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The Decision Making Bodies Of The Ecb Finance Essay

Eurosystem constitutes the ECB and the national central banks of the member states in the euro area, whereas the ESBC (European System of Central Banks) is made up of the ECB and NCBs of all EU member states. It is necessary to distinguish the “Eurosystem” and “ESBC” since there are EU member states whose currency is not the euro.

The objectives and tasks of the Eurosystem

According to article 127(1) of the Treaty, price stability is the primary objective of ESCB (hence the Eurosystem). The quantitative definition of price stability, confirmed by the Governing Council, is to keep the inflation rate in the euro area at below, but close to 2% over the medium term. (ECB, 2011) .In addition, the ESCB shall support the general economic policies to achieve the objective of the Union, such as sustainable growth of real output, stable unemployment and capacity utilization rate.

The basic task of ESCB (hence the Eurosystem) shall be:

Responsible for defining and implementing the monetary policy of the euro area

To conduct the foreign-exchange operations

To hold and manage the official foreign reserves of the member states

To promote the smooth operation of payment systems

(Article 127(2) of the TFEU)

Furthermore, the ECB should assume the responsibility of issuance of banknotes and collecting statistics as well as maintaining international and European cooperation. Considering the importance of financial stability, Furthermore, the Eurosystem shall make contribution to the smooth conduct of policies pursued by the authorities relating to the prudential supervision of credit institutions and the stability of the financial system.

The European Central Bank

The decision-making bodies of the ECB

The ECB has been established as the core of decision-making in the Eurosystem. It focuses on formulating the monetary policy and on ensuring that the decisions are implemented consistently by the NCBs. There are three bodies of decision-making in the ECB: the Governing Council, the Executive Board and the General Council. The first two are the main decision making bodies, whereas the General Council has no responsibility for monetary policies decisions in the euro area.

The Executive Board consists of 6 members—the President, the Vice-President and other four members—are nominated by the European Council, since the Treaty of Lisbon went into force. The board is mainly responsible for preparing decisions and monitoring the conduct of monetary policy.

The Governing Council consists of the 6 members of the Executive Board and the governors of the NCBs in the euro area (17 governors in 2011). Its current vote system is “one-country-one-vote”. When the number of governors of the euro area exceeds 18, a rotation system will be introduced. The primary responsibility of the Council is to define the strategy (intermediate monetary objectives, key interest rate and the supply of reserves) and to make monetary policy decisions.

The National Central Banks

The national central banks are subject to their national rule of their respective countries, hence have legal personality. Meanwhile, as a request for legal convergence, they have to operate according to the Community law. As a consequence, the national law applied to national central banks has to be amended when they interfere with the Community law.

The national central banks perform almost all the operational tasks of the Eurosystem and enact the decisions made by the ECB. They are responsible for execution of monetary policy operations, managing foreign reserves of their own and the ECB’s, oversight of financial market infrastructure and payment instruments, issuance of banknotes together with the ECB, collecting statistics and providing assistance to the ECB.

Credibility of the European Monetary Policy

The credibility of a monetary policy is crucially determined by the credibility of the central bank. If the ECB enjoys a high degree of credibility in its ability to maintain price stability, inflation expectation will remain firmly anchored to price stability, which will, in turn, influence the real economy. Hence, credibility facilitates the task of monetary policy. In order to achieve credibility, the central bank should specify its goal, conduct monetary policy in a consistent and systematic method and communicate with public transparently and clearly. To conclude, the conditions on the credibility of the ECB should include three aspects, i.e. independence, accountability and transparency.

Independence

It is demonstrated by substantial theoretical and empirical analysis that central bank independence is conducive to maintaining price stability. Independence can be clarified four categories: goal independence, institutional independence, financial independence and personal independence. The ECB set price stability as its primary objective .The institutional independence of ECB from political influence is ratified by article 130 of the TFEU. When exercising the power and duty, neither ECB nor any member of its decision-making bodies shall seek instruction from the Community institutions or bodies, from any government of a member states or any other body. The ECB has its own budget, independent from that of EU. Moreover, the Statue protects the personal independence of members of the decision-making bodies.

Accountability

Accountability is a core element of a democratic society. According to Dr.Issing (1999), accountability can be simply defined as ECB “do what we are supposed to do”. He suggested that accountability can only be achieved considering the definition of mandate ratified to the central bank and ultimately the fulfillment of the mandate can merely evaluated by the observable variables. The more clearly and narrowly the mandate is defined, the easier it will be to monitor the central banks’ performance (Issing, 1999). An overriding focus on the mandate of price stability and the quantitative definition of price stability enables the ECB to be held accountable by the European public and its elected representatives.

In this sense, accountability can raise the degree of credibility of ECB, hence that of monetary policies formulated by ECB.

Transparency


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