The European Central Bank (ECB): an overview

The European Central Bank (ECB) is one of the 7 primary institutions in the EU and serves as the central bank of the Eurozone, a monetary union of 19 EU member states which employ the euro.

Located in Frankfurt, Germany, the Central Bank is tasked with managing the euro, crafting economic policies and ensuring the stability of the EU economy. The ECB is headed by the ECB president and has three governing bodies for decision making: the governing council, executive board and general council.

The European Central Bank is also responsible for the monetary policy of the Eurozone. By working with the European Central Bank, EU member countries maintain price stability and the purchasing power of the euro.

History of the European Central Bank

The European Central Bank (ECB) was established in 1998, succeeding the previous European Monetary Institute (EMI). The EU assigned Wim Duisenberg as the first president of the ECB. During the first 20 years after its establishment, the ECB took on the many roles that the EMI was performing. There weren’t any major financial crises during these first two decades, but the ECB managed to keep inflation very low and ensured that the EU financial system was strong.

After the 2008 financial crisis, the ECB had many simultaneous issues to deal with. This included housing market crashes, the Eurozone debt crisis and more. To navigate these financial crises, the ECB had to take a more active role in the EU economy and step in to ensure prices, markets and the euro stayed stable. Although it took several years, the ECB was able to stabilize the EU after encountering several financial crises.

Today, the ECB is continuously expanding the role it plays in the EU economy. From issuing bank notes to regulating the most powerful financial organizations, the ECB is the sole institution that is tasked with the economic stability of the EU economy. Additionally, the ECB is closely monitoring the dynamic financial markets with the emergence of new stores of value like cryptocurrencies and other technologies.

Key provisions and powers

Development and deployment of euro banknotes: The European Central Bank is the only authority that can create and issue euro banknotes in the EU. Every version of every banknote is designed, developed and issued by the European Central Bank. The euro is the official currency of 19 out of the 27 countries that are EU members.

Economic stability: Since the European Central Bank serves as a central bank for dozens of countries, it is responsible for ensuring economic stability in the European Union. Events like stock market crashes, housing market downfalls and similar situations require the European Central Bank to monitor and occasionally take action to stabilize local economies.

Supervision of financial markets and institutions: As the central bank of the EU, the European Central Bank is responsible for regulating and supervising large financial institutions and the market. With the backing of the EU, the ECB can take financial, legal and regulatory action against non-compliant financial institutions.

In addition, the ECB can also craft monetary policies and other laws to adequately supervise the major financial market players. Without the executive guidance of the European Central Bank, financial institutions will go relatively unchecked.

Who must comply?

Major banks located in the EU: All major banks located in the EU must comply with the ECB. Although the ECB has the power to supervise all banks, it focuses primarily on the largest banks in the EU. This would include major banks of EU member countries (e.g. Bank of Ireland). Since these large banks have the most profound impact on local economies, the ECB closely monitors them to ensure regulations are being followed and the local economies are financially stable.

Businesses operating in the EU: The ECB also has authority over all businesses operating in the EU. Many companies that set up EU locations are multinational, billion or trillion dollar companies. The monetary policies that the ECB sets will impact them by default. These companies must follow the guidelines set out by the ECB or the ECB has the power to take punitive action.

The public: Since the ECB serves as the central bank over 19 countries, it has power to legislate over the public when it comes to currencies and certain practices. The public has a lot of influence on monetary policy, prices and more factors. In order for economic stability to occur, the public must also comply with the ECB in addition to major institutions and businesses. Any currency manipulation or destruction will have financial and legal ramifications by the ECB.