Table of Contents
2.The European Central Bank
4. Monetary Policies
4.1 The Monetary Policy in the Euro System
4.2 The Monetary Policy of the Federal Reserve System
4.3 Differences between the Monetary Policies
6. List of references
Since the European Monetary Union was established in 1999 the worlds political attention has been drawn to two main central banks: the European System of Central Banks and the Federal Reserve System. The legal basis of the European System of Central Banks is the Treaty establishing the European Community and the Statute of the European System of Central Banks and of the European Central Bank. Since it's estblishments the European Central Bank has played a central role in both European and global financial markets.
The Federal Reserve System was signed into law by the Federal Reserve Act in 1913. Although the Federal Reserve System was established long before the European System of Central Bank there are several similarities in the ways the central banks operate and control the monetay policy of their nations. But the central banks also differ in certain ways. Whereas the Federal Reserve System was established in order to rearrange the financial system of the United States, the European System of Central Banks started business in order to create a single monetary policy. The following chapters will give a closer look into both systems and their monetary policies.
2. The European Central Bank
The European Central Bank (ECB) was established in June 1998 and is responsible for the monetary policy in the euro area. The months of the second half of 1998 were used to replace the currencies of the member states with a single currency and to develop a monetary policy for the euro area.
In 1999 the national central banks transferred their responsibility of 11 EU Member States to the ECB, other Euro countries followed.1
The first stage of the Economic and Monetary Union was reached in 1990. The Member States of the European Economic Community were given more responsibility to be able to coordinate the monetary policies of the Member States and to achieve price stability. In addition stage one included complete freedom for capital transaction, increased cooperation between the central banks, free use of the european currency unit and the improvement of economic convergences.
Stage two took place in 1994 when the European Money Institute was established to strengthen the cooperation beetween the central banks and to coordinate the monetary policy as well as to prepare the establishment of the European System of Central banks to manage a single monetary policy and to create a single currency in the third stage.
The European Unit agreed to the Euro as the European currency and confirmed the start of this currency for 1 January 1999.
The government of the 11 Member States elected the President, Vice-President and other members of the Executive Board of the ECB. On 1 January 1999 the exchange rates of the 11 member currencies were fixed which marked the third stage.
To join the euro area the member states need to fulfill certain economic criteria such as a high degree of price stability and stable exchange rates.
The decision-making body of the ECB is the Governing Council consisting of the six members of the Executive Board in addition to the governors of the 17 euro area countries.The members of the Executive Board are appointed by the governments of the Euro-area countries.2
3. The Federal Reserve System
The first Bank if the United States was established in 1791 in Philadelphia. It only lasted for 20 years since it was opposed by many Americans who did not follow the idea of a powerful bank. In the following years, several national and state banks were established but bank runs and financial panics brought instability to the nation's banking and financial system. In 1907 most Americans called for a central banking authority after a severe banking panic which was caused by failed speculations on Wall Street. In 1913 the Federal Reserve Act was signed which was supposed to lead to a decentralized central bank to balance and organize the interests of pivate banks. In 1914 the
1 Ex.: http://www.ecb.int/ecb/history/emu/html/index.en.html (10.07.2011)
2 Ex.: http://www.ecb.europa.eu/ecb/orga/decisions/eb/html/index.en.html ( 10.07.2011)