Question

. Compare the structure and independence of the European System of Central Banks and the Federal Reserve System.

Answer 1

The political independence of the ECB is instrumental to its primary objective of maintaining price stability. It is a cornerstone of the euro area’s monetary system.

As guardians of price stability, central banks create the foundation for a healthy and stable economy. If governments had direct control over central banks, politicians could be tempted to change interest rates in their favour to create short-term economic booms or use central bank money to finance popular policy measures. This would seriously harm the economy in the long term.

To ensure the ECB acts in the best interest of the European people, it has been set up specifically as an independent institution. The Treaty on the Functioning of the EU gives the ECB the very clear and limited mandate to maintain price stability in the euro area. This way, the ECB is able to pursue a monetary policy that fosters economic growth and job creation in Europe.

Institutional independence

The Treaty states that the ECB must not seek or take instruction from any institution, government or other body. At the same time, Member State governments and other EU institutions are not allowed to influence the decision-making bodies of the ECB.

Personal independence

The Statute protects the personal independence of the ECB’s Executive Board members. They are appointed for a non-renewable term of eight years and can only be removed from office in case of serious misconduct. This allows them to make responsible and objective decisions.

Functional and operational independence

Through the Statute, the ECB is assigned all necessary competencies to achieve its primary objective of price stability. To this end, the Eurosystem enjoys exclusive competence for monetary policy in the euro area. In addition, the ECB is prohibited from lending directly to the public sector. This shields it from pressure from public authorities.

Financial and organisational independence

To further limit external influence on the Eurosystem, the ECB and the national central banks have their own financial resources and income. The Statute allows the ECB to organise its internal structure as it sees fit. This autonomy makes it possible for the Eurosystem to pursue all its tasks as required.

The European System of Central Banks (ESCB) consists of the European Central Bank (ECB) and the national central banks (NCBs) of all 28 member states of the European Union (EU).

The ESCB is not the monetary authority of the eurozone, because not all EU member states have joined the euro. That role is performed by the Eurosystem, which includes the national central banks of the 19 member states that have adopted the euro. The ESCB's objective is price stability throughout the European Union. Secondarily, the ESCB's goal is to improve monetary and financial cooperation between the Eurosystem and member states outside the eurozone.

The ECB President represents the Bank at high-level EU and international meetings. The ECB has the 3 following decision-making bodies:

• Governing Council – the main decision-making body.
  Consists of the Executive Board (see below) plus the governors of the national central banks from eurozone countries.
• Executive Board – handles the day-to-day running of the ECB.
  Consists of the ECB President and Vice-President and 4 other members appointed for 8-year terms by the leaders of the eurozone countries.
• General Council – has more of an advisory & coordination role.
  Consists of the ECB President and Vice-President and the governors of the central banks from all EU countries.

The Federal Reserve System is composed of five parts

1. The presidentially appointed Board of Governors (or Federal Reserve Board), an independent federal government agency located in Washington, D.C.
2. The Federal Open Market Committee (FOMC), composed of the seven members of the Federal Reserve Board and five of the twelve Federal Reserve Bank presidents, which oversees open market operations, the principal tool of U.S. monetary policy.
3. Twelve regional Federal Reserve Banks located in major cities throughout the nation, which divide the nation into twelve Federal Reserve districts. The Federal Reserve Banks act as fiscal agents for the U.S. Treasury, and each has its own nine-member board of directors.
4. Numerous other private U.S. member banks, which own required amounts of non-transferable stock in their regional Federal Reserve Banks.
5. Various advisory councils

The Federal Reserve System is an independent government institution that has private aspects. The System is not a private organization and does not operate for the purpose of making a profit The stocks of the regional federal reserve banks are owned by the banks operating within that region and which are part of the system. The System derives its authority and public purpose from the Federal Reserve Act passed by Congress in 1913. As an independent institution, the Federal Reserve System has the authority to act on its own without prior approval from Congress or the President. The members of its Board of Governors are appointed for long, staggered terms, limiting the influence of day-to-day political considerations The Federal Reserve System's unique structure also provides internal checks and balances, ensuring that its decisions and operations are not dominated by any one part of the system. It also generates revenue independently without need for Congressional funding. Congressional oversight and statutes, which can alter the Fed's responsibilities and control, allow the government to keep the Federal Reserve System in check. Since the System was designed to be independent while also remaining within the government of the United States, it is often said to be "independent within the government"