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European Central Bank: CNBC Explains

The European Central Bank—or ECB—is the central bank for Europe's single currency, the euro. Managing the euro and the countries that use it is a big task, as CNBC explains.

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What is the ECB?

The ECBis considered one the most important central banks in the world.

Its primary focus is to maintain the euro's purchasing power and price stability in the euro area. In simple terms, that means controlling inflation.

The euro area is made up of 17 countries or nation-states that use the euro for their currency. They are:

  • Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, Netherlands, Portugal, Slovakia, Slovenia, Spain.

The ECB was established by the Treaty of Amsterdam in 1998, and is headquartered in Frankfurt, Germany. It has about 600 employees. The ECB is the successor to the European Monetary Institute (EMI), which was set up in 1994 to handle the transition of states dropping their own currency in order to adopt the euro.

The ECB is the central bank or controlling force for 17 national central banks, each serving its own country. Those central banks are the original members of the euro zone.

Although the ECB is governed by European law, it's set up like a corporation in the sense that the ECB has shareholders and stock capital. Shares in the ECB are not transferable and cannot be used as collateral.

The ECB's capital holdings are said to be around five billion euros which is held by the national central banks of the member states as shareholders.

What powers does the ECB have?

The key power the ECB has is to implement monetary policy—basically controlling the supply of money. It also conducts foreign exchange operations and takes care of the foreign reserves, the amount of foreign currency, held by the central banks of the euro zone countries.

The ECB can lend money to the central banks. It can also buy up debts of euro zone nations but only on the secondary markets.

A big tool for the ECB is its ability to raise or lower interest rates for the euro zone, depending on what it sees as the best way to control inflation.

The ECB has the exclusive right to issue euro banknotes and coins—the money people use. Member states can also issue euro coins, but the amount must be approved by the ECB.

How does the ECB compare to the U.S. Federal Reserve?

In some ways, they are very similar. Both the ECB and the Fed are central banks. Both have boards of governance—though set up differently—that decide on policy matters.

But here is one difference. The Fed acts as the Federal Government's banker. The U.S. Treasury maintains accounts with the Fed and those accounts handle Federal tax deposits and outgoing government payments. But the ECB does not have that role. It does not handle outgoing payments for the euro zone countries or handle tax deposits.

The biggest difference, however, may be in the mandates. The Fed has a written policy stating it must ‘promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.’ That means controlling inflation as well as promoting job growth.

The ECB’s monetary policy does have an objective of high employment, but price stability—controlling inflation—is the primary goal.

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