European Central Bank: Objectives and Tasks of the ECB
The primary objective of the ECB and, by implication, the ESCB, is to maintain price stability, a goal set but not defined by the Maastricht Treaty. The ECB defines price stability as an inflation rate close to 2 percent in a Europewide index of consumer prices called the Harmonized Index of Consumer Prices over the ‘‘medium term.’’ What is the medium term? The ECB does not provide a precise definition. It notes thatmonetary policy actswith long and variable lags, an idea made famous by Milton Friedman. Experience, however, suggests that inflation can be controlled within the objectives set out by the ECB within a two-year horizon. To achieve this objective, the ECB decided to give prominence to money growth as well as to a wide range of indicators such as the exchange rate, the yield curve, and various fiscal indicators. More precisely, the ECB’s strategy involves a so-called two-pillars approach. This means that, in setting interest rates for the euro area, the ECB considers developments both on the real side of the economy, which are of a shorter-term nature, as well as on the monetary side, which captures the longer-run influences on monetary policy. Since current interest rate decisions have an impact on future decisions by individuals and firms, the ECB also receives guidance from forecasts of inflation and real economic activity for the euro area as a whole.
The ECB is headed by a president who serves a nonrenewable eight-year term. The first president of the ECB, Wim Duisenberg from the Netherlands, did not serve his full term, which would have ended in 2006; instead, Jean Trichet of France was appointed as the president of the ECB in 2003. Since the president and other senior officials of theECBare appointed by ‘‘common accord’’by the heads of state or governments of EU members, national political imperatives play an important role in such appointments. Therefore, it is unlikely that a country could have more than one representative on the executive board.
The principal decision-making body of the ECB is the governing councilmade up of the governors of the thirteen euro-area national central banks and the executive board. The executive board, which consists of sixmembers chosen fromthe governing council, is responsible for the implementation of monetary policy and carrying out the day-to-day affairs of the ECB. The governing council of the ECB consists of members of the executive board and all the heads of the national central banks that belong to the euro area.The governing council ismainly responsible for formulating monetary policy. The general council, largely an advisory body, includes members from both euro-area and non-euro-area countries that are members of the EU.
Both the executive board and the governing council meet twice a month, generally in Frankfurt. During the first monthly meeting the governing council announces the monetary policy decision made by the executive board. The second monthly meeting is reserved for making decisions related to the other tasks of the euro system. The schedule of meetings is published in advance so financialmarkets can prepare for the announcement of the interest rate decision. Additionally, in an emergency or crisis the governing council can meet in an extraordinary session, as happened, for example, following the terrorist attack on theUnited States in September 2001. The president of theECB announces the interest rate decision immediately after the meeting and holds a press conference, but the ECB does not release minutes of the meeting.
In addition to its responsibility for defining and implementing monetary policy in the euro area, the ECB conducts foreign exchange operations, holds and manages member states’ foreign exchange reserves, and helps promote the Europewide payments system. This payment system is called TARGET (Trans-European Automated Real-Time Gross SettlementTransfer System). Finally, theECB, together with the individual national central banks, collects and disseminates a large variety of financial and economic statistics.
The primarymonetary policy instruments consist of open market operations followed by a marginal lending facility that permits select financial market participants to borrow overnight from national central banks against eligible assets. Finally, banks in the EMU are required to hold reserves against shortterm deposits.