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The European Central Bank

Posted by maliyye May 14, 2008

The European Central Bank

The ECB is the central bank for Europe’s single currency, the euro. The ECB’s main task is to maintain the euro’s purchasing power and thus price stability in the euro area. The euro area comprises the 15 European Union countries that have introduced the euro since 1999.

ECB, ESCB and the Eurosystem

Since 1 January 1999 the European Central Bank (ECB) has been responsible for conducting monetary policy for the euro area – the world’s largest economy after the United States.

The euro area came into being when responsibility for monetary policy was transferred from the national central banks of 11 EU Member States to the ECB in January 1999. Greece joined in 2001, Slovenia in 2007 and Cyprus and Malta in 2008. The creation of the euro area and of a new supranational institution, the ECB, was a milestone in the long and complex process of European integration.

To join the euro area, the 15 countries had to fulfil the convergence criteria, as will other EU Member States prior to adopting the euro. The criteria set out the economic and legal preconditions for countries to participate successfully in Economic and Monetary Union.

European Central Bank

The legal basis for the single monetary policy is the Treaty establishing the European Community and the Statute of the European System of Central Banks and of the European Central Bank. The Statute established both the ECB and the European System of Central Banks (ESCB) as from 1 June 1998. The ECB was established as the core of the Eurosystem and the ESCB. The ECB and the national central banks together perform the tasks they have been entrusted with. The ECB has legal personality under public international law.

European System of Central Banks

The ESCB comprises the ECB and the national central banks (NCBs) of all EU Member States (Article 107.1 of the Treaty) whether they have adopted the euro or not.

Eurosystem

The Eurosystem comprises the ECB and the NCBs of those countries that have adopted the euro. The Eurosystem and the ESCB will co-exist as long as there are EU Member States outside the euro area.

Euro area

The euro area consists of the EU countries that have adopted the euro.

 

The mission of the Eurosystem

The Eurosystem, which comprises the European Central Bank and the national central banks of the Member States whose currency is the euro, is the monetary authority of the euro area. We in the Eurosystem have as our primary objective the maintenance of price stability for the common good. Acting also as a leading financial authority, we aim to safeguard financial stability and promote European financial integration.

In pursuing our objectives, we attach utmost importance to credibility, trust, transparency and accountability. We aim for effective communication with the citizens of Europe and the media. We are committed to conducting our relations with European and national authorities in full accordance with the Treaty provisions and with due regard to the principle of independence.

We jointly contribute, strategically and operationally, to attaining our common goals, with due respect to the principle of decentralisation. We are committed to good governance and to performing our tasks effectively and efficiently, in a spirit of cooperation and teamwork. Drawing on the breadth and depth of our experiences as well as on the exchange of know-how, we aim to strengthen our shared identity, speak with a single voice and exploit synergies, within a framework of clearly defined roles and responsibilities for all members of the Eurosystem.

 

 

 

The European System of Central Banks

The European System of Central Banks (ESCB) comprises

  • the European Central Bank (ECB) and
  • the national central banks (NCBs) of all 27 EU Member States.

This means that the ESCB includes the national central banks of those EU Member States that have not yet adopted the euro, be it due to their special status (Denmark, United Kingdom) or because they have a derogation. The latter currently applies to Sweden as well as 9 of the 12 Member States that have joined the EU since May 2004. This means in consequence: these countries still have their own national currency, for which they still conduct their own monetary policy and their respective central banks keep for the time being their monetary sovereignty. This also means, of course, that they are not involved in the performance of the core activities of Monetary Union, such as the conduct of the monetary policy for the euro area.

 

 

 

The Eurosystem

Members

The legal texts which establish the European System of Central Banks (ESCB) – the Treaty establishing the European Community and the Statute of the ESCB – were written on the assumption that all EU Member States will adopt the euro and that therefore the ESCB will conduct all the tasks involved in the single currency. However, until all EU countries have introduced the euro, it is the “Eurosystem” which is the key actor. The term “Eurosystem” therefore serves to facilitate understanding of the structure of central banking in the euro area.

The Eurosystem as the central banking system of the euro area comprises:

  • the ECB, and
  • the national central banks (NCBs) of the 15 EU Member States whose common currency is the euro.

The Eurosystem is thus a sub-set of the ESCB. Since the ECB’s policy decisions, such as on monetary policy, naturally apply only to the euro area countries, it is in reality the Eurosystem which as a team carries out the central bank functions for the euro area. In doing so, the ECB and the NCBs jointly contribute to attaining the common goals of the Eurosystem.

Why a system instead of a single central bank?

There are three main reasons for having a system of central banking in Europe:

  • The Eurosystem approach builds on the existing competencies of the NCBs, their institutional set-up, infrastructure, expertise and excellent operational capabilities. Moreover, several central banks perform additional tasks beside those of the Eurosystem.
  • Given the geographically large euro area and the long-established relationships between the national banking communities and their NCB, it was deemed appropriate to give the credit institutions an access point to central banking in each participating Member State.
  • Given the multitude of nations, languages and cultures in the euro area, the NCBs (instead of a supranational one) were best located to serve as access points of the Eurosystem.

 

 

 

Tasks

The tasks of the ESCB and of the Eurosystem 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 ‘Eurosystem’. It was drawn up on the premise that eventually all EU Member States will adopt the euro. Until then, the Eurosystem 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 Eurosystem 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 fora both within the EU and internationally in respect of tasks entrusted to the Eurosystem.

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