
http://www.bloomberg.com/news/2012-11-22/mersch-named-to-ecb-post-after-longest-euro-appointmentbattle.html (25 December 2014)

2.3.2 THE GOVERNING COUNCIL

The Governing Council is the main decision-making body of the Eurosystem. 24 It comprises the
members of the Executive Board (six in total) and the governors of the National Central Banks of
the euro area countries (18 as of 2014). The fact that the Council's minutes are not published has
raised controversy in some financial circles.
2.3.3 THE GENERAL COUNCIL
The General Council is a body dealing with transitional issues of euro adoption, for example,
fixing the exchange rates of currencies being replaced by the euro (continuing the tasks of the
former EMI).25 It will continue to exist until all EU member states adopt the euro, at which point it
will be dissolved. It is composed of the President and vice-president together with the governors of
all of the EU's national central banks.26
2.3.4 SHAREHOLDERS
Although ECB is governed by European law directly and thus not by corporate law applying to
private law companies, its set-up resembles that of a corporation in the sense that the ECB has
shareholders and stock capitals. Its capital is five billion euros which is held by the national central
banks of the member states as shareholders. The initial capital allocation key was determined in
1998 on the basis of the states' population and GDP, but the key is adjustable. Shares in the ECB are
not transferable and cannot be used as collateral.

24 European
Central
Bank.
The
Governing
Council.
http://www.ecb.europa.eu/ecb/educational/facts/orga/html/or_016.en.html (25 December 2014)
25 European
Central
Bank.
The
General
Council.
http://www.ecb.europa.eu/ecb/orga/decisions/genc/html/index.en.html (25 December 2014)
26 Knowing the past to build the future. The origins and development of the European organisations.
http://www.cvce.eu/collections/unit-content/-/unit/en/d5906df5-4f83-4603-85f7-0cabc24b9fe1/ae7780e3-050b4a5e-914e-e1599d6f04dc (26 December 2014)

2.4 INDEPENDENCE
The independence of the ECB is instrumental in maintaining price stability. Not only must the
bank not seek influence, but EU institutions and national governments are bound by the treaties to
respect the ECB's independence. To offer some accountability, the ECB is bound to publish reports
on its activities and has to adrress its annual report to the European Parliament, the European
Commission, the Council of the European Union and the European Council. 27 The European
Parliament also gets to question and then issue its opinion on candidates to the executive bord.
The governors of national central banks represented in the Governing Council of the ECB are
appointed by their national executives, and can be reappointed. In spite of the fact that voting inside
the ECB is secret, there is some evidence pointing in the direction of Governing Council members
voting along national lines.28
The ECB's financial independence means that the ECB has its own budget. Its capital is
subscribed and paid up by the euro area central banks.29
The Eurosystem is functionally independent. Governors of national central banks (NCBs) and
members of the executive board of the ECB have security of tenure:
NCB governors have a minimum term of office of five years.
Members of the Executive Board have a non-renewable term of office of eight years.
Their removal from office can only be in the event of incapacity or grave misconduct.

27 European Central Bank. Accountability. http://www.ecb.europa.eu/ecb/orga/accountability/html/index.en.html (25

December 2014)
28 Heinemann, Friedrich; Huefner, Felix. Is the view from the Eurotower purely European? National divergence and
ECB interest rate policy. Scottish Journal of Political Economy 51(4):544-558, 2004.
29 European Central Bank. Independence. http://www.ecb.europa.eu/ecb/orga/independence/html/index.en.html (25
December 2014)

10

2.5 EUROPEAN SOVEREIGN DEBT CRISIS

From late 2009 a handful of mainly southern eurozone member states (predominantly Greece,
Ireland, Portugal, Cyprus, Spain) started being unable to repay their national government debt or to
finance the bail-out of troubled financial sectors under their national supervision without the
assistance of third parties. This so-called European debt crisis began after Greece's new elected
government stopped masking its true indebtness and budget deficit and openly communicated the
immanent danger of a Greek sovereign default.30
Seeing the sovereign default in the eurozone as a shock, the general public, international and
European institutions, and the financial community started to intensively reassess the economic
situation and credit worthiness of eurozone states. 31 Those eurozone states being assessed as not
financially sustainable enough on their current path, faced waves of credit rating downgradings and
rising borrowing costs including increasing interest rates spreads. As a consequnce, the ability of
these states to borrow new money to further finance their budget deficits or to refinance existing
unsustainable debt levels were strongly reduced.32

2.5.1 NEW SYSTEMS AND TOOLS AS A RESPONSE

Until 2009 there had not been sufficient instruments in place on the eurozone level to prevent or
solve a debt crisis in a member state. Several systems have been put into place since then to fill this
gap:

In 2010, two temporary rescue programs have been started, the European Financial
Stabilisation Mechanism (EFSM) and the European Financial Stability Facility (EFSF).
Together with massive financial support of the International Monetary Fund (IMF), these
facilities have provided funds to Greece, Ireland and Portugal in 2010 and 2011.

In 2012 the European Stability Mechanism (ESM) with a lending capacity of 500 billion,
has been established to replace the previous temporary rescue programs. The ESM is
intended as a permanent firewall for the eurozone to safeguard and provide instant access to
financial assistance programs for member states in financial difficulty. Spaind and Cyprus

30 Matlock, George. Peripheral euro zone government bond spreads widen. (16 February 2010)
http://www.reuters.com/article/2010/02/16/markets-bonds-spreads-idUSLDE61F0W720100216 (25 December
2014)
31 The
Economist.
Europe's
sovereign
debt
crisis:
Acropolis
now.
(29
April
2010)
http://www.economist.com/node/16009099 (25 December 2014)
32 Walker, Bruce. Greek Debt Crisis Worsens. (09 April 2010) http://www.thenewamerican.com/worldnews/europe/item/8553-greek-debt-crisis-worsens (26 December 2014)

11

have drawn funds from the ESM program in 2012 and 2013, with a focus on
recapitalization (bail-out) of their financial sectors.

In 2013, the European Fiscal Compact became valid as a contract that obliges the EU
member states to introduce domestic self-correcting mechanism on member state level to
ensure balanced public budgets and sustainable public debt levels.

In 2014 the Single Supervisory Mechanism (SSM) was introduced. It grants the European
Central Bank (ECB) a supervisory role to monitor the financial stability of banks in the
eurozone states (full members) and other EU states. This supervision intended as a first
step to prevent bank bail-out needs in EU states that could induce or contribute to a debt
crisis in the respective state.

As the introduction of the above-mentioned long-term mechanisms may still not be sufficient and
is only implemented over time during the ongoing debt crisis, the ECB has chosen to play an active
role with its own monetary policy instruments to support the troubled states and their financial
sectors.
2.5.2 CAUSES
The principal monetary policy tool of the European Central Bank is collateralised borrowing or
repo agreements. These tools are also used by the United States Federal Reserved Bank, but the Fed
does more direct purchasing of financial assets than its European counterpart. 33 The collateral used
by the ECB is tipically high quality public and private sector debt.
The criteria for determining high quality for public debt have been preconditions for
membership in the European Union: total debt must not be too large in relation to gross domestic
product, for example, and deficits in any given year must not become too large. 34 Though these
criteria are fairly simple, a number of accounting techniques may hide the underlaying reality of
fiscal solvency- or the lack of same.
In central banking, the privileged status of the central bank is that it can make as much money as
it seems needed.35 In the United States Federal Reserve Bank, the Federal Reserve buys assets:
tipically, bonds issued by the Federal Government. There is no limit on the bonds that it can buy
and one of the tools at its disposal in a financial crisis is take such extraordinary measures as the
33 Federal
Reserve
Bank
of
New
York.
Open
market
operations.
http://www.newyorkfed.org/aboutthefed/fedpoint/fed32.html (26 December 2014)
34 Darvas, Zsolt; Pisani-Ferry, Jean, Sapir, Andre. A comprehensive approach to the euro-area debt crisis. Corvinus
University of Budapest: Budapest, 2011. page 21
35 Bernanke, Ben S. Federal Reserve Policies in the Financial Crisis. (1 December 2008)
http://www.federalreserve.gov/newsevents/speech/bernanke20081201a.htm (26 December 2014)

12

purchase of large amounts of assets such as commercial paper. The purpose of such operations is to
ensure that adequate liquidity is available for functioning of the financial system.
2.5.3 RESPONSE TO THE CRISIS
There are a variety of possible responses to the problem of bad debts in a banking system. One is
to induce debtors to make a greater effort to make good on their debt. With public debt this usually
means getting government to maintain debt payments while cutting back on other forms of
expenditure. Such policies often involve cutting back on popular social programes.36
Stringent policies with regard to social expenditures and employment in the state sector have led
to riots and political protests in Greece. Another response is to shift losses from the central bank to
private investors who are asked to share the pain of partial defaults that take the form of
rescheduling debt payments.37
However, if the debt rescheduling causes losses on loans held by European banks, it weakens the
private banking system, which then puts pressure on the central bank to come to the aid of those
banks. Private-sector bond holders are an integral part of the public and private banking system.
Another possible response is for wealthy member countries to guarantee or purchase the debt of
countries that have defaulted or are likely to default. This alternative requires that the tax revenues
and credit of the wealthy member countries be used to refinance the previous borrowing of the
weaker member countries, and is politically controversial.38

36 Cohen, Sabrina; Meichtry, Stacy. Italy cuts criticised by Unions. (15 August 2011)
http://www.wsj.com/news/articles/SB10001424053111903392904576508253558418390?mg=reno64-wsj&url=http
%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424053111903392904576508253558418390.html
(26
December 2014)
37 The CNN Wire Staff. Greek austerity protests turn ugly as strike begins. (28 June 2011)
http://edition.cnn.com/2011/WORLD/europe/06/28/greece.strike/index.html?_s=PM:WORLD (26 December 2014)
38 Ewing, Jack; Alderman, Liz. Some in Germany want Greece to Temporarily Exit the Euro Zone. (10 August 2011)
http://www.nytimes.com/2011/08/11/business/global/greece-feels-push-toward-euro-exit.html?_r=0 (26 December
2014)

13

2.5.4 POWER AND OBJECTIVES DURING THE EUROPEAN BANKING CRISIS

The European debt crisis has revealed some relative weakness in the sovereign debt of such
member countries as Portugal, Ireland, Greece and Spain. Rescue operation involving sovereign
debt have included temporarily moving bad or weak assets of the balance sheets of the weak
member banks into the balance sheets of the European Central Bank. 39 Such action is viewed as
monetisation and can be seen as an inflationary threat, whereby the strong member countries of the
ECB shoulder the burden of monetary expansion (and potential inflation) to save the week member
countries. Most central bank prefer to move weak assets off their balance sheets with some kind of
agreement as to how the debt will continue to be serviced. This preference has tipically led the ECB
to argue that the weaker member countries must:
1. Allocate considerable national income to servicing debts.
2. Scale back a wide range of national ecpenditures (such as education, infrastructure, and
welfare transfer payments).
The European Central Bank had stepped up the buying of member nations debt. In response to
the crisis of 2010, some proposals have surfaced for a collective European bond issue that would
allow the central bank to purchase a Europan version of US Treasury Bills. 40 To make European
sovereign debt assets more similar to a US Treasury, a collective guarantee of the member states'
solvency would be necessary. But the German government has resisted this proposal, and other
analyses indicated that the sickness of the euro is due to the linkage between sovereign debt and
failing national banking systems. If the European Central Bank were to deal directly with failing
banking systems sovereign debt would not look as a leveraged relative to national income in the
financially weaker member states.41
On 17 December 2010, the ECB announced that it was going to double its capitalisation. 42 The 16
central banks of the member states would transfer assets to the ledger of the ECB.

39 Buite, Willem. Greece and the fiscal crisis in the EMU. NBER, 7 September 2010. page 24
40 Walker,
Marcus.
Closer
Fiscal
Union: A
Collective
Guarantee.
(17
December
2010)
http://www.wsj.com/news/articles/SB10001424052748703395204576023784088914652?mg=reno64-wsj&url=http
%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052748703395204576023784088914652.html
(27
December 2014)
41 Nixon,
Simon.
A
Way
Around
European
Bonds.
(7
December
2010)
http://www.wsj.com/news/articles/SB10001424052748704156304576003760628199904?mg=reno64-wsj&url=http
%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052748704156304576003760628199904.html
(26
December 2014)
42 Walker, Marcus; Forelle, Charles. Bailout Deal Fails to Quell EU Rifts. (17 December 2010)
http://www.wsj.com/news/articles/SB10001424052748703395204576023732485094802?mg=reno64-wsj&url=http
%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052748703395204576023732485094802.html
(26
December 2014)

14

In 2011, the European member states may need to raise as much as US$2 trillion in debt. Some of
this will be the new debt and some will be previous debt that is rolled over as older loans reach
maturity. In either case, the ability to raise this money depends on the confidence of investors in the
European financial system.43 The ability of the European Union to guarantee its members' sovereign
debt obligations have direct implications for the core assets of the banking system that support the
Euro.
The bank must also co-operate within the EU and internationally with third bodies and entities.
Finally, it contributes to maintaining a stable financial system and monitoring the banking sector. 44
The latter can be seen, for example, in the bank's intervention during the subprime mortgage crisis,
when it loaned billions of euros to banks to stabilise the financial system. 45 In December 2007, the
ECB decided in conjuction with the Federal Reserve System under a program called Term auction
facility to improve dollar liquidity in the eurozone and to stabilise the money market.46
In late May 2012, looking ahead to further challenges with Greece, Bundesbank chief and ECB
council members Jens Weidmann pointed out that the council could veto emergency liquidity
assistance (ELA) to, for instance, Greece through a two-third majority of the council. If Greece
chose to default on its debts yet wanted to stay in the Euro, the Ela would be one of the ways to
accommodate the country's and its banks' liquidity needs or, alternatively, to precipitate departure.
On 31 October 2012, ECN announced it has phased out one of the crisis measures aimed at
supporting the shaky banking system of the 17-country eurozone.

43 European Central Bank. Aggregated balance sheet of euro area monetary financial institutions, excluding the
Eurosystem:
2.5
Capital
and
reserves.
http://www.ecb.europa.eu/stats/money/aggregates/bsheets/html/outstanding_amounts_L60.X.Z5.0000.en.html (26
December 2014)
44 Summaries
of
EU
legislations.
The
European
Central
Bank
(ECB).
http://europa.eu/legislation_summaries/economic_and_monetary_affairs/institutional_and_economic_framework/o
10001_en.htm (26 December 2014)
45 Landler, Mark.
Credit
Squeeze Puts Europe's Bank in Spotlight.
(14 August
2007)
http://www.nytimes.com/2007/08/14/business/worldbusiness/14euro.html?_r=1&n=Top/Reference/Times
%20Topics/Organisations/E/European%20Central%20Bank&oref=slogin (26 December 2014)
46 European Central Bank. Press release. http://www.ecb.europa.eu/press/pr/date/2008/html/pr080110_2.en.html (26
December 2014)

15

3. CONCLUSION
The European Central Bank (ECB) is an independent, supranational monetary institution,
representing the core of the ESCB and the Eurosystem. The (ECB) is headquartered in Frankfurt am
Main, Germany.
The primary objective of the ECB is to maintain price stability, and without prejudice to its
primary objective, to support the general economic policies of the EU. All other objectives are of
secondary importance and must not be in conflict with its primary objective.

The ECB tasks are the following: 1) defining Eurosystem policies; 2) deciding, co-ordinating and
monitoring the monetary policy operations; 3) adopting legal acts (primarily guidelines and
instructions, to ensure that decentralised operations are carried out consistently by national central
banks; 4) planning, co-ordinating and monitoring the issuance of euro banknotes; 5) interventions
on the foreign exchange markets; 6) international and European co-operation; 7) monitoring
financial risks and 8) fulfilling advisory functions to Community institutions and national
authorities.

Meanwhile, as part of EU efforts to spearhead greater fiscal and political integration, officials
began work in the summer of 2012 on plans for a eurozone banking union. To start, the EU would
develop a supervisory agency to monitor the major banks in the eurozone, situated under the ECB.
While such a banking authority would certainly expand the power of the bank, Bini Smaghi argues
that such a role is well within its mandate. "Financial stability," he notes, "is a key element in
achieving price stability."

16

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19

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20