The Evolution of the European Central Bank

Abstract

The European Central Bank (ECB) is a central bank whose array of functions and jurisdictional domain are determined by a Treaty instrument, the Maastricht Treaty. Following the adoption of the Lisbon Treaty, the treaty governing the ECB is now the Treaty for the Functioning of the European Union (TFEU). This distinctive feature makes the ECB a unique institution amongst central banks.

The ECB is the monetary authority in those Member States of the European Union that have adopted the euro as their single currency. The European Central Bank has played a key role during the twin financial and sovereign debt crisis in Europe. It has been an institution that has proved adept at evolving, stretching the mandate granted to it by the Treaty to the limits of the law, but within the law. Ordinary times are not the same as extraordinary times. The success of institutions is to tread carefully on what is extraordinary and try to channel the instruments at their disposal towards a return to ordinary times. Central banks often act last resort: purchasers of last resort, lenders of last resort, liquidity of last resort, investors of last resort. These last resort considerations are suited for extraordinary times. It is the immediacy of the availability of central bank liquidity that makes such liquidity essential when other sources either dry out or become prohibitively expensive.This article surveys the functions and objectives of the ECB and pays special attention to the increasing emphasis given to the goal of financial stability, a goal that was somewhat neglected when the ECB was created. The article also considers the complex structure of the ESCB, the status of independence and accountability and the challenges the institution currently faces in the light of the sovereign debt problems in Greece and other Eurozone member states. Like all EU institutions, the ECB has evolved since its inception and continues to evolve.