European Central Bank

The European Central Bank (ECB) - based in Frankfurt - has, from the start of 1999, had responsibility for the conduct of monetary policy in the Eurozone. The Eurozone marks the first step on the long road to European Monetary Union ( EMU ).

The ECB sets interest rates for the countries that have signed up for the single currency, the Euro. It is also the sole issuer of Europe's currency, the Euro. Britain is not joining the Euro for now at least.

The fore-runner of the Bank is the European Monetary Institute .

As the central bank for the European Monetary Union ( EMU ) zone, which is already being called "Euroland", the ECB will be the sole issuer of Euros.

The head of the ECB, the president of the bank is appointed for a non-renewable 8 year term. However, the appointment of the first president of the ECB, Dutchman Wim Duisenberg almost descended into farce as French President Jacques Chirac insisted on his nominee, Jean-Claude Trichet. A compromise was hammered out at the Brussels summit in May 1998 under which Duisenberg committed himself to stepping down "voluntarily" ahead of the end of his term and Tricher was effectively anointed as his successor. It was a messy arrangement which left observers openly sniggering at Chirac as he announced the deal.

However, with political horse-trading out of the way, the business of the bank is under way. In addition to the President, there is a vice president and four other board members drawn from countries within Euroland. Each will serve an 8-year non-renewable contract.

The bank's main objective, defined in the Maastricht Treaty, is to ensure price stability. To achieve this it sets short-term interest rates for Euroland through meetings of its governing council which consists of the executive committee plus the governors of the national central banks participating in EMU . The Maastricht Treaty stipulates that the members of the council must be independent from political interference.

National central banks, like the German Bundesbank , will continue to exist and will, together with the ECB, form the European System of Central Banks. They will be responsible for the day-to-day running of the Euroland financial system, ensuring liquidity in the financial markets and regulating the money market in line with ECB policy. It is a system similar to the decentralised Fed eral Reserve operations in the USA.

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Last Updated: May 2007 © Moneyextra.com

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