THE ECONOMICS OF MONEY,BANKING, AND FINANCIAL MARKETS 427

CHAPTER 15

Central Banks and the Bank of Canada

395

a similar role to that of the Federal Reserve Banks. The European Central Bank and
the national central banks of the countries that have adopted the euro are referred to
as the Eurosystem (note that Slovenia adopted the euro on January 1, 2007, Cyprus
and Malta in January 1, 2008, and Slovakia on January 1, 2009). The Eurosystem
excludes the central banks of the European Union countries that have not yet
adopted the euro. The Eurosystem should not be confused with the European System
of Central Banks, the term used to refer to the European Central Bank and the
national central banks of all twenty-seven European Union (EU) member countries
when all EU member countries adopt the euro, the Eurosystem and the European
System of Central Banks will become one entity.
The European Central Bank, which is housed in Frankfurt, Germany, has an
Executive Board that is similar in structure to the Board of Governors of the Federal
Reserve; it is made up of the president, the vice president, and four other members,
who are appointed to eight-year, nonrenewable terms. The Governing Council, which
comprises the Executive Board and the presidents of the National Central Banks, is
similar to the FOMC and makes the decisions on monetary policy. While the presidents of the National Central Banks are appointed by their countries respective
governments, the members of the Executive Board are appointed by a committee
consisting of the heads of state of all the countries that are part of the European
Monetary Union.
DIFFERENCES BETWEEN THE EUROPEAN SYSTEM OF CENTRAL BANKS AND THE
FEDERAL RESERVE SYSTEM In the popular press, the European System of Central

Banks is usually referred to as the European Central Bank (ECB), even though it
would be more accurate to refer to it as the Eurosystem, just as it would be more
accurate to refer to the Federal Reserve System rather than the Fed. Although the

structure of the Eurosystem is similar to that of the Federal Reserve System, some
important differences distinguish the two. First, the budgets of the Federal Reserve
Banks are controlled by the Board of Governors, while the National Central Banks
control their own budgets and the budget of the ECB in Frankfurt. The ECB in the
Eurosystem therefore has less power than does the Board of Governors in the
Federal Reserve System. Second, the monetary operations of the Eurosystem are
conducted by all the National Central Banks in each country, so monetary operations are not centralized as they are in the Federal Reserve System. Third, in contrast
to the Federal Reserve, the ECB is not involved in supervision and regulation of
financial institutions; these tasks are left to the individual countries in the European
Monetary Union.
Just as there is a focus on meetings of the FOMC in the
United States, there is a similar focus in Europe on meetings of the Governing
Council, which meets monthly at the ECB in Frankfurt to make decisions on monetary policy. Currently, fifteen countries are members of the European Monetary
Union, and the head of each of the fifteen National Central Banks has one vote in
the Governing Council; each of the six Executive Board members has one vote. In
contrast to FOMC meetings, which staff from both the Board of Governors and individual Federal Reserve Banks attend, only the twenty-one members of the
Governing Council attend the meetings with no staff present.
The Governing Council has decided that although its members have the legal
right to vote, no formal vote is actually taken; instead the Council operates by consensus. One reason the Governing Council has decided not to take votes is
because of worries that the casting of individual votes might lead to heads of
National Central Banks supporting a monetary policy that would be appropriate

GOVERNING COUNCIL