ECN 361 Chapter 5 The European Central Bank and the Eurosystem

price stability

-Primary objective of Eurosystem -Benefits of price stability: 1. Recognising changes in relative prices. 2. Avoiding inflation risk premium. 3. Productive use of resources Reducing distortionary impact of tax and social security system. 4. Maintaining social cohesion and stability

Benefits of the Euro

-Removal of transaction costs -Elimination of exchange rate risks -Security of purchasing power -Price transparency

The central banks of the Eurosystem have a range of additional tasks.

-The European Central Bank (ECB) is one that can only make banknotes in the euro area. -The European Central Bank (ECB) works with the national central banks to make the statistical data needed for the Eurosystem to do its job. -In addition, the Eurosystem helps the governments make decisions about how to keep credit institutions safe and keep the economy stable.

European System of Central Banks (ESCB)

-The central banking system of the European Union. -It comprises the ECB and the national central banks of all EU members (but the national central banks of EU Member States whose currency is not the euro are not involved in the conduct of the Euro system's monetary policy for the euro area because they retain responsibility for monetary policy under national law). -ESCB implies cooperation with the Eurosystem in 1. Target payment system and statistics European 2. Exchange Rate Mechanism (ERM II): a framework for monetary and exchange policy

National central banks(NCB)

-They have legal personalities according to the national law of their respective country. -They follow the rules set by the ECB's decision-making body when they do their jobs for the Eurosystem. -They also help the work of the Eurosystem and the ESCB by taking part in the different Eurosystem and ESCB Committees. -There are also non-Eurosystem functions (on their own responsibility)

The ECB and the European System of Central Banks (ESCB)

-established in June 1998 -replacing the EMI

Three stages to economic and monetary union (EMU)

1. Abolition of all restrictions 2. Establishment of the European Monetary Institute 3. Fixing of conversion rates 4. Introduction of Euro

Tasks of European Central Bank (ECB)

1. manages the euro and frames and implements EU economic & monetary policy. 2. to keep prices stable, thereby supporting economic growth and job creation.

The basic tasks of the Eurosystem

1. to define and implement the monetary policy of the euro area; 2. to conduct foreign exchange operations consistent with the provisions; 3. to hold and manage the official foreign reserves of the Member States 4. to promote the smooth operation of payment systems.

11 Member States met the convergence criteria

Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg, The Netherlands, Austria, Portugal, and Finland. *Greece and Sweden did not fulfil all the criteria.

European Central Bank (ECB's) Monetary Policy Strategy

Economic Analysis: -Analysis of economic dynamics and shocks -Assessing short-medium term determinants of price developments -Real activity and financial conditions in the economy Monetary Analysis: -Long-run link between money and prices. -Monetary trends and monetary stability. -Detailed analysis of monetary and credit developments with a view to assessing their implications for future inflation and economic growth.

European Central Bank (ECB)

The central authority, located in Frankfurt, Germany, which oversees monetary policy in the common currency area

Supervisory institutions

Micro-prudential supervision: -the European Banking Authority ( EBA ) -the European Insurance and Occupational Pensions Authority (EIOPA) -European Securities and Markets Authority ( ESMA ) Macro-prudential oversight: -European Central Bank (ECB) -National central banks -European Supervisory Authorities (ESAs) -European Commission

Eurosystem

The European Central Bank + the National Central Banks of participating countries; together, they carry out the tasks of central banking in the euro area.

Stability and Growth Pact (SGP)

agreement of the EU member states concerning conduct over their fiscal policy, which aimed to ensure that the constraints on member states prior to the introduction of the single currency would continue after economic and monetary union was in place

European Monetary institute (EMI)

coordinate monetary policy among the national central banks