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ECB: the European Central Bank
By Gabriele Brambilla
A key body for the Eurozone, the ECB is the Union's central bank, responsible for monetary policies and the management of foreign exchange reserves
Discovering the ECB
The ECB is one of the most important bodies of theEuropean Union.
Endowed with great powers, it is able to significantly affect the economic development of the Continent.
In addition, the decisions taken by it can also have repercussions on the crypto sector.
Therefore, we have prepared a dedicated in-depth study, so you can understand what the ECB is, what its functions are, and why it is so important.
In addition, we will also satisfy some curiosity, for example, by telling how the European Central Bank was born and where it is based.
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What is the ECB?
First, we need to answer the question “what does the acronym ECB stand for?”
ECB stands for European Central Bank, a Union entity that operates in the economic field. In English the acronym is reversed, becoming ECB: European Central Bank. It is also improperly called ECB Bank.
In more detail, what is the European Central Bank?
As the EU built Economic and Monetary Union, it became increasingly necessary to have an institution that could manage and coordinate it.
Making it very short, otherwise we would be dilly-dallying unnecessarily, the Maastricht Treaty stipulated that bankers would be in charge of the day-to-day management of monetary policies. However, it was preferred to avoid giving them free rein by creating an ad hoc structure. Thus, the European System of Central Banks, known as the ESCB, was born.
According to the TFEU (Treaty on the Functioning of the European Union), the main objective of the ESCB is to maintain price stability. In addition, it is to support the general economic policies of the Union in order to contribute to the achievement of the Union’s objectives as defined in Article 3 of the Treaty on European Union.
At the heart of the ESCB is precisely the ECB. In fact, the System is governed by the decision-making bodies of the European Central Bank, namely the Governing Council and the Executive Board, to which is also added the General Council.
The ECB Governing Council has two main tasks:
- It makes decisions to ensure that the tasks of the ESCB go smoothly.
- It outlines the eurozone’s monetary policy. This is where the familiar interest rate changes we hear so much about fall.
The Governing Council consists of the governors of the central banks of the various Eurozone countries, members of the Executive Board, the chairman of the ECOFIN council and a member of the European Commission. However, the latter two figures do not hold voting power.
The ECB Executive Board ‘s primary task is to implement the monetary policies set by the Governing Council. To do so, it directs the various national central banks how they should act.
The composition of the Committee is as follows: president and vice-president of the ECB plus four members.
The choice must fall among people of a certain standing and experience in the monetary or banking field; the appointment is made at the hands of the European Council by qualified majority, on the recommendation of the Council and after consulting the European Parliament and the ECB Governing Council (Article 283 TFEU).
These two bodies are then joined by the ECB General Council, with consultative and coordinating functions.
It consists of the ECB president and vice-president plus all the central bank governors of the Eurozone.
The ECB is thus a key institution on several stages, from simple consultations to the actual execution of what is decided in decision-making. Its “colleague” in the United States it’s the US Federal Reserve.
"The ECB is the most important economic body in the Eurozone"
Where is the European Central Bank located?
The ECB is based in Germany, in the city of Frankfurt am Main, right on the river bank.
Before the opening of the new complex where the ECB is located in 2015, the headquarters was divided among different locations in the same city: the Eurotower, Eurotheum, Neue Mainzer Straße 32-36, and Japan Center.
European Central Bank story
As we said, the ECB came into being to ensure that the European System of Central Banks could really work. It is the result of countless discussions and is part of the larger context of a common monetary policy within the Eurozone.
It was established in 1998, a few years before the arrival of the single currency, the Euro.
In this quarter century, there has been no shortage of friction between the ECB and member states. In fact, the European Central Bank holds great powers and responsibilities; in exercising them, it often comes into conflict with the various national realities.
Over time, a variety of criticisms have come, especially on the issue of interest rates. This has also led to clashes between prominent political leaders, among which we highlight that between former French President Sarkozy and former German Chancellor Merkel: while the former supported active management of rates, the latter thought diametrically opposed.
In short, the birth of the ECB came about in order to comply with the plans that emerged in the 1990s. The single currency required a centralized conduct of monetary policies, on pain of chaos within the Eurozone.
Although created with all good assumptions, the European Central Bank remains a body as powerful as it is criticized, often frowned upon by politicians, insiders and citizens of member states. This is because, as in other areas of the Union, ceding decision-making power always requires great national efforts (and discontent).
"The ECB was established in 1998 to ensure the smooth functioning of the European System of Central Banks"
What are the functions of the European Central Bank?
What functions does the ECB have? This institution performs several tasks. Let us see what the main ones are.
First and foremost, and as we all know, the ECB sets interest rates related to the loans it issues to commercial banks in the Eurozone. Of course, everything is then reflected on the end customers.
Through this mechanism, the Bank controls themoney supply, increasing or reducing it as needed.
This allows it to intervene in inflation. One of the primary goals of a central bank is precisely to keep this economic parameter controlled; however, the goal is not always achieved.
The European Central Bank keeps prices and related trends monitored, producing regular reports and analysis, trying to ensure their stability in the Eurozone.
Also related to our currency, the ECB authorizes Eurozone countries toissue Euro banknotes. Provisions in this regard follow the lines established by the Central Bank itself.
Also important is the task related to conducting the foreign exchange reserves of the entire Eurozone, including purchases and sales designed to keep exchange rates in balance.
Not to be underestimated is the supervisory role over national authorities, which in turn are charged with keeping domestic financial institutions and markets under control. The same applies to payment systems, both from the perspective of security and continuity of operation.
More generally, the European Central Bank is a key element from the perspective of security and stability of the entire European banking system.
The list given is not exhaustive but refers only to the most important tasks of the ECB. To these are added other equally significant ones that showcase the importance of this institution, a true European bank.
For the crypto world and in investments in general, the ECB interest rate carries quite a lot of weight.
When a Central Bank raises rates, investments are penalized because it is more expensive to borrow money. At the same time, an investor will have more incentive to deposit their savings in instruments such as government bonds precisely because they will pay more interest.
Such a maneuver is put in place to counter excessive inflation.
In contrast, lower rates have the opposite effect and stimulate companies to borrow money and invest in their businesses. Financial investment is also stimulated.
Such maneuvers could encourage higher inflation, although not in the immediate term.
Combined with U.S. rates, ECB rates also impact bitcoin, Ethereum and other cryptocurrencies, especially in recent years.
For the more curious, here are some useful links to learn about this institution in detail:
Who is the chairman of ECB?
The term as president of the European Central Bank is eight years and is nonrenewable.
Currently, the post is held by Christine Lagarde, formerly chief operating officer at the International Monetary Fund (IMF).
From 2007 to 2011, Lagarde was minister of Economy, Industry and Employment in her country, France.
She is the first woman to serve as president of the ECB.
In carrying out her duties, Christine Lagarde serves on all the decision-making bodies of the European Central Bank listed above: the Executive Board, Governing Council and General Council.
CBCD Euro: the ECB digital currency
We close by returning to our world and talking about CBDC.
CBDC stands for Central Bank Digital Currency, which is a digital currency issued by a central bank.
This type of asset has long been in the spotlight. Technologically, it is similar to cryptocurrencies; what is totally different is the purpose, as well as the structure behind it.
If bitcoin was born as a new form of currency, free and decentralized, CBDC is the exact opposite, being an asset issued by a central body.
A Central Bank Digital Currency is nothing more than the digital form of a particular country’s currency.
On our continent, discussions about a Euro CBDC (also known as a digital Euro) are more alive than ever.
The ECB is pushing this solution quite a bit, with the hope that it will overshadow traditional cryptocurrencies.
