European System of Central Banks
Monetary policy in the participating countries is managed by
the European System of Central Banks, which consists of the
European Central Bank (ECB) and the national central banks. The
ECB is based in Frankfurt/Main.
It started work in 1999 and is an
independent institution committed to maintaining stable prices.
The Stability and Growth Pact is an important part of the EMU.
Under this Pact, governments are committed to “reach a budg-
etary position of ‘close to balance or in surplus’ in the coming
The Stability and Growth Pact also sets up procedures
on how to handle excessive defcits, which are deemed to begin
at a rate above 3% of gross domestic product (GDP), except in
extreme economic conditions.
Furthermore, the ratio of gross
government indebtedness to GDP is not permitted to exceed
60% at the end of any fscal year. In January 2012, the heads of
state and government of the Member States decided to tighten
the Stability and Growth Pact in response to the European debt
This “Fiscal Compact” came into effect in January 2013.
Among other aspects, it includes an obligation for the individual
countries to implement a balanced budget amendment in
national legislation by 2018. In addition, the European Stability
Mechanism (ESM) was established to prevent heavily indebted
Eurozone countries from becoming insolvent.