Money, Banking, and International Financeinto another. Third, a single currency helps align political interests. The Eurozone members
work and cooperate with each other as they strive for peace and stability. Finally, a single
currency promotes competition and regions within the Eurozone begin to specialize.
Specialization can occur across many industries and countries. For instance, the financial
institutions within the Eurozone can specialize and reduce their lending costs. Furthermore,
countries can specialize. Germany specializes in automobile and machinery production while
France specializes in pharmaceuticals, chemicals, and aerospace. As countries within the
Eurozone specialize, the producers experience higher efficiency and greater productivity, and
they have access to more consumers. Consequently, the zone helps integrate European countries,
spurring economic growth and unleashing the competitive market forces. Over time, the
Europeans should see their living standard rise and their unemployment rate fall.
The European Central Bank (ECB) manages the euro and is located in Frankfurt,
Germany. ECB was modeled after the Bundesbank, which was Germany’s central bank. Primary
goal of the ECB is to achieve price stability, keeping the euro stable with a low inflation rate.
Euro is successful while the Eurozone rivals the United States in terms of GDP. Furthermore,
the euro was appreciating against the U.S. dollar as it strove to become the new international
currency because Europe’s financial markets and international trade rival the U.S.
Euro did well until the 2008 Financial Crisis struck the world’s economy. Euro began
losing ground against the U.S. dollar. Subsequently, several EU member countries, such as
Greece, Ireland, Portugal, and Spain were plagued with severe budget problems that led to the
European Debt Crisis in 2012. We discuss the crisis at the end of the chapter.
Structure of the European Central Bank is similar to the structure of the Federal Reserve
System. The Governing Council decides and formulates monetary policy for the European
Central Bank and is similar to the Board of Governors of the Federal Reserve System. The
council is composed of the Executive Board and 17 Governors. The Governors are the heads
from their country’s central bank that are members of the Eurozone.
The Executive Board implements monetary policy and manages the day-to-day operation
of the ECB, similar to the Federal Open Market Committee (FOMC). Board has a president,
vice president, and four additional members, whom the European Council selects. The
European Council consists of heads of state of the EU member countries. The European
Council appoints members to the Executive Board for an eight-year term that is not renewable.
Furthermore, the board members’ terms are staggered. Consequently, the European Council
cannot change the board members all at once. President of the Executive Council also becomes
the president of the Governing Council. The ECB president is selected from a central bank
whose country is a member of the Eurozone. Winn Duisenburg, from the Netherlands, was the
first ECB president.
EU countries retained their central banks, even countries that have adopted the euro.
Country’s central banks remain independent of the EU, and the top official of a central bank in
the Eurozone is a governor and a member of the Governing Council. Currently, 17 EU countries
adopted the euro, which means the Governing Council has 17 Governors. Country’s government
selects the governor who serves at least a five-year term. Furthermore, the governors have more
influence on monetary policy within the European Central Bank than the presidents of the