These pages have been compiled to guide students and teachers through each round of the competition, in particular the analysis round.
Euro area, Eurosystem, European Central Bank and European System of Central Banks
Since 1 January 1999 the European Central Bank (ECB) has been responsible for conducting monetary policy for the euro area – one of the biggest economic areas in the world.
The euro area came into being when responsibility for monetary policy was transferred from the national central banks (NCBs) of 11 EU Member States to the ECB in January 1999. Greece joined in 2001, Slovenia in 2007, Cyprus and Malta in 2008, Slovakia in 2009, Estonia in 2011, Latvia in 2014 and Lithuania in 2015.
The creation of the euro area – consisting of the 19 EU countries that have adopted the euro as their currency – and of a new supranational institution, the ECB, was a milestone in the long and complex process of European integration.
To join the euro area, the 19 countries had to fulfil the convergence criteria, as will other EU Member States prior to adopting the euro. The criteria set out the economic and legal preconditions for countries to participate successfully in Economic and Monetary Union.
The legal basis for the single monetary policy of the Eurosystem is the Treaty on the Functioning of the European Union (TFEU) and the Statute of the European System of Central Banks and of the European Central Bank (ESCB Statute). The ESCB comprises the ECB and the NCBs of all Member States of the European Union, irrespective of whether they have adopted the euro or not. The Eurosystem comprises the ECB and the NCBs of those Member States whose currency is the euro. The Eurosystem and the ESCB will coexist as long as there are Member States outside the euro area.
The main decision-making body of the Eurosystem is the ECB’s Governing Council. It consists of:
• the six members of the Executive Board of the ECB, plus
• the governors of the NCBs of those Member States whose currency is the euro.
The Governing Council’s responsibilities include:
• formulating monetary policy for the euro area, i.e. setting key interest rates and supplying reserves (liquidity) to the banks in the euro area;
• adopting the regulations and taking the decisions necessary to ensure the performance of the tasks assigned to the ESCB and the Eurosystem.
The Governing Council meetings dedicated to monetary policy are held every six weeks. At these meetings, the Governing Council assesses economic and monetary developments and takes its monetary policy decision. Non-monetary policy meetings are held at least once a month. The purpose of these meetings is to mainly discuss issues related to the other tasks and responsibilities of the ECB and the Eurosystem. The meetings usually take place at the ECB in Frankfurt am Main, Germany.
The monetary policy decision is explained in detail at a press conference held shortly after each monetary policy meeting. The President together with the Vice-President chairs the press conference, which is divided into two parts: the President first reads out the Introductory Statement, which provides the rationale for the monetary policy decision taken by the Governing Council, and then answers the journalists’ questions.
In addition, the ECB publishes regular accounts of the Governing Council’s monetary policy meetings before the date of the next one.
Objectives of the Eurosystem
The main objective of the Eurosystem is to maintain price stability. Without prejudice to this objective, the Eurosystem supports the general economic policies in the EU, such as full employment and sustainable economic development. The Treaty establishes a clear hierarchy of objectives for the Eurosystem, assigning overriding importance to price stability. It also makes clear that ensuring price stability is the most important contribution monetary policy can make to achieving a favourable economic environment and full employment.
These Treaty provisions reflect the broad consensus that the benefits of price stability are substantial. Maintaining stable prices on a sustained basis is a crucial precondition for increasing economic welfare and the growth potential of an economy. Monetary policy can affect real economic activity in the shorter term, but ultimately can only influence the price level in an economy.
The Treaty provisions also imply that, in the actual implementation of monetary policy decisions, the Eurosystem should also take into account the broader economic goals of the EU. In particular, given that monetary policy can affect real activity in the shorter term, the Eurosystem typically should avoid generating excessive fluctuations in output and employment if this is in line with the pursuit of its primary objective.
Basic tasks of the Eurosystem
According to the Treaty the basic tasks to be carried out through the Eurosystem are:
• to define and implement the monetary policy for the euro area;
• to conduct foreign-exchange operations;
• to hold and manage the official foreign reserves of the Member States (portfolio management);
• to promote the smooth operation of payment systems.
In addition, the ECB is responsible for specific tasks concerning the prudential supervision of credit institutions established in participating Member States. It carries out these tasks within a Single Supervisory Mechanism composed of the ECB and the national competent authorities.
Further Eurosystem tasks
The Eurosystem is also responsible for a number of additional tasks in the following fields:
• Banknotes: the ECB and the NCBs of the countries which belong to the euro area are responsible for issuing euro banknotes in the EU.
• Statistics: in cooperation with the NCBs, the ECB collects the statistical information it needs to fulfil its tasks, either from national authorities or directly from economic agents.
• Financial stability and supervision: the Eurosystem contributes to the smooth conduct of policies pursued by the relevant authorities in matters relating to the prudential supervision of credit institutions and the stability of the financial system.
• International and European cooperation: the ECB maintains working relations with relevant institutions, bodies and forums both within the EU and internationally in respect of tasks assigned to the ESCB.
The objective of price stability
The objective of price stability refers to the general level of prices in the economy and implies avoiding prolonged periods of both inflation and deflation.
The ECB defines its price stability objective as “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below, but close to, 2% over the medium term”.
Price stability contributes to achieving high levels of economic activity and employment by:
• improving the transparency of the price mechanism. In an environment of stable prices, it is easier for people to recognise changes in relative prices (i.e. prices between different goods), instead of being confused by widespread changes in the general price level when inflation is high. Consequently, they are able to make well-informed consumption and investment decisions and to allocate resources more efficiently;
• reducing inflation risk premia in interest rates (i.e. the “compensation” that investors demand for any unexpected rise in inflation during the period of their investment). This reduces real interest rates and boosts incentives to invest;
• rendering unnecessary unproductive activities aimed at hedging against the negative impact of inflation or deflation, e.g. holding on to goods in the expectation that their price may increase;
• reducing distortions of inflation or deflation, which can exacerbate the distortionary impact on the economic behaviour of tax and social security systems; and
• preventing an arbitrary redistribution of wealth and income as a result of unexpected periods of inflation or deflation.
Monetary policy of the Eurosystem
Click on the link below for details on the ECB / Eurosystem’s monetary policy:
For data on ECB interest rates:
For more on the monetary policy strategy:
Factors determining price developments
Click on the link below for details on factors determining price developments:
For more on inflation:
For more on euro area data:
Monetary policy instruments
Monetary policy operates by steering short-term interest rates, thereby influencing economic developments, in the best possible way. The steering of short-term interest rates is carried out through the operational implementation of monetary policy. To this end, the Eurosystem has at its disposal a set of monetary policy instruments, namely open market operations, standing facilities and minimum reserves.
Open market operations
The most important monetary policy instrument is the open market operation, which serves to steer interest rates, manage the liquidity situation in the money market, and signal the monetary policy stance.
Open market operations can be divided into the following categories:
• refinancing operations conducted regularly with maturities from one week to up to three years;
• fine-tuning operations, which are executed on an ad hoc basis and are aimed at managing the liquidity situation in the market and steering interest rates, in particular to smooth the effects on interest rates of unexpected fluctuations in market liquidity; and
• structural operations, which are carried out through the issuance of debt certificates, reverse transactions and outright transactions.
The Eurosystem also offers standing facilities, which aim to provide and absorb overnight liquidity and set the boundaries for overnight market interest rates. The two standing facilities on offer are:
• the marginal lending facility, which allows counterparties (i.e. financial institutions such as banks) to obtain overnight liquidity from the euro area national central banks against eligible assets;
• the deposit facility, which can be used by counterparties to make overnight deposits with the euro area national central banks.
Finally, the Eurosystem requires credit institutions to hold minimum reserves on accounts with the euro area national central banks. The purpose of the minimum reserve system is to stabilise money market interest rates and create or enlarge a structural liquidity shortage.
For more information on monetary policy instruments:
ECB press conferences and introductory statements
You can see all the introductory statements on the ECB’s website:
The statements are ‘introductory’ as they precede the press conference at which the ECB’s President explains the Governing Council’s monetary policy decision. You can watch the ECB press conferences live at 14:30 CET following each monetary policy meeting of the Governing Council.
The webcasts of previous ECB press conferences are available on the ECB’s website:
Non-standard monetary policy measures
Non-standard monetary policy measures
On account of the depth and length of the financial crisis, it would not have been possible to ensure price stability through standard monetary policy alone. The short-term interest rate was reduced to its effective lower bound, thereby reducing the potential for further rates cuts to support the economy. Indeed, even before the short-term interest rate became constrained in this way, the ECB needed to implement some of its non-standard monetary policy measures to address the serious disruptions in the transmission of its policy. Additional non-standard monetary policy measures have been introduced to provide additional monetary stimulus when interest rates reached a virtual zero-level in order to mitigate disinflationary risks.
The aim of the non-standard monetary policy measures introduced by the ECB, which are unprecedented in nature, scope and magnitude, is to fulfil the ECB’s primary objective of safeguarding price stability and to ensure an appropriate monetary policy transmission mechanism. These measures form part of the Eurosystem’s monetary policy implementation “toolbox” but are, by definition, exceptional and temporary in nature. They have been designed to provide liquidity to the banking sector, ease overall financial conditions and restore specific market segments and the bank lending channel. The banking sector is a particularly important channel for transmitting monetary impulses to euro area firms and households.
Non-standard monetary policy measures include the following:
• Liquidity and funding measures
– Fixed-rate tender procedure with full allotment
– Extension of the maturity of refinancing operations (three-year longer-term refinancing operations (LTROs) in November 2011)
– Expansion of the collateral pool
• Outright purchases in malfunctioning market segments
– Securities Markets Programme
– Covered bond purchase programmes
– Outright Monetary Transactions (September 2012)
• Forward guidance (July 2013)
• Credit easing and asset purchases (since June 2014)
– Targeted longer-term refinancing operations (TLTROs)
– Asset-backed securities purchase programme
– Covered bond purchase programme
– Corporate sector purchase programme
– Expanded asset purchase programme
On 22 January 2015 the ECB launched its expanded asset purchase programme. This programme added the purchase of sovereign bonds to the ECB’s existing private sector asset purchase programmes that had been launched towards the end of 2014. The monthly asset purchases of €80 billion, subsequently reduced to €60 billion, are intended to continue until the end of 2017. At the monetary policy meeting on 26 October, the Governing Council decided to downsize the asset purchase programme (APP) to €30 billion from January to September 2018.
For more information on the asset purchase programme: