What is the ECB role and impact on the euro?

  • by Ofeed Team
  • September 11, 2019, 13:6 AM
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The European Central Bank (ECB) is the de facto successor to the European Monetary Institute (EMI). EMI was established at the beginning of the second phase of the European Union Economic and Monetary Union (EMU) to deal with the transitional issues of countries adopting the euro and the readiness to establish the European Central Bank and the European Central Bank System (ESCB). The EMI itself acquired the former European Monetary Cooperation Fund (EMCF). 

The ECB officially replaced EMI on June 1, 1998 under the Treaty of the European Union (TEU, Maastricht Treaty), yet it did not exercise its full powers until the introduction of the euro on January 1, 1999, indicating the third phase of the EMU. The central Bank was the last institution needed for the European Monetary Union, as outlined in the EMU reports issued by Pierre Werner and President Jacques Delores.

When the ECB was created, the eurozone included only eleven members. Thereafter, Greece joined in January 2001, Slovenia in January 2007, Cyprus and Malta in January 2008, Slovakia in January 2009, Estonia in January 2011, Latvia in January 2014 and Lithuania in January 2015, expanding the bank's scope and board membership.  

The first President of the ECB was Wim Duisenberg, former president of the central bank of the Netherlands and the European Monetary Institute, and the current president is Mario Draghi, who is former President of the central bank of Italy. 

Decision making board of the ECB  

The Governing Council is the main decision-making body in the European system. The council includes executive board members (six in total) and governors of the national central banks of eurozone countries (19, as of 2015). 

Since January 2015, the ECB has published on its website a summary of the board's deliberations ("Accounts"). The publications were partly in response to repeated criticisms of the ECB's opacity. Unlike other central banks, the ECB still does not disclose individual voting records of board governors. 

How is the ECB President elected? 

The new President of the ECB is nominated by the European Council, with the consultation of the central bank's Board of Directors and Parliament. Before voting, he/she will be invited to a Listening session by the Committee on Economic and Monetary Affairs, as the President of the ECB is considered a major figure in the European system. 

The upcoming ECB President

Christine Lagarde is due to be confirmed in the next month as the new head of the European Central Bank (ECB), after finance ministers of the eurozone have formally signed the agreement reached by governments a week ago. This means that the nomination of Lagarde will now go to the Board of Directors of the European Central Bank and the European Parliament for consultation. Finally, the EU will formally appoint her as the new President in time to replace the current president on the first day of November. 

Impact of ECB decisions on the euro 

In general, each currency is influenced by the central bank's monetary policies. For the euro, the ECB decisions regarding interest rates and other monetary tools can have significant impact on the European common currency. The ECB press conferences is the most important event to follow because the market is usually predicting interest rate changes.  

On a quarterly basis, the ECB publishes its economic expectations for the euro area, most notably the growth and inflation forecasts for the current year and next few years. If the ECB President's statements seemed to be” hawkish”, this means there may be concerns about inflation, which could prompt the central bank to increase interest rates. Accordingly, the euro should take advantage of interest rate hikes, like any other currently. On the other hand, dovish comments about the economy or the euro may indicate future rate cut, which should drive the euro lower.

What to expect from the ECB on Thursday?

ECB President Mario Draghi will once again return to the spotlight on Thursday, as investors cheer for a shift towards easier monetary policy. Some analysts predict the ECB would restart its quantitative easing program to bolster both growth and inflation in the 19-nation region, amidst the recent worries from the trade war, global slowdown and Brexit.

Meanwhile, there are stagnation fears in the region’s biggest economies, more specifically Germany and Italy after a key drag from the manufacturing sector on the back of the ongoing trade dispute.

It is worth mentioning that the announcement of bond purchases or cut in economic forecasts may negatively impact the shared currency.

As of 08:55 GMT, the euro traded lower versus the U.S. dollar at 1.1025, noting that it rebounded from a low of 1.0925 last week, which was the lowest since May 2017.

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