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The Euro system is the combination of the European central banks and the national central banks(NCB) of the 19 member states that are part of Eurozone. Some of the members are Austria, Belgium, France, Germany, Italy etc. The Eurosystem says that ECB and national central banks jointly contribute to achieving its objectives. The primary objective of Eurosystem is price stability. Secondary objectives are financial stability and financial integration.
Functions carried by the Eurosystem are:
- To conduct foreign exchange operations
- To hold and manage the official foreign reserves of the eurozone members state, and
- To define and implement the common monetary policy of the eurozone
Eurosystem supports the general economic policies in the community and acts in accordance with the principles of an open market economy. Not only this, Eurosystem also contributes to the smooth conduct of the policies pursued by the competent authorities.
Well, some advantages of the Eurosystem are:
- Eliminate exchange rate uncertainty- the exchange rate eliminates business confidence in investing but due to a common currency, business confidence improves which leads to greater trade and economic growth.
- Price transparency- With a single currency, it will be easier to compare prices in European because they all will be in euros. Hence, there will transparency in prices all over the eurozone.
- Benefits to the financial sector- The introduction of euro appears to have reduced the costs of bonds, equity, and banking assets within the eurozone.
Even though Eurosystem has so many advantages but it also has some disadvantages.
- Two-speed economies- Due to disparities in inflation, economic growth, productivity and laws, it was inevitable that two-speed economies formed. Certain countries like Germany have an efficiency productivity and thus have a competitive advantage over other countries like Greece. This may lead to interest rate dilemma for the European central bank.
- To raise or lower interest? – if an economy is performing well, like Germany. Then they would require an interest rate hike in order to control inflation while countries like Greece where the economy is shrinking and demand is falling then they may require an interest rate cut, in order to stimulate demand in the economy. Hence, it leads ECB in dilemma.
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