A beacon in the night. This is how could be simply summed up the usefulness of the european central Bank in the economic landscape in europe. This institution based in Frankfurt, Germany, since 1998 and which replaced the european monetary Institute is to be one of the main weapons to maintain – or at least to try to maintain better price stability in the euro area countries. The ECB, created in the framework of the Maastricht treaty in 1992, is a part of shade for a good number of Europeans as its actions may be complex and abstract. In fact, the institution that manages the single currency, and develops and implements economic and monetary policies of the EU.
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Specifically, the european central Bank fixed the interest rate at which it lends to commercial banks of the euro area”, explains the official website of the european Union. An operation that is used to regulate the money supply in the euro zone but also to control the inflation. In this sense, the institution ensures, through its action on the interest rate, the inflation rate is close to 2%. A figure set by the ECB, which responds to a variety of different issues. Inflation that is too high would result in a reduction of the purchasing power. Conversely, inflation that is too low may lead… on a deflation, or the decline of widespread and self-sustaining prices. But the control is difficult to maintain both the euro area and account for cost savings heterogeneous. A rate too large may slow down the growth of the country “less dynamic”, and a rate that is too low may result in the inflation of countries in sustained growth. It’s all a matter of dosage, so.
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When the action on the rate is not enough, the ECB has other strings to his bow to try to control the oscillations of price. One of them is the purchase of securities, as was the case extensively as soon as 2015-to ward off the risk of deflation. This method, known as “quantitative easing” (or “QE”), is based on the creation of money to buy on the market for government bonds or private held by investors. The goal is quite clear: that they feed back the cash they get in exchange in the economy, by lending to households and businesses, which, in turn, should stimulate growth and inflation. Beyond these actions, the ECB also arises as an institution of surveillance. It must, in this sense, to ensure the safety and soundness of the european banking system as well as control the financial markets and institutions.
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If the european leaders agreed on Tuesday on the name of Christine Lagarde as the successor to Mario Draghi, the latter will need to negotiate with the three main bodies of the institution for ensuring the euro area. The president will be “supported” by the general council, which carries out a role of consultation and coordination, the executive board, which ensures the daily management of the central bank and the board of governors. This instance is considered to be the most important. Composed of six members of the executive Board and the governors of the central banks of the countries of the euro area, the governing council decides on the economic and monetary policies of the ECB. There is no doubt that the first woman to head this flagship will have a hard time.
