EUROPEAN MONETARY SYSTEM

MEANING OF EURO SYSTEM

It is the term used to refer to the European Central Bank(ECB) and National Central Bank(NCB) of the members state which have adopted the union.

The NCB is one of the member state which dont participate in the Euro area, are the members of European System of Central Bank(ESCB) with the special status .

ORGANIZATION
1) GOVERNING COUNCIL It comprises of all the members of the elective board and governors of the NCB. 2) EXECUTIVE BOARD It comprises of President, Vice President and 4 other members appointed by common understanding of the governments of the member state.

CONSTITUTION OF ESCB
STAGE 1 On the basis of tellers report, the European Council decided in June 1989 that the first stage of realization of economic and monetary union should begin on 1st July,1990 STAGE 2 In this stage the establishment of economic and monetary union (EMU) have been taken place

on 1st January 1994. The EMI has been set up with monetary integration of communities. Their 2 most important task of EMI are:(i) To strengthen central bank operation & monetary policy co-ordination. (ii) To make preparation for the establishment of ESCB. STAGE 3 On 1st January,1991 the third and final stage of EMU commenced with the irrevocable fixing of exchange rates of the currency of 11 member state, initially participating in monetary union.

OPERATIONAL FRAMEWORK OF EURO SYSTEM

1) OPEN MARKET OPERATION It play an important role in the monetary policy of ECB for the purpose of steering interest rates, managing liquidity situation and singling the monetary policy stands in the market.

5 types of instruments are available to Euro System for the conduct of open market operations: a) Reverse transactions

b) Outright transactions c) Issue of debt certificates d) Foreign exchange swap e) Collection of fixed term deposits The open market operations of Euro System can be divided in the following 4 categories: 1) Refinancing operations 2) Longer term refinancing operations 3) Fine tuning operations 4) Structural operations

2) STANDING FACILITIES These aim to provide and absorb overnight liquidity, signaling the general monetary stanc and bound overnight market interest rates.

2 standing facilities are available: i) Marginal lending facility ii) Deposit facility

3) MINIMUM RESERVES The governing council of ECB applied minimum reserves as an integral part of the operational framework for the monetary policy. This system is intended to pursue the aims of stabilizing money market interest rates, creating or enlarging a structural liquidity shortage and control of monetary expansion.

4) ELIGIBLE ASSETS The Euro system allows a wide range of assets to underline its operations. A distinction is made between 2 categories of eligible assets: i) TIER-1 : it consists of marketable debt instruments which fulfill uniform eligibility criteria for the entire Euro Area as specified by ECB. ii) TIER-2 : it consists of additional assets which are of particular importance for National Financial Market and banking systems for which eligibility criteria are established by NCB, subject to the ECBS approval.