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What is a European Central Bank?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 19 August 2016
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The European Central Bank is the major banking group in charge of monetary policy for the European Unit of Currency or euro. Founded in 1998, the European Central Bank has many functions but is primarily tasked with maintaining price stability in the currency of member nations. As of 2010, the European Central Bank has 16 member nations that rely on its policies.

Now one of the major banking systems in the modern world, the ECB grew from previous institutions such as the European Money Institute and the earlier European Monetary Cooperative Fund. The ECB was the result of the Masstricht Treaty, also called the Treaty on European Union, that paved the way for the creation of the European Union and the implementation of a single currency for member nations. The area ruled by the policies of the ECB is collectively known as the Eurozone.

Unlike other central banks that have a number of equal tasks, the European Central Bank specifically singles out one purpose to be held above all others: the creation and maintenance of price stability. The means for achieving this goal are varied, but are marked by a low inflationary rate and a high level of employment. Other major tasks of the ECB include foreign exchange policy, management of reserves for member nations, creating and implementing monetary policy, and overseeing payment systems.

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The European Central Bank has many tools at hand to help meet its major goals. It is the only organization that can issue bank notes, much like the Federal Reserve in the United States. Additionally, it can work closely with other European banking organizations in both member and non-member states, in order to boost regional stability and streamline operations between countries. It also has a large section devoted to the collection and analysis of financial statistics that can help influence and guide policy.

Decisions are made by way of the Governing Council, which has six executive members as well as the governors of each member country's central bank. The executive members include a president, vice-president and four other members. Traditionally, the makeup of the executive board is as international as possible to avoid a perception of favoritism. The entire board meets in Frankfurt, Germany twice per month to discuss policy and review financial development.

The ECB is not without controversy. When governing widely varying states with contentious histories, it is difficult, if not impossible, to please everyone. Discussion of the policies of the ECB is a common political topic in both member and non-member nations. Support for the organization is mixed, with some believing that it has done important work in stabilizing the currency and monetary policy of Europe, while detractors continue to favor nationalistic policy instead.

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