FACTS THE EUROPEAN CENTRAL BANK THE EUROSYSTEM THE EUROPEAN SYSTEM OF CENTRAL BANKS

Transcription

1 SEC/GovC/X/06/271 FACTS THE EUROPEAN CENTRAL BANK THE EUROSYSTEM THE EUROPEAN SYSTEM OF CENTRAL BANKS European integration Organisation Monetary policy Banknotes and coins

2 CONTENTS Page Page EUROPEAN INTEGRATION Progress of European integration... Enlargement of the European Union... Preparation of Economic and Monetary Union (EMU)... Three Stages to Economic and Monetary Union (EMU)... Convergence criteria... Economic and Monetary Union (EMU)... Benefits of the euro... Introduction of euro banknotes and coins: effects on prices... Financial integration of the euro area... Key characteristics of the euro area... ORGANISATION The European System of Central Banks (ESCB)... The Eurosystem... The NCBs as integral part of the Eurosystem... The European Central Bank (ECB)... Organisational structure of the ECB... Key for subscription of the ECB s capital... Independence... Accountability... Basic tasks of the Eurosystem... Other tasks of the Eurosystem... EI.001 EI.002 EI.003 EI.004 EI.005 EI.006 EI.007 EI.008 EI.009 EI.010 OR.001 OR.002 OR.003 OR.004 OR.005 OR.006 OR.007 OR.008 OR.009 OR.010 Division of labour in the Eurosystem... OR.011 Tasks of the ECB (1/2)... OR.012 Tasks of the ECB (2/2)... OR.013 Tasks of the NCBs... OR.014 Decision-making bodies of the ECB... OR.015 Governing Council... OR.016 Executive Board... OR.017 General Council... OR.018 OR.019 Eurosystem/ESCB Committees... MONETARY POLICY Price stability objective of the Eurosystem... MP.001 Price stability definition... MP.002 Benefits of price stability... MP.003 The ECB s monetary policy strategy... MP.004 Economic analysis... MP.005 Monetary analysis... MP.006 The monetary policy instruments... MP.007 BANKNOTES AND COINS The euro banknotes... BC.001 The euro coins... BC.002

3 EUROPEAN INTEGRATION PROGRESS OF EUROPEAN INTEGRATION The European Union (EU) that we know today started out in 1952 as the European Coal and Steel Community (ECSC).The founding members were Belgium, Germany, France, Italy, Luxembourg and the Netherlands.The idea was to withdraw those resources that had been vital for the World Wars coal and steel from national sovereignty in order to preserve lasting peace. Encouraged by their success, the same six countries soon decided to integrate other sectors of their economies such as agriculture, with the aim of removing trade barriers and of forming a common market. In 1958, these six countries established the European Economic Community (EEC) and the European Atomic Energy Community (Euratom). In 1967 the institutions of these three Communities were merged. In the course of time, other western European countries joined the then European Communities (EC) or, since the Maastricht Treaty (1992), the European Union in several rounds of accession. Integration means in this context that the countries take joint decisions on many matters approving policies in a very vast field, ranging from agriculture to culture, from consumer affairs to competition and from the environment and energy to transport and trade. The Single Market was to be formally completed at the end of 1992, but there is still work to be done in some areas for example, creating a genuinely single market in financial services. Source: EI /06

4 EUROPEAN INTEGRATION ENLARGEMENT OF THE EUROPEAN UNION 1952: Belgium, Germany, France, Italy, Luxembourg and the Netherlands The first step in European integration was taken in 1952 when these six countries set up a common market in coal and steel.the aim in the aftermath of the Second World War was to secure peace between European nations. It brought them together as equals, cooperating within shared institutions. 1973: Denmark, Ireland and the United Kingdom Denmark, Ireland and the United Kingdom decided to join the Communities and were granted membership.this first enlargement, from six to nine members, took place in At the same time, the Communities took on new tasks and introduced new social, regional and environmental policies and 1986: Greece, Spain and Portugal In 1981 Greece joined the Communities, followed by Spain and Portugal in In order to reduce the economic development gap between the then 12 Member States, structural programmes such as the first Integrated Mediterranean Programmes (IMP) were introduced. 1995: Austria, Finland and Sweden These three countries joined the EU on 1 January : Czech Republic, Estonia, Cyprus, Latvia, Lithuania, Hungary, Malta, Poland, Slovakia and Slovenia In the mid-1990s the EU received membership applications from Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia, the three Baltic States (Estonia, Latvia and Lithuania), one of the republics of former Yugoslavia (Slovenia) and two Mediterranean countries (Cyprus and Malta). The Union was on the way to its biggest enlargement ever. For 10 of the candidate countries, negotiations were completed on 13 December 2002 in Copenhagen and they joined the EU in May 2004.The Union now has 25 Member States, and will continue growing as more countries join in the years ahead. Acceding and candidate countries Bulgaria and Romania are expected to join the EU in Croatia and Turkey began membership negotiations in 2005.To ensure that the enlarged EU can continue functioning efficiently it needs a more streamlined system for taking decisions.that is why the Treaty of Nice laid down new rules governing the size of the EU institutions and the way they work. Further improvements in the Union s institutional set-up are foreseen in the Constitutional Treaty. Source: EI /06

5 EUROPEAN INTEGRATION PREPARATION OF ECONOMIC AND MONETARY UNION (EMU) In the 1960s, with European economic integration making progress, the idea arose of creating a single currency. However, a single European Economic Communities (EEC) currency was not yet foreseen in the treaties. Moreover, at the time, all six EEC countries were part of a reasonably functioning international monetary system (the Bretton Woods system ). Within this system, exchange rates of currencies were fixed but adjustable and remained relatively stable until the mid-1960s, both within the EEC and globally. In 1969, the European Commission submitted a plan (the Barre Plan ) to follow up on the idea of a single currency because the Bretton Woods system was showing signs of increasing strain. On the basis of the Barre Plan the Heads of State or Government called on the Council of Ministers to devise a strategy for the realisation of Economic and Monetary Union (EMU).The resulting Werner Report, published in 1970, proposed to create EMU in several stages by However, this process lost momentum in a context of considerable international currency unrest after the collapse of the Bretton Woods system in the early 1970s and under the pressure of divergent policy responses to the economic shocks of that period, in particular the first oil crisis. To counter this instability and the resulting exchange rate volatility among the currencies the nine members of the then EEC 1 relaunched the process of monetary cooperation in March 1979 with the creation of the European Monetary System (EMS). Its main feature was the exchange rate mechanism (ERM) which introduced fixed but adjustable exchange rates among the currencies of the EEC countries. Thus it required adjustments in monetary and economic policies as tools for exchange rate stability. Within the EMS framework, the participants succeeded in creating a zone of increasing monetary stability and gradually relaxing capital controls. A further impetus for pursuing a single currency and EMU was provided by the adoption of the Single European Act in 1986.This Act set a timeframe for launching the Single Market and reaffirmed the need for achieving EMU. In 1988 the European Council confirmed EMU as an objective and mandated a committee of monetary policy experts, in particular the governors of the EC central banks, to propose concrete steps leading to EMU. The resulting Delors Report recommended that EMU be achieved in three steps.the legal basis for EMU still had to be created.the report led to negotiations that resulted in the Treaty on European Union, signed in Maastricht on 7 February 1992.This Treaty established the European Union (EU) and amended the founding treaties of the European Communities by adding a new chapter on economic and monetary policy.this new chapter laid down the foundations of EMU and set out a method and timetable for its realisation. 1 Belgium, Denmark, Ireland, Germany, France, Italy, Luxembourg, the Netherlands and the United Kingdom. EI /06

6 EUROPEAN INTEGRATION THREE STAGES TO ECONOMIC AND MONETARY UNION (EMU) On 1 July 1990, Stage One of EMU started. It was characterised mainly by the abolition of all internal barriers to the free movement of goods, persons, services and capital within EU Member States. Stage Two started with the establishment of the European Monetary Institute (EMI), the predecessor of the European Central Bank (ECB), on 1 January Stage Two was dedicated to technical preparations for the creation of the single currency, enforcement of fiscal discipline and enhanced convergence of the economic and monetary policies of the EU Member States.The ECB was established in June 1998, giving it half a year to implement the preparatory work of the EMI. On 1 January 1999 Stage Three, the final stage of EMU, started with the irrevocable fixing of the conversion rates of the currencies of the 11 Member States initially participating, and with the introduction of the euro as the single currency. It is also since this date that the Governing Council of the ECB has been responsible for conducting the single monetary policy for the euro area.this was preceded by the EU Council meeting, in the composition of the Heads of State or Government, which in May 1998 confirmed that 11 of the 15 EU Member States at that time Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, the Netherlands, Austria, Portugal and Finland had fulfilled the criteria for the adoption of the single currency. On 1 January 2001 Greece joined the euro area. The changeover to the euro was completed on 1 January 2002 with the introduction of euro banknotes and coins. Since March 2002, the euro has been the sole currency with legal tender in all countries of the euro area, and former national banknotes such as the French franc or Deutsche Mark became a piece of history. For details about the three stages of EMU, see EI /06

7 EUROPEAN INTEGRATION CONVERGENCE CRITERIA CONVERGENCE AND EMU The euro area has been established as a currency area initially comprising 11 of the 25 EU Member States with more than 300 million people. In 1999, responsibility for monetary policy was transferred to the Eurosystem 1, which is headed by a supranational institution, the ECB. However, responsibility for economic policies has remained with the participating Member States. Against this background, sustained convergence efforts by individual Member States were important for the creation of an environment of price stability in Europe. National economic policies contributed to achieving more similar economic conditions throughout the euro area.the smooth introduction of the euro was made possible because the economic features of the previous national currencies had converged towards the best existing benchmarks. It is likely that the economies of the euro area will converge further, e.g. by diminishing inflation differentials between countries.this will facilitate the task of monetary policy, which is to maintain a stable price level in the euro area and thus contribute to non-inflationary growth. Looking forward, EU Member States that will adopt the euro in the future are also obliged to make sure that their economies converge with the euro area economy. CONVERGENCE CRITERIA To ensure sustainable convergence, the EC Treaty sets criteria which must be met by each EU Member State before taking part in the third stage of EMU. 1. The Member State must not be subject to a Council decision that an excessive budgetary deficit exists; 2. There must be a sustainable degree of price stability and an average inflation rate, observed over a period of one year before the examination, which does not exceed by more than one and a half percentage points that of the three best performing Member States in terms of price stability; 3. There must be a long-term nominal interest rate which does not exceed by more than two percentage points that of the three best performing Member States in terms of price stability; 4. The normal fluctuation margins provided for by the exchange rate mechanism must be respected without severe tensions for at least the last two years before the examination. 5. Each Member State should ensure that its national legislation, including the statute of its NCB, is compatible with Articles 108 and 109 of the Treaty and with the ESCB Statute.This obligation applying to Member States with a derogation is also referred to as legal convergence. The convergence criteria are meant to ensure that economic development within EMU is balanced and does not give rise to tensions between the EU Member States. It must also be remembered that the criteria relating to government deficit and government debt must continue to be met after the start of the third stage of EMU (1 January 1999). A Stability and Growth Pact with this end in view was adopted at the Amsterdam European Council in June For the detailed convergence criteria, see 1 The Eurosystem is the central banking system of the euro area. It comprises the ECB and the national central banks of the Member States that have adopted the euro in Stage Three of Economic and Monetary Union (EMU). EI /06

8 EUROPEAN INTEGRATION ECONOMIC AND MONETARY UNION (EMU) EMU IN 2006 Of the 25 EU Member States today,12 have adopted the euro, meaning that they participate in Stage Three of EMU: Austria, Belgium, Germany, Greece, Spain, Finland, France, Italy, Ireland, Luxembourg, the Netherlands and Portugal.Two Denmark and the United Kingdom have a special status, which means that in protocols annexed to the EC Treaty they were granted the exceptional right to choose whether or not to participate in Stage Three of EMU.They both notified the EU Council (Denmark in 1992 and the United Kingdom in 1997) that they did not intend to move to Stage Three, i.e. they did not wish to become part of the euro area for the time being.the other EU countries currently have a derogation. Having a derogation means that a Member State has not yet met the conditions for the adoption of the euro and it is therefore exempt from some, but not all, of the provisions which normally apply from the beginning of Stage Three of EMU.This includes all provisions which transfer responsibility for monetary policy to the Governing Council of the ECB. CONVERGENCE CRITERIA Countries wishing to adopt the euro as their currency must achieve a high degree of sustainable convergence.the degree of convergence is assessed on the basis of several criteria in the EC Treaty (see separate slide Convergence criteria ). REPORTING ON CONVERGENCE At least every two years, or at the request of the Member State concerned, the European Commission and the ECB report to the EU Council on the progress made by Member States with a derogation.these reports examine whether a high degree of sustainable convergence has been reached by determining the extent to which each Member State has fulfilled the convergence criteria. Moreover, the reports check the compatibility of each Member State s national legislation, including the statute of its national central bank, with the EC Treaty in respect of central bank independence. Further, the Convergence Reports also take account of market integration, the situation and development of balances of payments on the current account and the development of unit labour costs and other price indices. On a proposal from the Commission and after consulting the European Parliament, and after discussion in the EU Council, meeting in the composition of the Heads of State or Government, the Economic and Financial Affairs Council decides by a qualified majority which Member States with a derogation fulfil the convergence criteria. If this is the case it abrogates the derogation, which means that the Member States concerned would become members of the euro area. For details about the convergence criteria, see The Convergence Reports are available at EI /06

9 EUROPEAN INTEGRATION BENEFITS OF THE EURO The single currency that we have today can be seen as a logical step in complementing the Single Market.The striking benefits of the single currency are: Low interest rates due to a high degree of price stability The conduct of the single monetary policy by the Eurosystem is successful.the euro is as stable and credible as the bestperforming currencies previously used in the euro area countries.this has established an environment of price stability in the euro area, exerting a moderating influence on price and wage-setting. As a consequence, inflation expectations and inflation risk premia have been kept low and stable, leading to low levels of market interest rates. More price transparency Payments can be made with the same money in all countries of the euro area, making travelling across these countries easier. Price transparency is good for consumers since the easy comparison of price tags makes it possible for consumers to buy from the cheapest supplier in the euro area, e.g. cars in different euro area countries.therefore, price transparency created by the single currency assists the Eurosystem to keep inflation under control. Increased competition makes it more likely that available resources will be used in the most efficient way, spurring intra-euro area trade and thereby supporting employment and growth. Removal of transaction costs The launch of the euro on 1 January 1999 eliminated foreign exchange transaction costs and thus made possible considerable savings. Within the euro area, there are no longer any costs arising from: buying and selling foreign currencies on the foreign exchange markets; protecting oneself against adverse exchange rate movements; cross-border payments in foreign currencies, which entail high fees; keeping several currency accounts that make account management more difficult. No exchange rate fluctuations With the introduction of the euro, exchange rate fluctuations and therefore foreign exchange risks within the euro area have also disappeared. In the past, these exchange rate costs and risks hindered trade and competition across borders. EI /06

10 EUROPEAN INTEGRATION INTRODUCTION OF EURO BANKNOTES AND COINS: EFFECTS ON PRICES After the introduction of euro cash in January 2002, consumers suddenly perceived inflation to be higher than what was actually indicated by official statistics. Statistics show indeed that at the time of the euro cash changeover the price of several items, most notably those purchased more often recorded increases above average. Some of these increases may have been due to some firms and retailers taking advantage of the changeover to raise prices at the expense of the consumer. However, other increases were not directly related to the introduction of the euro banknotes and coins. For example, international oil prices were rising at the time and influenced the retail price of fuel at the pump. Similarly, bad weather conditions had pushed up the prices of fruit and vegetables. These events coincided with the euro cash changeover and were sometimes, though mistakenly, associated with it. An analysis from Eurostat, the statistical office of the EU, shows that the direct impact of the euro cash changeover was fairly limited: not more than 0.3 percentage point of an overall euro area inflation rate at 2.3% in Moreover, a study 2 has shown that consumers tended to be convinced before the cash changeover that prices would be raised or rounded up to their disadvantage.these expectations appear to have influenced significantly their subsequent perceptions. Finally, many consumers today continue to recall a price level in national currencies that has remained frozen in time and becomes therefore increasingly unrealistic as time goes on. However, surveys by the European Commission 3 also show that consumers have become accustomed to the euro and that the gap between perceived inflation and actual measured inflation is gradually decreasing. For information about how inflation is measured in the euro area, see 1 See Eurostat News Releases no. 23/2002, 58/2002, 84/2002 and 69/ Traut-Mattausch E., Schulz-Hardt S., Greitemeyer T. and Frey D. (2004), Expectancy confirmation in spite of disconfirming evidence: the case of price increases due to the introduction of the euro, European journal of social psychology,vol. 34., No. 6, pp Flash Eurobarometer 2002, 2003 and EI /06

11 EUROPEAN INTEGRATION FINANCIAL INTEGRATION OF THE EURO AREA In the past, the financial systems in the euro area were organised with a national focus, each for its own currency. As a result of the Single Market and the euro, the European financial system is becoming more and more interlinked.this means that national boundaries are becoming less relevant. Such links are being established for financial markets, their related financial infrastructure, and also for financial institutions: for example, banks merge across borders or establish branches in other countries. THE GENERAL ECONOMIC BENEFITS OF FINANCIAL INTEGRATION Ultimately, financial integration increases the potential for higher economic growth.this means that the gross domestic product (GDP) of the euro area is higher, the more integrated the euro area financial system is. Looking at the individual economic agents, a bigger and more integrated financial system enables them inter alia to better exploit economies of scale and scope. In return, households can benefit from access to a larger variety of financial products like mortgage loans for house purchases at relatively lower costs. WHY FINANCIAL INTEGRATION IS IMPORTANT FOR THE ECB'S TASKS 1. The financial system is used for the conduct of the monetary policy in the euro area, which is the basic task assigned to the Eurosystem under the EC Treaty. A well-integrated financial system enhances the smooth and effective transmission of monetary policy impulses throughout the euro area. 2. Financial integration has implications for the task of safeguarding financial stability in the euro area and the EU to which the Eurosystem contributes, as laid down in the Treaty. For example, the pursuit of financial integration can have very beneficial effects on financial stability as more integrated financial markets could provide the necessary conditions for the smoother absorption of financial shocks. WHAT THE ECB IS DOING In this context the ECB closely monitors the process of financial integration and takes initiatives to foster this process. Concerning monitoring, the ECB published in September 2005 for the first time an annual report on indicators of financial integration. To foster the integration of the euro area financial system, the ECB together with the national central banks provides, for example, the TARGET system, which is the Europe-wide payment system for large-value payments. Another example is that the ECB at times helps market participants to make progress in certain initiatives.the ECB then acts as a catalyst, helping the market participants to overcome potential coordination problems.this is underway for example in the area of retail payments: here the banks, with the help of the ECB, are preparing a euro area-wide framework so that in the future citizens and enterprises can make payments throughout the euro area from a single bank account using a single set of payment instruments, as easily, cheaply and safely as today in their national systems. For the report Indicators of financial integration in the euro area, September 2005, see indicatorsfinancialintegration200509en.pdf For a general overview of financial integration, see: For details about TARGET, see EI /06

12 EUROPEAN INTEGRATION KEY CHARACTERISTICS OF THE EURO AREA Prior to the establishment of Monetary Union the individual countries that are now part of the euro area were relatively small and open economies. By contrast, the euro area forms a large, much more self-contained economy.the size of the euro area makes it comparable with the United States. In terms of population, the euro area is one of the largest developed economies in the world, with million citizens in By comparison, the populations of the United States and Japan were and million respectively. In terms of share of world gross domestic product (GDP), the euro area was the second largest economy in 2004, with 15.3%, behind the United States with 20.9%. Japan s share was 6.9%. The fact that the euro area economy is far less open than the economies of the individual euro area countries tends to limit the impact of movements in external prices on domestic prices. However, the euro area is still more open than either the United States or Japan. Euro area exports of goods and services as a share of GDP were significantly higher in 2004 (19.4%) than the corresponding figures for the United States (9.8%) and Japan (13.6%). Sources: for euro area and EU: ECB, Eurostat, national data, IMF and ECB calculations; for the United States and Japan: national sources, IMF. EI /06

13 ORGANISATION THE EUROPEAN SYSTEM OF CENTRAL BANKS (ESCB) The European System of Central Banks (ESCB) comprises the European Central Bank (ECB) and the national central banks (NCBs) of all 25 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 the new Member States that joined the EU in 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. of activity such as participation in the TARGET payment system and support in the collection of statistics. In addition, the European Exchange Rate Mechanism II (ERM II) provides aframework for monetary and exchange rate policy cooperation with the Eurosystem.The institutional forum for such cooperation is the General Council of the ECB. The legal basis for the ESCB is the Treaty establishing the European Community and the Statute of the European System of Central Banks and of the European Central Bank. The Treaty entrusts the ESCB in general with the performance of the central banking functions for the euro.the ESCB Statute defines more specifically the relative roles and functions of the ECB and the NCBs, respectively. For the text of the EC Treaty and the ESCB Statute annexed to it, see The non-euro area NCBs are nevertheless committed to the principles of monetary policies which aim at price stability. Furthermore, ESCB membership implies at varying degrees active cooperation with the Eurosystem in several fields OR /06

14 ORGANISATION THE EUROSYSTEM MEMBERS The legal texts which establish the ESCB the EC Treaty 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 NCBs of the 12 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: 1. 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. 2. 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. 3. 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. For the mission statement of the Eurosystem, see OR /06

15 ORGANISATION THE NCBs AS INTEGRAL PART OF THE EUROSYSTEM Each National Central Bank (NCB) has legal personality according to the national law of its respective country. The euro area NCBs, which form an integral part of the Eurosystem, carry out the tasks conferred upon the Eurosystem in accordance with the rules established by the ECB s decision-making bodies.the NCBs also contribute to the work of the Eurosystem and the ESCB through their participation in the various Eurosystem/ESCB Committees (see also separate slide Eurosystem/ESCB Committees ). They may perform non-eurosystem functions on their own responsibility, unless the Governing Council finds that such functions interfere with the objectives and tasks of the Eurosystem. Such non-eurosystem functions vary according to countries and mainly consist of various types of financial and administrative services to the governments of the respective countries. Most NCBs for example are involved in the supervision of financial institutions in their respective countries and some NCBs run their own printing works for the production of banknotes. For the mission statement of the Eurosystem, see OR /06

16 ORGANISATION THE EUROPEAN CENTRAL BANK (ECB) The European Central Bank (ECB) is the organisation for the conduct of monetary policy and the performance of other central banking functions for the euro. It carries out these tasks together with the national central banks of the euro area.the ECB is at the heart of the Eurosystem and the European System of Central Banks (ESCB). It was established in June 1998, replacing its precursor, the European Monetary Institute (EMI). The number of staff of the ECB amounts to around 1,370 (in 2005) and it is truly European: its members come from all 25 countries of the European Union (EU) and also from the acceding countries Bulgaria and Romania. In the early days, the EMI and the ECB recruited many staff from the national central banks of the EU Member States, but nowadays the ECB also attracts staff members from other sectors. The legal basis of the ESCB and the ECB is provided for in Article 8 of the Treaty.The Treaty limits the ECB s activities to aclearly defined area: the central bank functions for the euro. The ECB has its seat in Frankfurt am Main, Germany. Due to initial growth, the staff of the ECB is currently located in three different sites. However, new headquarters will be built in the eastern part of the city of Frankfurt.The construction is estimated to be completed at the end of OR /06

17 ORGANISATION ORGANISATIONAL STRUCTURE OF THE ECB The European Central Bank's functional units are grouped into business areas (Directorates General (DG) and Directorates (D)) that consist of Divisions and Sections. The overall responsibility for day-to-day business lies with the Executive Board. The organisational structure reflects the tasks performed and can be divided between core processes, which are closely related to the tasks as defined in the Treaty, and enabling processes, which support the work. CORE BUSINESS AREAS D Banknotes DG Economics D Financial Stability and Supervision DG International and European Relations ECB Permanent Representation in Washington D.C. DG Legal Services DG Market Operations DG Payment Systems and Market Infrastructure DG Research DG Statistics SUPPORTING BUSINESS AREAS DG Administration D Communications DG Human Resources, Budget and Organisation DG Information Systems D Internal Audit DG Secretariat and Language Services Counsel to the Executive Board For details of the organisational structure, see OR /06

18 ORGANISATION KEY FOR SUBSCRIPTION OF THE ECB S CAPITAL As provided by Article 29 of the Statute of the European System of Central Banks (ESCB) and of the European Central Bank (ECB), the shares of the national central banks (NCBs) in the ECB s capital key are weighted according to the shares of the NCBs Member States in the total population and gross domestic product of the EU, in equal measure. In accordance with Article 49.3 of the Statute of the ESCB, which was added to the Statute by the Treaty of Accession, the ECB s subscribed capital is automatically increased when anew Member State joins the EU and its NCB joins the ESCB.This happened on 1 May 2004: as ten new Member States joined the EU, the ECB s capital key was expanded. Eurosystem NCBs are required to pay up their subscribed capital in full.the 13 non-euro area NCBs (the ten new NCBs, Danmarks Nationalbank, Sveriges Riksbank and the Bank of England) are required to pay up a minimal percentage of their subscribed capital (7% as at 1 May 2004) as a contribution to the operational costs of the ECB. To date, the fully paid-up subscriptions of euro area NCBs to the capital of the ECB amount to a total of 3,978,226, They break down as shown on the slide. The increase was determined by multiplying the prevailing amount of subscribed capital (i.e. 5,000 million) by the ratio, within the expanded capital key, between the weighting of the entering NCB(s) and the weighting of those NCBs that are already members of the ESCB.Therefore, on 1 May 2004 the subscribed capital of the ECB was increased to 5,564,669, OR /06

19 ORGANISATION INDEPENDENCE A cornerstone of the monetary order of the euro area is the independence of the ECB and the NCBs of the Eurosystem, which has been given constitutional status, as it has been enshrined in both the EC Treaty and the ESCB Statute, rather than in secondary legislation. Independence is an indispensable element which facilitates the pursuit of price stability. The concept of independence includes: FUNCTIONAL INDEPENDENCE Functional independence requires a primary objective determined by clarity and legal certainty that provides the central bank with the necessary means and instruments to achieve this objective, independently of any other authority. The primary objective of the ESCB, as enshrined in the EC Treaty and the ESCB Statute, is the maintenance of price stability. INSTITUTIONAL INDEPENDENCE The principle of institutional independence is expressly referred to in Article 108 of the EC Treaty and Article 7 of the ESCB Statute.These provisions prohibit the ECB, the NCBs and members of their decision-making bodies from seeking or taking instructions from Community institutions or bodies, from any government of a Member State or from any other body. In addition, they also prohibit such institutions, governments and bodies from seeking to influence the members of the decision-making bodies of the ECB or the NCBs. PERSONAL INDEPENDENCE The Statute s provisions on security of tenure for members of the ECB s decision-making bodies further safeguard central bank independence. Such provisions stipulate a minimum term of office of five years for NCB governors (renewable), and a non-renewable term of office of eight years for the members of the ECB s Executive Board. Furthermore, members of the decision-making bodies may not be dismissed for reasons other than those stipulated in the ESCB Statute. FINANCIAL INDEPENDENCE The ECB and the NCBs must be able to autonomously avail themselves of sufficient financial resources to fulfil their mandates.the ECB has its own capital, subscribed and paid up by the NCBs. It also has its own budget independent from that of the other European institutions. As regards the NCBs, Member States may not put their NCBs in the position of not having sufficient financing resources to carry out their ESCB-related and own national tasks. OR /06

20 ORGANISATION ACCOUNTABILITY Accountability is a core element of democratic structures. The Eurosystem has the exclusive competence for the monetary policy of the euro area and thus has been entrusted with monetary sovereignty. Respect for the fundamental principles of democratic societies requires that the ECB is held accountable to the citizens and their democratically elected representatives, in order to balance the substantial degree of independence that it has been granted. Consequently, both the EC Treaty and the Statute of the ESCB contain a number of provisions that require the ECB, just like any other independent central bank, to subject its actions and decisions to public scrutiny. It is of course also in the ECB's own interest to ensure that its decisions are properly explained and justified so as to foster public support for its policies. The legitimacy of the independent ECB rests on a comprehensive framework for holding it accountable.thus, the ECB is called on to explain and justify to the European citizens and their elected representatives how it uses the powers and prerogatives it has been entrusted with. REPORTING: PUBLICATIONS AND PRESS CONFERENCES The Treaty lays down a number of reporting requirements for the ECB, ranging from the publication of an annual report, a quarterly report and a weekly consolidated financial statement to appearances before the European Parliament. The ECB fully complies with these requirements and even exceeds them, for instance by publishing a Monthly Bulletin rather than a quarterly report, by holding monthly press conferences to explain its monetary policy decisions and, since December 2004, by making public on a monthly basis other decisions taken by the Governing Council in addition to interest rate decisions. PUBLIC SPEECHES AND TESTIMONIES The members of the Governing Council deliver numerous speeches and give interviews throughout the euro area in order to explain the ECB s policies to the public. In line with the provisions of Article 113 of the Treaty, the ECB also reports regularly to the European Parliament on the decisions taken in the field of monetary policy and on its other tasks. Quarterly testimonies by the President of the ECB,before Parliament s Committee on Economic and Monetary Affairs serve as the main forum for these regular exchanges of views. The President also presents the ECB s Annual Report to the plenary of the European Parliament. Beyond the scope of its Treaty obligations, the ECB has the voluntary practice of replying to written questions submitted by members of the European Parliament on issues related to the ECB s mandate. FINANCIAL CONTROLS The accounts of the ECB and NCBs are also subject, under Article 27 of the ESCB Statute, to the audit review by independent external auditors recommended by the Governing Council and approved by the EU Council. Such auditors have the full power to examine all books and accounts of the ECB and the NCBs and obtain full information on their transactions. In addition, the European Court of Auditors is entrusted with examining the operational efficiency of the management of the ECB and publishes the results of such examination in its annual report. Finally, the ECB is also subject to control from OLAF, the European Anti-Fraud Office. For all online publications, see OR /06

21 ORGANISATION BASIC TASKS OF THE EUROSYSTEM The EC Treaty entrusts the ESCB with the task of performing the central bank function for the Community. Since some EU Member States do not participate in EMU, the terms ESCB and Community are to be read as Eurosystem and euro area, respectively. MONETARY POLICY The Eurosystem is responsible for defining and implementing the monetary policy of the euro area.this is a public policy function that is implemented mainly by financial market operations. Important for this task is the full control of the Eurosystem over the monetary base. As part of that, the ECB and the NCBs are the only institutions that are entitled to actually issue legal tender banknotes in the euro area. Given the dependency of the banking system on base money, the Eurosystem is thus in a position to exert a dominant influence on money market conditions and money market interest rates. FOREIGN EXCHANGE OPERATIONS Foreign exchange operations influence exchange rates and domestic liquidity conditions; both are important variables for monetary policy. Assigning this task to the Eurosystem is therefore logical, also because central banks have the necessary operational facilities. Secondly, if the central bank carries out this task it ensures that the foreign exchange operations remain consistent with the aims of the central bank s monetary policy. PROMOTE SMOOTH OPERATION OF PAYMENT SYSTEMS Payment systems are a means to transfer money between credit and other monetary institutions.this function places them at the heart of an economy s financial infrastructure. Assigning the task of promoting their smooth operation to the Eurosystem acknowledges the importance of having sound and efficient payment systems not only for the conduct of monetary policy but also for the stability of the financial system and as such for the economy as a whole. HOLD AND MANAGE FOREIGN RESERVES One of the most important reasons for managing the foreign reserves portfolio is to ensure that the ECB has sufficient liquidity to conduct its foreign exchange operations.the ECB s foreign reserves are currently managed in a decentralised manner by the NCBs that opt to take part in operational ECB foreign reserve management activities.these NCBs act on behalf of the ECB in accordance with instructions received from the ECB. Although the NCBs manage their own foreign reserves independently, their operations on the foreign exchange market are, above a certain limit, subject to the approval of the ECB, in order to ensure consistency with the exchange rate and monetary policy of the Eurosystem. OR /06

22 ORGANISATION OTHER TASKS OF THE EUROSYSTEM ADVISORY FUNCTIONS The ECB has to be consulted within certain limits and conditions on any proposed Community act in its field of competence, by national authorities regarding any draft legislative provision in the ECB s field of competence. The ECB gives its advice in the form of ECB opinions which are published, for example on its website. For the online version of the legal framework, see COLLECTION AND COMPILATION OF STATISTICS The ECB, assisted by the national central banks, collects a wide range of statistical information necessary for the fulfilment of its tasks. Statistics are essential, for example for the monthly decision on the key interest rates because they mirror the current situation of the euro area economy. CONTRIBUTION TO PRUDENTIAL SUPERVISION AND FINANCIAL STABILITY Whereas direct responsibility for the pursuit of financial stability and prudential supervision has remained with the national competent authorities, the Treaty has assigned to the Eurosystem the important task of contributing to the smooth conduct of policies in these fields.this task which evolves in relation to market and institutional developments encompasses three main activities: first, the monitoring of financial stability, which aims at identifying sources of vulnerabilities and assessing the degree of resilience of the financial system in the euro area. Second, the provision of advice to the competent authorities on the design and amendment of financial rules and supervisory requirements. Third, the promotion of arrangements for the maintenance of financial stability and the effective management of financial crises, including the smooth cooperation between central banks and supervisory authorities. ISSUANCE OF EURO BANKNOTES AND ENSURING THEIR INTEGRITY Only euro banknotes have the status of legal tender in the euro area. In addition, the euro banknotes are used on an international scale. It is the Eurosystem s task to ensure a smooth and efficient supply of banknotes and to preserve the general public s confidence in the legal tender. Ensuring the integrity of the euro banknotes is achieved by conducting research and development activities, by counterfeit deterrence and monitoring and by applying common quality and authentication standards for banknote processing by NCBs, credit institutions and other professional cash handlers, such as cash-in-transit companies. INTERNATIONAL COOPERATION A number of issues (such as global imbalances and systemic macroeconomic and financial stability) that are of relevance to the ECB s basic tasks (in particular monetary policy) have implications beyond the euro area and therefore need to be addressed at the international level. Against this background, the ECB participates in meetings of international fora in which issues of relevance to the Eurosystem are addressed in order to present the Eurosystem s views.the ESCB Statute stipulates that the President of the ECB shall decide how the Eurosystem shall be represented in the field of international cooperation. OR /06

23 ORGANISATION DIVISION OF LABOUR IN THE EUROSYSTEM The Eurosystem consists of the ECB and the national central banks of those EU countries that have adopted the euro. Under Article 8 of the Statute of the ESCB, it is the ECB s decision-making bodies that govern the Eurosystem. Within their respective responsibilities, these bodies take all the decisions that are necessary to enable the Eurosystem to carry out its tasks. Thus, the ECB and the NCBs jointly contribute to attaining the Eurosystem s common goals. However, according to Article 9.2 of the Statute the ECB has to ensure that all tasks are carried out properly and consistently.to ensure this across the euro area, the ECB has the power to issue guidelines and instructions to the NCBs. Except for the statutory tasks that have been exclusively assigned to the ECB, the Statute of the ESCB does not indicate to what extent ECB policies are to be implemented through activities of the ECB or the NCBs. For the bulk of the Eurosystem s activities, the actual intra-system division of labour has been guided by the principle of decentralisation, i.e. the ECB shall have recourse to the NCBs, to the extent deemed possible and appropriate, to carry out operations which form part of the tasks of the Eurosystem (Article 12.1 of the Statute of the ESCB). OR /06

24 ORGANISATION TASKS OF THE ECB (1/2) In contrast to the NCBs, the ECB carries out only few operations. Instead, it focuses on formulating the policies and on ensuring that the decisions are implemented consistently by the NCBs. In particular, the ECB is responsible for Defining Eurosystem policies: the Governing Council of the ECB is in charge of monetary policy for the single currency.this includes the definition of price stability, how inflationary risks are analysed, etc. Deciding, coordinating and monitoring the monetary policy operations: the ECB instructs the NCBs on the details of the required operations (value, time, date, etc.) and checks their successful execution. Adopting legal acts: within closely defined limits the decision-making bodies have the power to issue intra- Eurosystem binding legal acts, such as Guidelines and Instructions, to ensure that decentralised operations are carried out consistently by the NCBs. Moreover, within defined limits, they can adopt Regulations and Decisions, which are binding outside the Eurosystem. Authorising the issuance of banknotes: this encompasses the strategic planning and coordination of the production and issuance of euro banknotes. Furthermore, the ECB coordinates the Eurosystem s research and development activities and the security and quality of the euro banknote production. In addition the ECB hosts the Counterfeit Analysis Centre for the analysis and classification of euro counterfeits, the central database for euro banknote counterfeits, and the International Counterfeit Deterrence Centre, which contributes to global central bank cooperation on counterfeit deterrence under the auspices of the G10 Governors. Interventions on the foreign exchange markets: if needed, also jointly with individual NCBs.This involves the buying and/or selling of securities on foreign exchange markets. International and European cooperation: in order to present its views at the international and European level, the ECB participates in the meetings of various international and European fora. In December 1998, the ECB became the only central bank in the world to be granted observer status at the International Monetary Fund (IMF) and it now participates in all meetings of the IMF s Executive Board on EMU-relevant issues. For this reason, the ECB has established a permanent representation in Washington D.C. Moreover, the ECB participates in meetings of the G7, the G20 and the Financial Stability Forum. At the European level, the President of the ECB is regularly invited to attend meetings of the Eurogroup, the monthly informal gatherings of euro area finance ministers. Moreover, the ECB may participate in meetings of the EU Council whenever issues relating to the objectives and tasks of the Eurosystem are discussed. OR /06