Text A. ORGANISATION OF THE EUROPEAN SYSTEM OF CENTRAL BANKS (ESCB)

The ESCB is composed of the European Central Bank (ECB) and the national central banks (NCBs) of the European Union member states. In accordance with the ESCB Statute, the primary objective of the ESCB is to maintain price stability.

There are three main political and economic reasons why a system was established to carry out central bank functions for the euro, and not a single central bank:

1. The establishment of a single central bank for the whole euro area (possibly concentrating central bank business in one single place) would not have been acceptable on political grounds.

2. The Eurosystem approach builds on the experience of the NCBs, preserves their institutional set-up, infrastructure and operational capabilities and expertise; moreover, NCBs continue to perform some non-Eurosystem-related tasks.

3. Given the large geographic area of the euro area, it was deemed appropriate to give credit institutions an access point to central banking in each participating Member State. Given the large number of nations and cultures in the euro area, domestic institutions (rather than a supranational one) were considered best placed to serve as points of access to the Eurosystem.

The basic tasks to be carried out by the ESCB are:

· to define and implement the monetary policy of the EU;

· to conduct foreign exchange operations;

· to hold and manage the official foreign reserves of the Member States; and

· to promote the smooth operation of payment systems.

In addition, the ESCB contributes to the smooth conduct of policies relating to supervision of credit institutions and the stability of the financial system. It also has an advisory role on matters which fall within its field of competence. Finally, in order to undertake the tasks of the ESCB, the ECB shall collect the necessary statistical information.

Text B. Success of ECB critical for banking industry

The ECB is run by a six-member executive board headed by the ECB President and Vice-president. The four other members are in charge of payment systems, banking supervision, international relations, organisation, statistics, banknotes and information systems. The ECB took over from national central banks in setting interest rates from January 1999. Interest rates are now set by the ECB’s governing council which consists of the six-member executive board and the presidents of the national central banks of the participant countries.

The all-powerful council will ensure the continued influence of national central banks in the decision-making process. The majority of the presidents of the NCBs versus the six ECB “insiders” will ensure that national interests will not be ignored under EMU.

Some critics have argued that this could give rise to a potentially destabili-sing situation. The ECB’s legal mandate is to pursue monetary policy with a view to the whole of the EMU area and without favouring one country over another. Yet if several national central bank presidents were to form voting pacts, they could in theory outmanoeuvre the six executives.

Compared to the national central banks, the ECB will be relatively small. While the Bank of France and the Bundesbank each employ more than 10,000 staff, the ECB will have to do with only 500 employees. The comparison is not entirely fair because the ECB’s staff will be primarily engaged in research, security and payments systems, while most of the staff at NCBs are involved in areas such as logistics and administration.

Because the national central banks will remain large and important, the transition to the new regime will not mark a sudden shift. The Bundesbank will continue to exist and fulfil all its current functions except setting interest rates.

from Financial Times