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Questions and answers on the European Central Bank

FRANKFURT, Germany (AP) - The European Central Bank is the monetary authority for the 17 countries that use the euro currency. The eurozone has the world's second largest economy after the United States, with annual output of (EURO)9.41 trillion, or $11.75 trillion, and a population of 331 million.

Here are some questions and answers about the ECB.

Q: What are the origins of the ECB?

A: The ECB was established by the Treaty on European Union, also known as the Maastricht Treaty after the town in the Netherlands where European leaders signed it on Feb. 7, 1992. That treaty created the European Union from the existing European Community and laid the groundwork for the shared euro currency.

The ECB's precursor, the European Monetary Institute, started work in 1994 to prepare for the euro. It became the European Central Bank on June 1, 1998, six months ahead of the launch of the currency on Jan. 1, 1999.

Q: What is the ECB's job?

A: The ECB issues the euro currency. Only it can authorize printing and circulation of euro banknotes and coins through the national central banks.

Its primary economic policy job is keeping inflation under control. The bank aims to keep the inflation rate less than, but close to, 2 percent.

The ECB also provides credit to the 7,500 licensed banks and money market funds in the eurozone, should they need it. Banks must put up collateral such as government bonds to get that money. That insures the ECB against losses.

Q: How does the ECB keep prices stable?

A: The ECB's main tool in fighting excessive inflation is interest rates.

It can raise or lower its benchmark rate, called the refinancing rate, which is what banks pay to borrow from the ECB. That in turn influences the rate at which banks lend to companies and consumers.

Lower rates make it cheaper for people and companies to take out a loan to buy a house or expand a business. That can fuel inflation by increasing demand for goods and services.

The ECB can step on the growth gas pedal by lowering rates, and it can hit the brakes on inflation by raising rates.

Q: What about other important issues, like creating jobs?

A: The ECB is supposed to pursue economic growth and job creation, as well. But only if that doesn't get in the way of its mission to control inflation.

That means the ECB has less flexibility than other central banks, such as the U.S. Federal Reserve, which treats inflation control and job creation as equally important missions.

Q: Who runs the ECB?

A: The ECB is run by a 23-member governing council and a six-member executive board, both chaired by President Mario Draghi.

The executive board runs the bank's operations day-to-day at its headquarters in Frankfurt, Germany, and prepares the agenda for the governing council meetings.

The governing council is made up of the six executive board members and the 17 heads of the of the eurozone's national central banks.

By treaty, the ECB is legally independent and can't take advice from politicians and governments. That is supposed to insulate it from pressure to make decisions for political reasons.

Q: Why does Europe still have national central banks?

A: They execute the monetary policy operations decided by the ECB, such as lending to banks. They also put banknotes into circulation and withdraw them when they are worn out, and operate payment systems that let customers in one country pay businesses in another country. With ECB permission, they can also make emergency loans at their own risk to their banks.

Q: How are the ECB president and members of the executive board appointed?

A: They are chosen by the eurozone member governments, after consulting with the ECB and the European Parliament. The treaty says they must choose people with experience in banking or monetary policy. Often they are former government finance officials or national central bankers.

Q: What is their term of office?

A: One eight-year term.

Q: How often does the governing council meet?

A: Twice a month. The first meeting is where interest rates are usually decided. However, the governing council can meet at any time, by videoconference if need be, and without public notice.

Q: How does the council make decisions?

A: Meetings are chaired by Draghi. Council members vote and usually seek to make decisions unanimously or by broad consensus. The ECB does not publish minutes of its meetings the way the Fed and the Bank of England do. Sometimes the ECB president will give an indication at the news conference after the rate announcement whether a decision was unanimous or not.

Q: How do people find out what they did?

A: The bank issues its interest rate decision at 1:45 p.m. Central European Time (7:45 EDT, 12:45 GMT) via electronic link to information services used by financial professionals. It holds a simultaneous conference call where the news is given verbally. The information is then reported by the news media.

The president and the vice-president then appear at a news conference at 2:30 p.m. CET (8:30 EDT, 13:30 GMT). The president reads a statement explaining what the bank decided and how it sees the economy, and takes questions from journalists.


(Copyright 2012 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.)

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