Compare and Contrast Essay on Federal Reserve vs. European Central Bank

Federal Reserve is the United States central bank system which was founded by U.S. Congress in 1913 and includes the 12 independent regional reserve banks, the board of governors and the D.C. It is the most powerful financial institution in the world and is considered independent since its decisions do not have to be approved by the president. Its duties include conducting national monetary policy, providing financial services, regulating and supervising banking institutions, and supporting financial system stability. European Central Bank, on the other hand, is the central bank for the euro and is among the largest currency areas in the world. This bank was formed in Germany in June 1998, and it administers a monetary policy of the Eurozone which contains 19 members across Europe and also helping in maintaining price stability in the European Union.

Both Federal Reserve and the European Central Bank have the largest GDP shares of the world and belong to areas with leading economies. Independence of these banks is determined by looking into their political and economic independence. Firstly, European Central Bank is more independent than Federal Reserve because the members of Federal Reserve Board are appointed by US president and further approved by the Senate but the European Parliament have no legal powers to enforce decisions to European Central Bank (Gizem Kumas, 2009). An attempt to change ECB statues requires unanimity of all EU member states through changing Maastricht Treaty. Secondly, Federal Reserve lacks political independence since the government controls the exchange rate thus dictating terms but in ECB, the exchange rate is not a national policy thus their policies is not determined by the government. In looking at who sets targets, formulates policies and length of term of office between the two Banks arrives at the decision that ECB is the most independent bank.

Thirdly, in terms of accountability as a measure of independence, ECB is independent because through the Maastricht Treaty, the ECB do not have any superior power upon itself which can control its policies, but Federal Reserve is responsible to Congress who have powers to affect their internal activities through voting or by-laws intervention (Gizem Kumas, 2009). Fourthly, ECB is less transparent than the Federal Reserve because the Federal Reserve believes that transparent decision-making process restrains the volatility of financial markets and president of the central bank has to explain banks decisions, but the ECB doesnt have to publish activities of governing council since they take their decisions without considering national interests. Lastly, the Federal Reserve has a responsibility to establish a more effective banking supervision with other federal banking agencies through regulating US commercial banking and of foreign activities as well as supervising and regulating the state-charted banks. European Central Bank, on the other hand, leaves the responsibility of supervising banks to the nation states; they mostly deal with financial stabilization while the member countries monitor and control their banking system.

The Federal Reserve, however, needs to be more independent. The main advantage of being independence is to control inflation and to focus on monetary policies for the long term economic growth (Sardoni & Wray, 2005). This will prevent them from political pressures which can lead to biases in monetary policies. Politicians control over the Federal Reserve will be dangerous since they lack the political will to make difficult economic decisions.

As analyzed above, the Federal Reserve is more controlled by the Congress thus limiting its independence while on the other hand the European Central Bank is not regulated and controlled by any government agency thus making it the most independent entity. The charter which formed ECB cannot be easily changed through legislation as compared to Federal Reserve, and also the ECB has complete control over monetary policies of 11 euro countries thus making it more independent than Federal Reserve.

Reference

Bartel, R. D. (1995). Federal Reserve Independence and the Peoples Quest for Full Employment and Price Stability. Journal of Post Keynesian Economics, 18(2), 231-249.

Herr, H. (2014). The European Central Bank and the US Federal Reserve as lender of last resort. Panoeconomicus, 61(1), 59.

Sardoni, C., & Wray, L. R. (2005). Monetary policy strategies of the European Central Bank and the Federal Reserve Bank of the US (No. 431). Working papers//The Levy Economics Institute.