The European Central Bank (ECB) is the institution of the European Union (EU) that administers the monetary policy of the 17 EU Eurozone member states. It is thus one of the world's most important central banks. The bank was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt, Germany.
The European Central Bank was established on 1 June 1998. It has legal personality and is fully independent of national and European institutions. The ECB ensures the smooth running of the Economic and Monetary Union by managing the European System of Central Banks (ESCB). Its primary objective is to maintain price stability by defining the monetary policy of the Union.
The ESCB is made up of the European Central Bank and the national central banks of the Member States. The ESCB's principal aim is to maintain price stability within the EU by way of:
defining and implementing the monetary policy of the Union;
conducting foreign-exchange operations of the euro vis-à-vis national currencies;
holding and managing official foreign-exchange reserves of the Member States;
promoting the smooth operation of payment systems.
The structure of the ECB was outlined in the Maastricht Treaty (1992) as part of the programme to create Economic and Monetary Union (EMU). The Treaty set up the ESCB and a European Monetary Institute (EMI).
The ECB is based in Frankfurt, Germany. The first President of the ECB was Wim Duisenberg. He oversaw the launch of the Euro on 1 January 1999 and the Euro notes and coins in 2002. He was replaced by Jean-Claude Trichet in 2003.
The French argued that since the ECB was to be located in Germany, its President should be French. This was opposed by the German, Dutch and Belgian governments who saw Duisenberg as a guarantor of a strong euro. Tensions were abated by a gentleman's agreement in which Duisenberg would stand down before the end of his mandate, to be replaced by Trichet, an event which occurred in November 2003.
Like with all insurance mechanisms there is a risk of moral hazard. By providing lender of last resort insurance, the ECB gives an incentive to governments to issue too much debt. This is indeed a serious risk. But this risk of moral hazard is no different from the risk of moral hazard in the banking system.
The ECB has made it clear that it does not want to pursue its role of lender of last resort in the government bond market. This has forced the Eurozone members to create a surrogate institution (the European Financial Stability Facility or EFSF and the
The ECB increased liquidity for banks, offering unlimited funds for six months to prevent the money markets freezing up. The bank also left interest rates unchanged at 1.5pc and signalled an end to its rate-rise cycle.
The ECB has purchased almost a fifth of the combined debt of Greece
The Directorate General Research (DG-R) is the ECB business area responsible for conducting theoretical and empirical research relevant to the conduct of monetary policy and for providing information on how research results may have a bearing on policy decisions.