Questions and answers on the European Central Bank

FRANKFURT, Germany (AP) — The European Central Bank is the monetary authority for the 17 countries that use the euro currency. Its policies influence the eurozone economy, the world’s second largest after the United States. The eurozone has 331 million people and annual output of €9.41 trillion, or $11.75 trillion.

Here are some questions and answers about the ECB.

Q: What are the origins of the ECB?

A: The ECB was established by the Treaty on European Union, also known as the Maastricht Treaty after the town in the Netherlands where European leaders signed it on Feb. 7, 1992. That treaty created the European Union from the existing European Community and laid the groundwork for the shared euro currency.


The ECB’s precursor, the European Monetary Institute, started work in 1994 to prepare for the euro. It became the European Central Bank on June 1, 1998, six months ahead of the launch of the currency on Jan. 1, 1999.

Q: What is the ECB’s job?

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A: The ECB issues the euro currency. Only it can authorize printing and circulation of banknotes through the national central banks.

Its primary economic policy job is price stability: keeping inflation under control, protecting the value and stability of the euro. The bank aims to keep inflation less than, but close to, 2 percent.

It also provides credit to the 7,500 licensed banks and money market funds in the eurozone, should they need it. Banks must put up collateral such as government bonds to get that money. That insures the ECB against losses.

Q: How does the ECB keep prices stable?

A: The ECB’s main tool in fighting excessive inflation is interest rates.


It can raise or lower its key benchmark rate, called the refinancing rate. The refinancing rate is what banks pay the ECB when they borrow from it. That rate in turn influences many other kinds of interest rates paid by banks, companies and consumers.

Lower rates make it cheaper for people and companies to take out a loan to buy a house or expand a business. Those activities lead to more spending, investment, jobs and growth.

Higher rates have the opposite effect. They slow down economic activity and reduce demand for goods. That tends to slow the rise in consumer prices.

So the ECB can step on the growth gas pedal by lowering rates. And it can hit the brakes on inflation by raising rates.

Q: What about other important issues, like creating jobs?

A: The ECB is supposed to pursue economic growth and job creation, as well. But only if that doesn’t get in the way of its mission to control inflation.


That means that the ECB has less flexibility sometimes than other central banks, such as the US Federal Reserve, which treats inflation control and job creation as equally important missions.

Q: Who runs the ECB?

A: The ECB is run by a 23-member governing council and a six-member executive board, both chaired by President Mario Draghi.

The governing council members are:

— The six members of the executive board.

— The 17 heads of the national central banks, appointed by their national governments.

By treaty, the ECB is legally independent and can’t take advice from politicians and governments. That is supposed to insulate it from pressure to make decisions for political reasons.

The executive board runs the bank’s operations day to day at its headquarters in Frankfurt, Germany as their fulltime jobs, and prepares the agenda for the governing council meetings.

Q: Why does Europe still have national central banks?

A: They execute the monetary policy operations decided by the ECB, such as lending to banks. They also put banknotes into circulation and withdraw them when they are worn out, and operate payment systems that let customers in one country pay businesses in another country. With ECB permission, they can also make emergency loans at their own risk to their banks.

Q: How are the ECB president and members of the executive board appointed?

A: They are chosen by the eurozone member governments, after consulting with the ECB and the European Parliament. The treaty says they must choose ‘‘persons of recognized standing and professional experience on monetary or banking matters. ‘‘ Often they are former government finance officials or national central bankers, or both.

Q: What is their term of office?

A: One eight-year term.

Q: How often does the governing council meet?

A: Twice a month. The first meeting is where interest rates are usually decided. However, the governing council can meet at any time, by videconference if need be, and without public notice.

Q: How does the council make decisions?

A: Meetings are chaired by Draghi. Board members can vote but more often seek to make decisions unanimously or by broad consensus. The ECB does not publish minutes of its meetings the way the Fed and the Bank of England do. Sometimes the ECB president will give an indication at the news conference after the rate announcement whether a decision was unanimous or not.

Q: How do people find out what they did?

The bank issues its interest rate decision at 1:45 p.m. Central European Time (7:45 EDT, 12:45 GMT) via electronic link to information services used by financial professionals. It holds a simultaneous conference call where the news is given verbally. The information is then reported by the news media.

Then the president and the vice-president appear at a news conference at 2:30 p.m. CET (8:30 EDT, 13:30 GMT). The president reads a statement explaining what the bank decided and how it sees the economy, and then takes questions from journalists. Investors and journalists listen closely for clues about what the bank might do at coming meetings.