Monetary Policy and the European Central Bank: A Progressive Divorce from the Bundesbank Legacy?

Abstract This chapter begins with consideration of the key features of the European Central Bank (ECB), from its institutional set-up to its main economic features (such as the much debated independence and conservatism). The ECB’s operation and behaviour - concerning inflation (and other final goals), monetary strategies and key instruments (key interest rates) - are investigated through comparisons with those of other central banks (in particular the Federal Reserve in the United States).

Keywords European Central Bank (ECB) • Federal Reserve (FED) • Inflation • Euro • Key interest rate

The ECB and Its Governance

This chapter is devoted to monetary policy, which in the Economic and Monetary Union (EMU) is the only centralized policy because fiscal policies and structural policies remain in the domain of national governments, albeit with a certain degree of control and coordination by the EU institutions. The European System of Central Banks (ESCB) was created by the Maastricht Treaty (see Chap. 2): at its summit is the European Central Bank (ECB), which is responsible for the European monetary policy, while the national central banks have implementation tasks.

The governance architecture of the ECB includes an Executive Committee with six members: the President and the Vice-President of the ECB, in

© The Author(s) 2017

E. Marelli, M. Signorelli, Europe and the Euro, DOI 10.1007/978-3-319-45729-1_3

addition to four further members, all of them nominated by the European Council and in charge for 8 years. The ECB is located in Frankfurt-am-Maine. It proposes monetary policy decisions to the Governing Council, implements the monetary measures and gives instructions to the national central banks.

The Governing Council includes the six members of the Executive Committee and all the Governors of the national central banks of the Eurozone countries (thus 6 plus 19 members in 2016). It is the most important body because it decides monetary policy, interest rates, liquidity provision and unconventional operations, and many other monetary instruments. There is a majority voting rule; in the case of parity, the President’s vote prevails. Since 2015, monetary policy decisions are taken every 6 weeks; after the meeting of the Governing Council, there is usually a press conference held by the President, who illustrates the reasons for the most important decisions.

The third body is the General Council of the ECB; it comprises the President, the Vice-President and the Governors of the central banks of all countries of the EU (including the countries outside the Eurozone). It coordinates the monetary and exchange-rate policies of all EU countries and, in particular, it supervises the functioning of the ERM-II.1

According to some critics, the ESCB is too decentralized because the ‘central’ decision-makers (6 people) are much fewer than the ‘peripheral’ ones (now 19). This carries some risks. For instance, according to Friedman and Schwartz (1963), the excessively decentralized system of the United States’ Federal Reserve (FED) in the 1930s was one of the causes of the monetary policy mistakes that prolonged the Great Depression (at present the FED system is less decentralized). This is one possible reason why a reform became operational in 2015: only 15 Governors in the Governing Council have voting power according to a rotating scheme; the voting frequency depends on the economic and financial weight of the country. The latter weight is also reflected in the national shares of the ECB’s capital; in 2015 the four biggest shares belonged to Germany (25.6%), France (20.1%), Italy (17.5%) and Spain (12.6%).

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