1.1 ECB’s History
The European Central Bank was formally established on the 1st June 1998 in Frankfurt, Germany, when the appointment of its President, Vice-President and four other members of its Executive Board took effect.
However, the beginning of this organization can be dated back to June 1988, when the European Council confirmed the objective of the progressive realization of Economic and Monetary Union (EMU). In order to achieve such a result, a committee chaired by the then President of the European Commission Jacques Delors was created to propose the concrete stages leading to this union.
With the Maastricht Treaty that amended the European Community and formally begun the European Union, the ECB was thus established and it is now run by its third president, Mario Draghi since 2011.
1.2 The core activities of the European Central Bank
ECB’s core activities consist of printing cash banknotes and issuing them to the market agents through open market operations in order to manage the policy (or base) interest rate; in other words it defines and implements monetary policies. This is tied together with the principle of inflation targeting in the Eurozone, which is explained below.
In addition, it also performs some secondary activities like carrying out tasks in the areas of banking supervision, statistic, macroprudential policy, international and European cooperation, financial stability and financial advisory to other financial institutions.
However, since the financial crisis of 2008, the ECB has left its traditional “conservative” approach and has embraced a more active strategy to effectively fight against deflation and stagnation.
1.3 ECB’s mission
The main principle and the stated goal of the European Central Bank and of the Eurosystem as a whole is to maintain price stability, defined as “a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%”, safeguarding the value of the euro. Such an objective is achieved through the control over monetary policies and through the prudential supervision of credit institutions belonging to the euro area and non-euro area member states.
2.1 The environment
ECB’s organizational environment is extremely complex as it operates in the framework of the (somewhat still incomplete) economic and political union between European Member States, and social and economic factors influencing them.
The high level of complexity is given by the fact that it deals with a vast number of variables, many of them interdependent; and it also has to cope with the significant economic differences (both qualitative and quantitative) among the Eurozone members.
Moreover, although the ECB has a total control over monetary policies, it has no power at all over the fiscal ones. In fact, such policies are decided on a state to state basis, and the ECB must provide the same monetary answer to different policies, with a consequential clash of interest in some cases.
As a final remark, it is worth notice that the 2008 crisis has contributed to an increase in the instability and complexity of the environment in which the ECB operates, determining also a shift in its policies, as it will be argued in the next sections.
2.2 ECB’s Strategy
As a matter of fact, the ECB addresses its main goal trying to maintain the inflation rates below, but close to, 2% over the medium term. Moreover, ECB includes the analytical framework to assess all relevant information needed to make monetary policy decisions in its strategy. This framework is based on the economic and monetary analysis and it is known as the two-pillars approach (see appendix 1).
The economic analysis consists of the assessment of the short to medium-term determinants of price developments and it focuses on real activity and financial conditions in the economy. On the other hand, the monetary analysis looks at the long-run link between money and prices. It serves as a means of cross-checking the short to medium-term indications for monetary policy coming from the economic analysis.
The practical means traditionally used to reach such an objective are the manipulation of the rate of discount in order to influence the credit situation in the economy, open market operations and changes in reserves ratio.
However, things have changed since the financial crisis. In fact, after having recognized the threat that the spread between some countries’ bonds and Germans ones represented to the Eurozone, the ECB adopted the so called Outright Monetary Transactions (OMT) policy. This extraordinary instrument consisted in the purchase, on secondary markets, of sovereign bonds issued by countries who were facing difficulties, in order to decrease the spread and thus the interest rate over the bonds of economically weaker countries.
Moreover, the organization in a conference held in March 2016 announced a “nonstandard monetary policy measure”, expanding its monthly purchases in the effort to increase the interest rate that was around 0%. Nonetheless, despite the great injection of of liquidity in the European economy, inflation remained low and growth is still considered unsatisfactory. Furthermore, the legitimacy of the ECB on such policies has been questioned as detractors argue that the organization does not have the power to put into action such measures of quantitative and credit easing.
What is clear is the commitment of the organization in being effective rather than efficient; in fact such measures are considered extraordinary because they constitute a risk for Europe’s economy in the long run if not followed by political and economic reforms put into action by member states.
2.3 ECB’s Organizational design
The European Central Bank is funded by the Central Banks of all EU Member States and its capital currently amounts to €10,825,007,069.61.
Of this capital, €7,619,884,851.40 corresponds to the fully paid-up subscriptions of euro area National Central Banks (see appendix 2).
Moreover, other €120,192,083.17 are provided by nine non-euro area national central banks in order to pay for the operational costs incurred by the ECB in relation to their participation in the Eurosystem.
Net profits and losses are divided among euro-area countries according to Article 33 of the Statute of the European System of Central Banks and do not involve the other non-euro area national central banks.
2.3.2 Organizational Structure
The European Central Bank has around 2,500 employees in its offices and the decision-making power is concentrated in the hands of four bodies: the Governing Council, the Executive Board, the General Council and the Supervisory Board.
On the other hand, the organizational structure is a bit different from normal organizations, starting from the selection of the President itself. In fact, there is no such a body like a Management Board that elects a CEO and from which all the different areas and divisions come. In the Eurosystem, the European Council appoints the President of ECB and the organization is structured around three different bodies: the Executive Board (formed by the President the Vice-President and four other members), the Supervisory Board (formed by a Chair, a Vice-Chair, four ECB’s representatives and the representatives of national supervisors) and the Chief Services Officer. In fact, each of these committees (note that the Chief Service Officer is a single person) controls some areas and they are relatively independent one another (see appendix 3).
The most important business areas are the 15 headed by senior managers who report directly to the members of the Executive Board. Indeed, they are in charge of the main activities of the organization. Each of them is then divided in different divisions that are grouped according to the service they provide in order to coordinate better their activities. The only exception is the Economic business area that, given its preponderance, is divided between the directorate of economic developments and the directorate of monetary policy and each of them has its own divisions.
Then, there is the Chief Service Officer that controls mainly supportive areas (like Administration and Human Resources), and the Supervisory Board that manages supervision areas.
In order to maintain a higher degree of control over each division, the members of the Executive Board and of the Supervisory Board distribute the responsibilities among them so that each of them just control a limited number of areas. The one that is in charge of the highest number of divisions is the President.
The total number of divisions amounts to 83 of which 19 (roughly 1 fourth) are devoted to Banknotes, Economics, Macroprudential policy & Financial Stability and Market Operation areas, which constitute the core services of the ECB.
It is arguable that the organization is quite flat and horizontal, because the divisions are directly linked to the decision-making bodies without intermediate groupings, apart from the Economic area, and that there is a decent amount of decentralization due to the independence of each body in managing its own areas. That might be regarded as point of strength, in fact also in a general atmosphere of standardization there is a higher responsiveness to a more than ever uncertain environment.
However, the main decision-making power is still held by the Executive Board and, in this sense, it is possible to say that the ECB is a quite centralized organization, with some degrees of decentralization for what concerns support and secondary activities.
As a response to the challenges posed by the financial crisis, the ECB has undergone a process of organizational adaptation, to be able to match correctly the new environment and challenges.
So, why there is this perceived inability in fulfilling its goals?
The answer relies on the problem of the missed European integration. In fact, Europe never moved from monetary union to the financial one and fiscal policies are still in the hands of the national governments of member states. This implies that the ECB has to provide a unique monetary policy, as the treaties do not allow, as they are, to provide different policies for different areas (as it has been advocated recently by Nobel Memorial Prize for Economics laureate Joseph Stiglitz), in response to different national fiscal policies. Moreover, useful economic instrument such as the exchange rate and interest rate were struck down without being replaced by anything else, making it even harder for different economies (as are the European ones) to coexist without any problem.
Thus, only a profound renewal of European political and economic asset would be likely to provide a solution for the current situation, while the ECB can only gain time until a true economic union is achieved.
To conclude, it is necessary to underline the great change that the ECB has undergone since the financial crisis. As it was remarked more than once through this paper, many variables have been influenced by such an event, resulting in a consequential evolution of the organization itself. However, it is striking how, just in a few years, the European Central Bank passed from being a minor player in European political, and sometimes also economic, life to be one of the most important institution of the whole European Union, with a political weight that it has never had. Such a shift, occurred in large part under Mr. Draghi’s presidency and saw the organization emancipating from the influence of the German Bundesbank, given by the fact that it is located in Frankfurt, and becoming a pivotal player also in the political field.
When the situation was the worst and economic collapse was a real possibility, the ECB was able to stop with its routine tasks and adapted to the new scenario, trying to address economic instability in a more effective way with a more aggressive strategy, both economically and politically, remembering the member states that, as long as economic union was not complete, they were still the main responsible for that desperate situation and pushing towards a collective effort in order to save the Union.
Bibliography and other sources:
“The European Central Bank, History, Role and Functions”, Hanspeter K. Scheller, “004
1) The strategy:
2) Euro area national central banks’ contributions to ECB’s capital