Questions and answers on the European Central Bank
Aug 2, 2012, 3:26 PM
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 signed on Feb. 7, 1992. The treaty 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.
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.
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.
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.
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 With ECB permission, they can also make emergency loans at their own risk to their banks.
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 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 and takes questions from journalists.
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