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INTRODUCTION
The European System of Central Banks (ESCB) is composed of the European Central Bank (ECB) and the national central banks (NCBs) of all 27 European Union (EU) Member States. Since not all the EU states have joined the euro, the ESCB could not be used as the monetary authority of the eurozone. For this reason the Eurosystem (which excludes all the NCBs which have not adopted the euro) became the institution in charge of those tasks which in principle had to be managed by the ESCB. In accordance with the treaty establishing the European and the Statute of the European System of Central Banks and of the European Central Bank, the primary objective of the Eurosystem is to maintain price stability (in other words control inflation). Without prejudice to this objective, the Eurosystem shall support the general economic policies in the Community and act in accordance with the principles of an open market economy.
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The ESCB is assigned with carrying out central banking functions for the euro under the European Community Treaty. However, as the ESCB has no legal personality of its own, and because of differentiated levels of integration in the Economic and Monetary Union, the real actors are the European Central Bank and the 16 National Central Banks of the euro area countries. They exercise the core functions of the ESCB under the name Eurosystem.
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ECB Monetary Policy One of the main duties of the European Central Bank is to design and implement the euro zone monetary policy. It controls economic activity by influencing short-term interest rates through its open market operations, thus, effectively controlling money supply in the market. This in turn helps the European Central Bank to achieve its goal of keeping inflation rates below 2% per year.
ECB Foreign Reserves and Foreign Exchange Operations The European Central Bank is not only responsible for the euro zone foreign reserves, but also for foreign exchange operations and foreign exchange interventions. These interventions are important to keep the euro from appreciating or depreciating too much against other currencies.
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ECB Payment and Settlement Systems In order to have a reliable and effective financial system and a stable currency, the European Central Bank ensures the smooth operation of the payment and settlement systems in the euro zone.
ECB Financial Stability The European Central Bank monitors the development within the various financial markets and identifies any problems or threats to the system which ultimately encourages financial stability within the euro zone.
ECB Banknotes In the beginning of 1999 the Euro became currency for 15 (now 17) European Union countries. Both ECB and the national central banks of the participating countries can issue euro banknotes, but in reality only the national central banks do this.
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3. THE EURO
3.1 History
In the year 1989, the Commission President of the European Council put out a plan to launch the Economic and Monetary Union which included the formation of the European System of Central Bank. On 7 February 1992, an agreement was reached for currency union with the Maastricht Treaty so as to create a single currency by January 1999. After tough negotiations, particularly due to opposition from the United Kingdom, the Maastricht Treaty entered into force in 1993. The name euro was chosen for the new currency in December 1995 as replacement of ECU. Two years after that, the European Council decided to take up the Stability and Growth Pact, intended to guarantee budgetary discipline after the creation of the euro. Moreover, to provide stability to the euro and the national currencies of countries that had not yet entered the eurozone, a new exchange rate mechanism was set up. When the European Central Bank was founded in 1998, it did not take on its full power until the creation of the euro on 1 January 1999. The euro was launched primarily in non-physical form such as travellers cheques, electronic transfers, bankingetc on 1 January 1999. The euro, thus, became the successor to the European Currency Unit (ECU). On the same date, all bonds and other forms of government debts by the euro zone nations were denoted in euro. Ten currencies of eleven European countries merged together and the euro came into existence. This has been the most important step in the process of the European economic and political integration years. Eleven European countries have denationalised their currencies and had agreed to apply common monetary policy. New notes and coins were introduced on 1 January 2002.
1. Removed exchange rate risks from the internal market. 2. Cut the costs of transaction. 3. Encouraged firms to engage in international trade. 4. A stable monetary policy in the Eurozone. 5. Forced EU states to adopt responsible economic policies that contain inflation and increase real living standards. 5|Page
3.3 Overview of the Advantages and Disadvantages of the use of the Euro currency
Advantages:
Elimination of exchange-rate fluctuations Price transparency Transaction costs Increased trade across borders Increased cross-border employment Simplified billing Expanding markets for businesses Financial market stability Macroeconomic stability Lower interest rate Structural reform for European economies Unites Europe as one
Disadvantages:
Cost of transitioning 17 countries currencies as a single currency (including costs of accounting systems, software, printed materials, signs, vending machines, parking meters, phone booths and every other type of machine that accepts currency.) Training for employees, managers and consumers Countries cannot adjust interest rates Countries cannot adjust their exchange rates Restricted government spending Political shock Loss of cultural identity
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data on outstanding amounts (stocks) of euro banknotes and coins in circulation transactions data (flows) on the banknotes and coins issued into circulation, returned from circulation, sorted to check authenticity & fitness and sorted to unfit during the reporting period
the number of NCBs/commercial banks branches providing cash in the euro area the value of euro collector coins not intended for circulation issued by the euro area Member States.
The ECB closely monitors the stock and circulation of euro banknotes and coins. It is the Euro systems task to ensure a smooth and efficient supply of euro banknotes and to maintain their integrity.
4.3.1 Transparency
An unconventional act from the ECB was that it provided real time detailed reports and analyses and organized regular conferences with the press. It must be pointed that the ECB was among the first
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central banks implement that. By giving full details and summaries of each measure and event that happened in the Euro area, the ECB ensured its credibility and enhanced transparency. Furthermore, under its statues the ECB is independent from governmental or other influences when it changes interest rates in order to fight inflation. Therefore, the ESCB enjoyed full independence and had the leeway in choosing the level of interest rates to achieve the stated goal. It could also suspend any interventions if those would be an obstacle to achieving the main objective; maintaining price stability. It is obvious that if the ECB would perform well, the level of confidence of the public in the bank would increase. Thus in promoting the euro, the bank gives much importance to transparency.
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and monetary co-operation was desirable for the internal market to develop and flourish further. But the goal of achieving full EMU and a single currency was not given importance until the 1992 Maastricht Treaty, which set out the ground rules for its introduction. These say what the objectives of EMU are, who is responsible for what, and what conditions Member States must meet in order to adopt the euro. These conditions are known as the 'convergence criteria' (or 'Maastricht criteria') and include low and stable inflation, exchange rate stability and sound public finances. Moreover, apart from making travel easier, a single currency makes very good economic and political sense. The framework under which the euro is managed makes it a stable currency with low inflation and low interest rates, and encourages sound public finances. A single currency is also a logical complement to the single market which makes it more efficient. Using a single currency increases price transparency, eliminates currency exchange costs, oils the wheels of the European economy, facilitates international trade and gives the EU a more powerful voice in the world. The size and strength of the euro area also better protect it from external economic shocks, such as unexpected oil price rises or turbulence in the currency markets. But also, the euro gives the EUs citizens a tangible symbol of their European identity, of which they can be increasingly proud as the euro area expands and multiplies these benefits for its existing and future members.
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The monitoring of financial stability, which aims to identify sources of vulnerabilities and assess the degree of resilience of the financial system in the euro area. The provision of advice to the competent authorities on the design and amendment of financial rules and supervisory requirements. The promotion of arrangements for maintaining financial stability and effectively managing financial crises, including close cooperation between central banks and supervisory authorities.
On account of its technical expertise, the ECB is frequently asked by both EU and national authorities to help design and define the financial rules and supervisory requirements which apply to financial institutions. The ECB sometimes contributes to the deliberations on its own initiative. Whether its advice is sought or not, it nevertheless ensures that financial stability is taken into account as the latter can have a big impact on the euro currency in terms of stability and value.
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The ECB came into being during a particularly volatile period for global financial markets, and has, by all appearances, succeeded in maintaining a stable Euro-zone money market. Quibbles can be made regarding its ability to keep inflation within its target in the early years, and its lack of focus on growth and unemployment rates, but overall, the ECB gets good marks for its performance to date. Efficiency can be measures as follows: ECB should be efficient in delivering a stable and successful currency. It should try to maintain price stability A level of transparency should exist in the euro area Finally, how ECB operates in times of crisis help us to determine its efficiency.
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US $/
Year Source: Chart retrieved from the ECB Website From 4th January 1999 till 4th April 2012 where we can note that the value of the euro was estimated at
US $ 1.1789 and US $ 1.3142, we can comment that US $ price of Euro rose by 11.47%. After the introduction of the currency, it then experiences a drastic fall US $ 0.8252 on 26 th October 2000. We can further notice that the euro continue to rise in value to reach its peak on US $ 1.5990 on the 15 th July 2008. An abrupt decrease in the price of the euro entails due to the crisis which happen in 2008. After that, we can notice fluctuations in the value of the euro till date.
From the graphical illustration we can say that the ECB has been successful in promoting the euro as it is now considered as the strongest currency of the world economy.
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Inflation rate
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The ECB has to be credible in delivering price stability over time. The ECB is a young institution, but our track record over the past ten years has been widely recognised as being more than satisfactory. Since the introduction of the euro, average annual HICP inflation rate has been slightly above 2%, despite a succession of significant shocks.
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The euro also helps to strengthen trade and financial linkages across euro area countries. There is clear evidence that the introduction of the single currency and the associated increase in price and cost transparency has fostered both intra and extra-euro area trade in goods and services.
The euro also helps to strengthen trade and financial linkages across euro area countries. There is clear evidence that the introduction of the single currency and the associated increase in price and cost transparency has fostered both intra and extra-euro area trade in goods and services [3]. In addition, the euro is acting as a catalyst for a single market in financial services and a gradual portfolio reallocation away from holdings of domestic financial instruments and towards holdings of financial instruments issued elsewhere within the euro area.
Monetary analysis can be used to assess the efficiency of the ECB towards the implementation of its policies. Monetary analysis consists of a detailed analysis of monetary and credit
developments with a view to assessing their implications for future inflation and economic growth. Monetary analysis is conducted at the ECB using a broad set of tools and instruments that are continuously refined and expanded. The tools and instruments include a comprehensive analysis of the developments of the monetary aggregates based on information stemming from their components and counterparts. The role of monetary analysis in the ECBs monetary policy strategy is founded on the robust positive relationship between longer-term movements in broad money growth and inflation, whereby money growth leads inflationary developments. Accordingly, the efficiency of the ECB towards implementing its monetary and credit advances can be assessed through a monetary analysis.
5.4 Transparency
Transparency means that the central bank provides the general public and the markets with all relevant information on its strategy, assessments and policy decisions as well as its procedures in an open, clear and timely manner. Thus, ECB considers transparency as a crucial factor for the promotion of the euro and to maintain its position on the monetary market. This is true 16 | P a g e
especially for their monetary policy framework. The ECB gives a high priority to communicating effectively with the public. Transparency helps the public to understand the ECB's monetary policy. Better public understanding makes the ECBs policy more credible and effective. Transparency means that the ECB explains how it interprets its mandate and that it is forthcoming about its policy goals.
5.4.1 Credible
Accordingly, transparency has fostered credibility by being clear about its mandate and how it performs its tasks. When the ECB is perceived as being able and willing to achieve its policy mandate, price expectations are well anchored. Regular communication about a central banks assessment of the economic situation is particularly useful. It is also helpful for central banks to be open and realistic about what monetary policy can do and, even more importantly, what it cannot do.
5.4.2 Self-disciplined
The ECB has well-coordinated its actions plan towards the marketing of the EURO and thus, a strong commitment to transparency imposes self-discipline on policymakers. It ensures that their policy decisions and explanations are consistent over time. Facilitating public scrutiny of monetary policy actions enhances the incentives for the decision-making bodies to fulfill their mandates in the best possible manner.
5.4.3 Predictable
Indeed, the market is volatile to information. The ECB publicly announces its monetary policy strategy and communicates its regular assessment of economic developments. This helps the markets to understand the systematic response pattern of monetary policy to economic developments and shocks. It makes policy moves more predictable for the markets over the medium term. Market expectations can thus be formed more efficiently and accurately.
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If market agents can broadly anticipate policy responses, this allows a rapid implementation of changes in monetary policy into financial variables. This in turn can shorten the process by which monetary policy is transmitted into investment and consumption decisions. It can accelerate any necessary economic adjustments and potentially enhance the effectiveness of monetary policy.
The ECB, as a guardian of the EURO, has been able to bring low levels of inflation overall in the euro area, lower than the levels in the individual countries before. The existing differences are no bigger than if you compare differences in price levels, for example, between various states in the United States, which is as you know similar in size to the euro area. The single currency also enhanced price transparency, increased trade, and promoted economic and financial integration within the euro area and with the rest of the world. On the other hand, the European Commission has been providing fiscal stimulus corresponding to the current economic downturn to needy member countries in order to boost up their economies.
However, since the euro crisis has crop up, the chance to save the euro is fading. The European debt discussions always paint the alternatives as either bail out countries (really, bail out their bondholders) or break up the euro. In fact, the euro and the European economic union would be 18 | P a g e
stronger if countries can default. Some have even argued that the EU should have isolated Greece from the Eurozone a year and a half ago when the crisis first erupted. The European Central Bank (ECB) has bought sovereign debt from Greece, Portugal, Ireland, Italy and Spain. It has lent even more money to banks whose main asset is the same sovereign debt. Deposits are fleeing those countries' banks, and lending from the ECB is making up the difference. At this point, whether the ECB is really playing its role to unify Europe under the same currency is nevertheless disputed.
(Greece) lead bondholders to fear the worst in other bond markets and to sell the bonds there. This triggers a liquidity crisis in these other markets only because there is a fear that cash may not be available. The ensuing increase in interest rates then turns the liquidity crisis into a solvency crisis. Any country can become insolvent if the interest rate is pushed high enough. Distrust can drive a country in a self-fulfilling way into a bad equilibrium.
6. ARGUMENT
In 2007, during a French presidential campaign, the ECB has come under fire by Nicolas Sarkozy, who criticised its interest rate policy, saying that it focused too much on inflation and too little on growth, and also questioned its independent status. Eurozone finance ministers dismissed the French criticism at a Eurogroup meeting on 7 May 2007 and urged the President-elect to respect the ECB's independence. The critic was ignored, as Professor de Grauwe replied that if this critic is taken seriously, it could "endanger the monetary union". At the end of October 2011, after eight years in the top job, Jean-Claude Trichet passed the presidency of the European Central Bank (ECB) to Mario Draghi.No doubt; Mr Trichet deserves credit for his handling of the financial crisis of 2007-08 and the ensuing recession. Mr Trichet was successful earlier on, too. For most of his term the euro has been a strong currency, at times reaching $1.60. Mr Trichet takes pride in the ECBs effective monetary control over the rapidly growing euro area, which has expanded from 11 members to 17 since its creation in 1999. Stung by a reference to German criticism of the bank at a press conference in September 2011, the normally even-tempered Mr Trichet protested vehemently that the ECB had conducted monetary policy impeccably, impeccably! The ECB had kept inflation at 2% a year, in line with its target (below but close to 2%). The ECB was prompt to respond to the funding dearth that started in August 2007 with big dollops of liquidity, moving beyond the standard tools aimed at price stability. Many (though not Mr Trichet) think the ECB erred in raising interest rates in July 2008, shortly before the crisis was amplified by the collapse of Lehman Brothers. But it was then swift to bring rates down, from 4.25% at that time to 1% half a year later (see figure below).
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The ECB also bought covered bonds (bank debt backed by loans) to ease banks funding difficulties, although the purchases were far smaller than the quantitative-easing programmes in America and Britain.
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7. CONCLUSION
After decades of planning, the euro was born on 1st January 1999. Since then, the ECB has successfully ensured the smooth transition from various European currencies to sole reliance on the euro as the single currency of the European Monetary Union (EMU). Thus, the members of the euro zone have been able to benefit from a more positive financial and economic environment when compared to the pre-introduction of the euro as a currency. Eventually, the euro has harmonized trade between member countries as exchange risk did not hinder trading anymore. At start, a low level of interest rate was extended to the whole euro area at a rapid pace and this ultimately helped banks to offer the best rate over the time.
Since the inception of the euro, the credibility of the ECB was often pointed out. However, if we go deeply into the various roles of the ECB mentioned previously in the promotion of the euro, we can note that the ECB has successfully managed to replace the previous individual currencies with the euro to the same level of credibility. With the various agreements and a more conceptualized monetary policy, the ECB has maintained its supremacy and holds an important role along with the IMF and other transnational bodies.
During this research and from the previous graphical representation of the evolution of the euro vis a vis the US Dollar, it can be concluded that the ECB has been efficient in its role. Likewise, the euro has forged its way into the international monetary system from the beginning and has strived among strong currencies such as the US Dollar and Japanese Yen. The efficiency of ECB can be retraced back to the inflation rate. Maintaining inflation has led to a price stability 23 | P a g e
of the euro in the EMU and the ECB has been operating with a high level of transparency whereby this has fostered investments.
However, the credibility and efficiency of the ECB with regards to euro have been questioned with the emergence of the euro and sovereign debt crisis. Furthermore, the Greece and Spain financial chaos have pulled the ECB to trial. However, from the last speech of the new
president of the ECD, MR Draghi, it seems that the ECB would stick to its inflationist measures rather than buying out the nations debt.
The ECB is the only institution that can provide lending of last resort quickly and in convincing quantities. It would of course be much better if the ECB did not have to bail out the European rescue mechanism, but in this case one has to choose between two evils. As long as it is temporary, even a massive increase in the ECBs balance sheet constitutes a lesser evil than a breakdown of the Eurozone financial system. However, this proposal is against the Article 123 S1 of the TFEU which forbids direct ECB credit to public institutions so as to avoid monetary financing of fiscal deficits.
As a concluding note, the ECB is still sticking to its stated objective, which is, maintaining the strength, the trustworthiness and price stability of the Euro in the international monetary system.
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