Established inFrankfurt,Germany, the European Central Bank was formed in 1998 asEuropeawaited the implementation of the euro as the general currency for most of the continent.Europe’s single currency is the euro, and the European Central Bank is responsible for administering it.
With its mandate to supervise the money supply and maintain a stable currency, in some ways the bank is similar to other central banks. On the other hand, the majority of central banks are asked to balance twin objectives of promoting employment in addition to safeguarding against inflation, but the charter of the European Central Bank makes fighting inflation its main priority. The central bank’s chief job is to preserve the currency’s buying power and consequently price stability in the euro zone.
The euro zone stretches from Portugal to Finland and fromCyprustoIreland. By 2011 its ranks had swelled to 17, a vast increase from the 11 it started with in 1999. Countries whose currency is not the euro include the Czech Republic, Bulgaria, Latvia, Denmark, Hungary, Lithuania, Romania, Poland, the UK and Sweden. The UK and Denmark have special status, but the other countries are all prospective candidates for adopting the currency at some point in the future.
There is also the European System of Central Banks, which is made up of the European Central Bank and the national central banks of all European Union member states whether they have adopted the euro or not. The Euro system, on the other hand, comprises the European Central Bank and the national central banks of only those countries that have accepted the euro as their currency. The European System of Central Banks and the Euro system will co-exist so long as there are European Union member states outside the euro zone.
Political leaders recently took major steps towards making the central bank more like the United States Federal Reserve System, giving it the right to supervise the euro zone’s biggest banks. The central bank had to dispense almost US$1.3 trillion in cheap loans to calm the unrest in the European market. Interest rates reached record lows of 0.75% in an attempt to unblock credit.
This move was meant to give Europe’s slumped economy a boost because it becomes cheaper for consumers and businesses to take loans. Even as the interest rate was cut, European Central Bank President Mario Draghi remarked at a press conference that the reaction was “muted” because of low demands for loans in the sluggish economy.
In an unexpected move, the central bank also reduced the rate it offers banks for funds deposited overnight to zero. The low interest rate is meant to encourage banks to make loans to each other instead of stashing their money in the central bank. Slashing interest rates to zero, on the other hand, does not get rid of the explanation why so many banks are unwilling to make loans to one another: dread that the other bank would go bust and not be able to repay the money.
Even after using up so much of the ammunition they have on hand by cutting interest rates and raising the money supply in their various economies, on the global front central banks, including the European Central Bank, are constantly being pressured to take more action to support growth.
flickr image by MPD01605