How is monetary policy governed within the EU?

The European Central Bank (ECB) is responsible for conducting the monetary policy for the Euro area since January 1, 1990. <br\>

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). 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. <br\>

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.

The Eurosystem

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 16 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.

The national central banks

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 European System of Central Banks (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.

Basic tasks of the Eurosystem

The Treaty establishing the European Community entrusts the European System of Central Banks (ESCB) with the task of performing the central bank function for the Community. Since some EU Member States do not participate in Economic and Monetary Union, 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 national central banks (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