The Eurosystem is a system of the euro area central banks that includes:
- the European Central Bank, and
- the central banks of the 18 Member States that have adopted the euro.
The documents establishing the European System of Central Banks (the Maastricht Treaty and the Statute) were written on the assumption that all EU Member States would adopt the euro and that the European System of Central Banks (the ESCB) would fulfil all the tasks related to the single currency. The ESCB consists of the European Central Bank and the central banks of all the Member States of the European Union. The Eurosystem, which comprises the ECB and the central banks of countries that have adopted the euro, will have the main responsibility in matters related to the euro as long as there are EU Member States that have not adopted the single currency. The Eurosystem is thus part of the European System of Central Banks.
As economic policy decisions (e.g. monetary policy decisions) apply only to the countries in the euro area, it is the Eurosystem who performs the functions of the central bank in these countries.
Why a system instead of a single central bank? The Eurosystem approach builds on the existing competencies of the national central banks (NCBs), their institutional set-up and infrastructure. Given the geographically large euro area and the long-established relationships between the national banking communities and their NCBs, it was deemed appropriate to give the credit institutions an access point to central banking. In view of the national, linguistic and cultural diversity of the euro area, the NCBs are the ones who are able to guarantee the balanced functioning of the Eurosystem.
1.1 Key tasks of the Eurosystem
1. Developing and implementing monetary policy. The Eurosystem is responsible for defining and implementing the monetary policy in the euro area. The Eurosystem fulfils this task mainly by increasing or decreasing the amount of money in money markets. Therefore, the Eurosystem controls the monetary base in the economy. As commercial banks can lend companies and individuals only as much money as central banks have issued to the markets, the Eurosystem is able to influence the conditions in the money market and the money market interest rates considerably.
2. Performing foreign exchange operations. Foreign exchange operations influence the exchange rates and liquidity in the euro area; both are very important for monetary policy. It is the responsibility of the Eurosystem also because the central banks have the necessary means for performing foreign exchange operations. In addition, if the central bank carries out this task, it ensures that the foreign exchange operations remain in accordance with the aims of the central bank's monetary policy.
3. Promoting smooth operation of payment systems. Payment systems allow the performance of remittances among banks. Therefore, payment systems constitute a central part of the economy’s financial infrastructure and are essential for the stability of the entire economy.
4. Holding and managing foreign reserves. One of the most important reasons for managing the foreign reserves portfolio is to ensure that the ECB has sufficient liquidity to conduct its foreign exchange operations. The ECB’s foreign reserves are managed by the NCBs in accordance with instructions received from the European Central Bank. In addition, NCBs manage their own foreign reserves, but upon exceeding a certain limit their transactions require the approval of the ECB. This serves to guarantee that the operations of central banks remain in accordance with the exchange rate and monetary policy of the Eurosystem.
1.2 Other tasks of the Eurosystem
1. Advisory functions. The ECB has to be consulted on any proposed EU act in its field of competence or by national authorities regarding any draft legislative provision in its field of competence.
2. Collection of statistics. The central banks of the Eurosystem collect various statistical data that are necessary for the fulfilment of the Eurosystem’s tasks. Statistics provide an overview of the euro area’s economic situation and are thus essential for making decisions about monthly interest rates, for example.
3. Supervision of the fulfilment of financial institutions’ prudential norms and guaranteeing financial stability. All countries have specific institutions (such as the Financial Supervision Authority in Estonia) that are directly responsible for guaranteeing financial stability in the country and monitor that financial institutions fulfil certain requirements. However, the Eurosystem also has responsibilities in these areas. The Eurosystem
- monitors financial stability to identify sources of vulnerabilities and assess the degree of resilience of the financial system in the euro area;
- counsels competent authorities on the design and amendment of financial rules and supervisory requirements;
- develops systems that are used to maintain financial stability and manage financial crises efficiently. This takes place in close cooperation between national central banks and supervisory authorities.
4. Issuance of euro banknotes and guaranteeing their security. Euro banknotes and coins are the sole legal tender in the euro area. The task of the Eurosystem is to guarantee a smooth and efficient supply of banknotes and maintain the public’s trust in the euro. The security of euro banknotes is achieved through the research and development of security elements and through counterfeiting prevention and surveillance. Central banks, credit institutions and other cash handlers (for instance, companies who transport cash) also have to follow common quality standards and authentication requirements upon handling banknotes.
The European Central Bank has the exclusive right to decide over the design, volume of issuance into circulation, the circulated denominations and other similar issues regarding the euro banknotes. The central banks of the Eurosystem implement these decisions. The design and technical details of euro coins, however, are the responsibility of the EU Council, while the European Central Bank approves the volume of coins issued into circulation.
5. International cooperation. Many issues (such as imbalances in global economy, and macroeconomic and financial stability) that influence the fulfilment of the ECB’s basic tasks (primarily monetary policy) are also important outside the euro area and, thus, they must also be treated as international issues. Therefore, the representatives of the Eurosystem participate in international fora that deal with issues important for the Eurosystem. Pursuant to the Statute of the European System of Central Banks, the engagement of the Eurosystem in international cooperation is decided by the President of the European Central Bank.
1.3. Activities of the Eurosystem’s central banks
The Eurosystem operates pursuant to the principle of decentralisation, which means that the decisions of the ECB’s Executive Board are implemented, and the day-to-day operations on behalf of the Eurosystem are performed, by all the central banks of the Eurosystem. This means that the central banks of the Member States:
- Perform monetary policy operations, i.e. carry out transactions and are, among other things, responsible for lending the central bank’s funds to commercial banks.
- Manage the European Central Bank’s foreign reserves, i.e. perform and settle money market transactions necessary to invest the ECB's foreign reserves.
- Manage their own foreign reserves. The activities of NCBs must be approved by the ECB, if their transactions could influence exchange rates or liquidity in the euro area and/or if the size of the transactions exceeds the limits established in ECB guidelines. The aim of this requirement is to guarantee that the operations of the NCBs remain in accordance with the ECB’s monetary and exchange rate policy.
- Manage the infrastructures of payment systems and perform supervision over them. NCBs manage the national subcomponents of the euro payments system called TARGET2. The central banks of some countries manage also securities settlement systems. National central banks also participate in the oversight of financial market infrastructures.
- Issue banknotes in cooperation with the European Central Bank. On the basis of the ECB’s decision, banknotes are released into circulation by national central banks who are responsible for satisfying the demand. Each year they order the required amount of new banknotes and operate the whole management system of banknote reserves. NCBs adopt measures to guarantee the high quality of banknotes in circulation and to analyse counterfeit money.
- Collect various economic and financial data that are necessary for the implementation of monetary policy and the fulfilment of the Eurosystem’s other tasks. National central banks contribute to collecting statistical data from national financial institutions in the following areas:
- money, banking and financial markets,
- balance of payments statistics and the Eurosystem’s international reserves,
- financial accounts.
- Fulfil tasks not related to the European System of Central Banks. In addition to the provisions laid down in the Statute, national central banks may also fulfil other tasks.