European Central Bank
The ECB sets monetary policy for the eurozone's 350+ million people across 20 countries. Unlike national central banks, it must coordinate 20 different sovereign bond markets with 20 different fiscal policies and no fiscal counterpart.
The ECB functions like a colonial jellyfish (Portuguese man o' war)—not a single organism but a colony of specialized polyps (national central banks) fused into what looks like one creature. The float (Executive Board) keeps the colony on the surface but can't move without polyp cooperation.
The ECB's voting rights rotate monthly (not yearly like the Fed) among 20 national central bank governors competing for just 15 votes—creating constant musical chairs. Germany has lost two Bundesbank presidents to resignation over ECB policy disagreements (Axel Weber 2011, Jens Weidmann 2021), yet German hawks remain in a structural minority that cannot block decisions. The ECB is deemed to 'issue' 8% of all euro banknotes but never actually puts them into circulation—it holds claims on national central banks who do the actual distribution.
Key Facts
Power Dynamics
Governing Council sets monetary policy for 350+ million people through majority vote.
Despite one-country-one-vote principles, the system is designed around German acquiescence. Draghi's 2012 'whatever it takes' OMT program required Merkel's blessing despite Bundesbank's vocal opposition. The Executive Board (6 permanent voters) preps all decisions, giving Frankfurt bureaucrats disproportionate agenda-setting power.
- Germany (political veto, not formal)
- Any national parliament can challenge ECB decisions in courts
- Two-thirds majority required for 'other instruments of monetary control'
- Treaty change requires unanimity
- German Bundesbank (largest shareholder, 18.7% capital key)
- European Commission (fiscal coordination)
- National parliaments (democratic legitimacy)
- Bond markets (the real enforcer of discipline)
Revenue Structure
European Central Bank Revenue Sources
- Seigniorage on 8% banknote allocation 40% →
- Interest on securities (PEPP, PSPP) 45%
- Interest on foreign reserves 10% →
- Monetary income redistribution from NCBs 5% →
Currently negative
Post-2022 rate rises flipped profitability: now paying higher interest on bank reserves than earning on slowly-churning bond portfolio. NCBs cover ECB losses; if insufficient, losses carry forward against future profits.
Unlike Fed or BoE (which have Treasury indemnities), ECB losses flow through to national budgets via reduced NCB dividends. Creates fiscal pressure but no formal constraint on policy.
Decision Dynamics at European Central Bank
PEPP announcement March 18, 2020: Emergency Governing Council just 6 days after scheduled meeting failed to deliver. €750bn announced after markets closed to prevent Thursday panic.
OMT program took 14 months from crisis peak (May 2011) to Draghi's 'whatever it takes' (July 2012) to formal announcement (September 2012). Never actually used—required IMF program, and countries wouldn't accept stigma.
Consensus culture in 26-person council with 20 national political masters. Even emergency decisions require convincing Germany.
Failure Modes of European Central Bank
- 2010-2012 sovereign debt crisis: ECB initially resisted bond buying, allowing yields to spike. Required Draghi's extralegal 'whatever it takes' to stop contagion.
- 2011 premature rate hikes: Trichet raised rates in April and July 2011 into brewing sovereign debt crisis, forced to reverse as recession deepened.
- No fiscal counterpart—only central bank trying to stabilize 20 different sovereign bond markets
- Consensus paralysis—any controversial decision faces 6-12 month lag
- Treaty constraints—prohibited from 'monetary financing' yet bond buying walks this line
Italy's debt/GDP hits 150%, populist government threatens euro exit. ECB faces choice: buy Italian bonds (accused of bailout, German court challenge) or don't (yields spike, banking crisis, contagion). Either choice breaks the institution.
Biological Parallel
The ECB is not a single organism but a colony of specialized polyps (national central banks) that can't survive independently. Each polyp has distinct function—some sting (Bundesbank's hawkish dissent), some digest (smaller CBs implement policy)—but they're fused into what looks like one creature. The float (Executive Board) determines direction but can't move without polyp cooperation. If you sever a polyp, both parts die. When Greece nearly exited in 2012, the terror was existential: discovering you're not actually an organism, just polyps clinging together.
Key Agencies
Sets monetary policy via majority vote (6 Executive Board + 20 NCB governors)
Day-to-day management, 6 permanent voters
Banking supervision under Single Supervisory Mechanism