The European Central Bank: The Bank that rules Europe?

Abstract

The power of the European Central Bank (ECB) is rooted in its independence established in the Maastricht Treaty of 1992. This power is reinforced though the bank’s monetary policy credibility—achieved through meeting its price stability mandate, whilst resisting political pressures to manipulate monetary policy to other ends. This credibility contributes to the ideational power of the ECB which is rooted in widespread support for price stability, one of the core objectives of Economic and Monetary Union (EMU). The ECB’s relative power, as one of the two leading central banks in the world, is determined by the relative size of the Euro Area economy and the growing importance of the euro as an international reserve currency. The ECB is the leading face of the Euro Area abroad and a new and important presence in several international economic fora. The ECB is responsible for coordinating the policy making of Eurosystem NCBs in a range of areas and NCB discussions on inflation forecasts. However, there are clear limits to the ECB’s power. It controls neither exchange-rate policy nor prudential supervision. Limits have been placed upon its international role. The ECB must work with governments to build support for low inflationary policies and maintain political support EMU. It must also share many core central banking operations with Eurosystem national central banks (NCBs). This chapter explores the confines of European Central Bank power.