European Central Bank (ECB)

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The European Central Bank (ECB) is the intra-governmental monetary authority that oversees the Eurozone’s monetary supply, monitors the price index of goods and services within the European Union, and targets a 2% inflation rate.

Role of the European Central Bank

The ECB is one of seven institutions that collectively service the European Union. Its primary goal is to maintain price stability within the European Union countries that use the Euro by guiding the inflation rate.

Functionality of the European Central Bank

The ECB dictates monetary policy for the Eurozone, the monetary conglomerate of 19 member countries that use the Euro as legal tender. European laws apply to the ECB, but it operates like a corporation. The ECB’s shareholders are the national central banks located in each country using the Euro. Only the ECB may issue official Euro banknotes and national central banks must obtain permission to create new Euro coins.

European Central Bank vs. U.S. Federal Reserve

The U.S. Federal Reserve Bank may purchase assets from the U.S. Treasury to finance government spending, thus ensuring instantaneous and nearly unlimited credit. Any interest payments are reabsorbed back into the government, so the U.S. government’s cost of capital is very low.

On the other hand, the ECB utilizes collateral lending, where the member banks bid for a repurchase agreement, essentially agreeing to borrow euros and pay them back with interest. In other words, the national central banks must pay interest on currency borrowed from the ECB, unlike the Federal Reserve which remits interest payments back to the U.S. Treasury.

Learn more about the U.S. Federal Reserve banking system.