On June 1, 1998–twenty years ago today– the European Central Bank (ECB) was established. The ECB is one of the seven main institutions of the European Union (EU). It forms part of the European System of Central Banks (ESCB) together with the National Central Banks (NCBs) of all 28 Members States of the EU. The Eurosystem on the other hand only comprises the ECB and the NCBs of the EU Member States that have adopted the euro as their currency (currently 19). The ECB is the monetary authority for those Member States. For as long as there are Member States that have not adopted the euro as their currency, the ESCB and the Eurosystem will continue to co-exist.
In 1988, the “Delors Committee” was tasked by the European Council with exploring ways of realizing a European Economic and Monetary Union (EMU). It was composed of Jacques Delors, the then-President of the European Commission, and all twelve central bank governors of the then-European Community. The resulting “Delors Report” proposed that the EMU was to be achieved in three successive stages. The report eventually led to the signing of the Treaty on European Union (Maastricht Treaty) in 1992. The Maastricht Treaty created a single European currency, the euro, whose stability was to be ensured by focusing on price stability as a primary objective. The ESCB and the ECB were established and tasked with achieving this primary objective. The Maastricht Treaty also sets out the four criteria that countries have to fulfill to join the euro-area, the “convergence criteria” (TFEU, art. 140, para. 1). The convergence criteria are:
- Achievement of a high degree of price stability indicated by a low inflation rate;
- Sound and sustainable public finances;
- Exchange-rate stability; and
- Low and stable long-term interest rates.
Furthermore, joining the EMU also requires an independent central bank. (TFEU, art. 130). The third stage of the EMU, meaning the adoption of the euro by all Member States and the implementation of a single monetary policy under the responsibility of the ECB, has been ongoing since January 1, 1999. Two countries, namely the United Kingdom and Denmark, have opted out of moving to Stage Three for the time being (“Member States with a special status”).
The ECB is a supranational institution with legal personality. (TFEU, art. 282, para.3, Statute of the ESCB and the ECB, art.9.1). Its offices are located in Frankfurt am Main, Germany. The current ECB president is Mario Draghi from Italy. The ECB’s decision-making bodies are the Governing Council and the Executive Board. The Executive Board is in charge of the current business of the ECB. (Statute, art. 11.6). It consists of the President of the ECB, the Vice-President, and four other members that are appointed by the European Council from among persons of recognized standing and professional experience in monetary or banking matters. (TFEU, art. 282, para. 2). The Governing Council is made up of the six members of the Executive Board and the governors of the central banks of the Member States that are part of the euro area. (TFEU, art. 282, para. 1). It is the main decision-making body of the ECB and responsible for formulating the monetary policy for the euro area, for example setting key interest rates. The term of office of members of both decision-making bodies is eight years.
The primary objective of the ECB is to maintain price stability, meaning to safeguard the value of the euro. Monetary policy is conducted with this objective in mind. Price stability is not clearly defined in the Treaty on the Functioning of the European Union. The Governing Council has defined it as keeping inflation below, but close to, 2% over the medium term.
The ECB also carries out specific tasks in the areas of banking supervision. After the financial crisis of 2008, the banking union was established. It consists of two pillars, the Single Supervisory Mechanism (SSM) and the Single Resolution Mechanism (SRM). The SSM is made up of the ECB and the national supervisory authorities of the euro-area countries. Since November 4, 2014, the ECB directly supervises 118 “significant” credit institutions, financial holding companies, or mixed financial holding companies of the participating EU countries. What constitutes “significance” is determined by the ECB according to the criteria set out in the SSM Regulation, among them size (total value of assets), economic importance for the EU or any participating Member State, cross-border activities, and whether or not the bank has requested or received direct public financial assistance from the European Stability Mechanism (ESM) or its predecessor the European Financial Stability Facility (EFSF). (SSM Regulation, art. 6, para. 4.). Other banks continue to be supervised by their national supervisors, in close cooperation with the ECB.
If you would like to find out more about the ECB, the ESCB, the EMU, or other related topics, I suggest consulting one of the many resources available at the Law Library of Congress or online, a current selection of which you can find below.
- Klaus Lackhoff, Single Supervisory Mechanism : European Banking Supervision by the SSM : a Practitioner’s Guide (2017).
- Paul de Grauwe, Economics of Monetary Union (11th ed. 2016).
- Emmelmann, Steffen. Die politische Rolle der Europäischen Zentralbank : Unabhängigkeit und Demokratie (2016).
- Christos V. Gortsos, The Single Supervisory Mechanism (SSM) : Legal Aspects of the First Pillar of the European Banking Union (2015).
- European Banking Union (Danny Busch & Guido Ferrarini eds., 2015).
- European Central Bank, Guide to Banking Supervision (2014).
- Kommentar zur Europäischen Währungsunion (Helmut Siekmann ed., 2013).
- Harold James, Making the European Monetary Union (2012).
- European Central Bank, The Monetary Policy of the ECB (3rd ed. 2011).
- The European Central Bank at Ten (Jakob de Haan & Helge Berger eds., 2010).
- European Central Bank, The European Central Bank. The Eurosystem. The European System of Central Banks (2008).