Current Legal Issues Affecting Central Banks, Volume III.

5B. European Monetary Union and the European System of Central Banks

Robert Effros
Published Date:
August 1995
  • ShareShare
Show Summary Details

Objective of Monetary Union

The key provision of the Treaty Establishing the European Community (also known as the Treaty of Rome as amended by the Maastricht Treaty), which defines the objective of monetary union, is Article 3 a, paragraph 2. It provides

Concurrently with the foregoing, and as provided in this Treaty and in accordance with the timetable and the procedures set out therein, these activities shall include the irrevocable fixing of exchange rates leading to the introduction of a single currency, the ECU, and the definition and conduct of a single monetary policy and exchange rate policy the primary objective of both of which shall be to maintain price stability and, without prejudice to this objective, to support the general economic policies in the Community, in accordance with the principle of an open market economy with free competition.1

The monetary union is based on a single monetary policy, a single exchange rate policy, and a single currency, which is named in the Treaty as the ECU.2 The emphasis on a single currency as the final objective appears in other provisions of the Treaty.3 It is quite remarkable because the existence of a single currency is, in principle, not regarded as a constitutive element of a monetary union; permanently fixed exchange rates are sufficient under economic theory. Yet, a single currency is considered by the European Community an important addition to the realization of its monetary union.

In the preparation of the Treaty, the significance of a single currency was emphasized for at least three reasons: politically, a single currency would give to the monetary construction a touch of irreversibility, which may be lacking when national currencies remain under a regime of permanently fixed parities; economically, the advantages of the monetary union for the single market would be increased by the existence of a single currency, since transaction costs would disappear; and psychologically, the symbolic value of a single currency cannot be denied. This is why the Treaty opted in favor of a single currency, more decisively than the Delors Report on economic and monetary union.4

The European Economic Monetary Union (EMU) will be managed by a European Central Bank, which will be at the heart of a European System of Central Banks (ESCB). The creation of the ECB and the ESCB is perhaps the most important institutional element of the Treaty.5 Their creation gives a different connotation to the monetary aspects of the EMU, in comparison with the mostly regulatory features of economic union based on policy coordination, permanent surveillance, and budgetary discipline.6

Monetary Union Institutions

Before describing the institutional framework of the monetary union, it is useful to examine the institutional setup of monetary cooperation. Three organs are notable: the Monetary Committee, the Committee of Governors of the Central Banks, and the European Fund for Monetary Cooperation (which was dissolved when the European Monetary Institute was created).

Monetary Committee

The Monetary Committee was created by the EC Treaty as a consultative organ in charge of the coordination of monetary policy.7 Each member state and the European Commission appoint two members to this Committee. It reviews the economic, financial, and budgetary conditions of the member states. It has a specific role in international monetary cooperation and has to be consulted on draft EC legislation when the Treaty so provides. It also prepares the meetings of the Council of Economy and Finance. The Monetary Committee plays a preeminent role when a change in the central rates of the currencies of the Community is envisaged. It proposes a decision in this field to the finance ministers of the member states. Under the European Monetary System, these changes have to be realized through a common agreement of the states whose currencies are involved in the exchange rate mechanism. As provided in the Treaty on European Union, the Monetary Committee will become, from stage three of EMU, the Economic and Financial Committee.8 From that date, the responsibility for monetary cooperation and integration for the member states will lie with the ESCB, which will adopt the single currency.

Committee of Governors of the Central Banks

By a decision made on May 8, 1964, the Council created a Committee of Central Bank Governors. This Committee undertook monetary coordination, as far as monetary policy is the responsibility of central banks.9 Policy on monetary affairs was allocated to the governments and their central banks and, thus, could vary from one state to another. (The Committee was dissolved on January 1, 1994, when the European Monetary Institute was created.)

European Fund for Monetary Cooperation

Another organ was the European Fund for Monetary Cooperation (EFMC).10 The role of the EFMC was limited to that of an accounting organ. With the failure of the first plan concerning the EMU in the 1970s, it never evolved to the institutional stage envisaged at the time of its creation.

European Monetary Institute

The EFMC dissolved with the creation of the European Monetary Institute (EMI) on January 1, 1994.11 The EMI is in charge of preparing for the third and final stage of the EMU. It includes the governors of each central bank and a president appointed, on the recommendation of the Committee of Central Bank Governors, by the Heads of State or Government after consultation with the Council and the European Parliament.12 The EMI is to be responsible for monetary policy within the Community. However, during the second stage, this policy remains in the hands of national authorities. The EMI is in charge of a strengthened monetary coordination, the facilitation of the use of the ECU, and the preparation of the final stage in the regulatory field. It is also responsible for harmonizing instruments of monetary policy and for solving the logistical aspects of the centralization of monetary policy management for the European Community.13 The EMI will have an important responsibility for the transition to the final stage and will disappear with the creation of the ESCB.14

European System of Central Banks

The European System of Central Banks includes the ECB and the national central banks (NCBs).15 The word “system” expresses the view that both the ECB and the NCBs are integral parts of it and that they will be governed by a common set of rules and committed to the objectives and tasks assigned to the ECB. NCBs are the shareholders of the ECB, with shares allocated by population and gross domestic product.16 The same formula will apply for their participation in the benefits and possible losses of the ECB.17 NCBs will keep their legal personality. Moreover, the ECB will have a legal personality, while the ESCB will have no legal capacity. The ESCB is not an institution; it is a set of rules. This notion is important in order to illustrate the community of objectives uniting its participants. It also has accounting purposes, as there will be a consolidated global balance sheet for the ESCB.

The sources of the regime applicable to the ESCB and the ECB are found in some important articles of the Treaty and in the Protocol on the Statute of the European System of Central Banks and of the European Central Bank (also called the Protocol).18 A protocol is an integral part of the Treaty, has the same legal value, and is an element of the constitutional charter of the Community. Apart from some technical provisions that can be revised through a simplified Community procedure, any change in the Protocol requires revision of the Treaty under the cumbersome procedure of Article 23619—now Article N of the Treaty on European Union—which requires the approval of all member states.

Objectives of the ESCB

The objectives are listed in Article 105, paragraph 1, of the Treaty and Article 2 of the Protocol:

The primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievements of the objectives of the Community as laid down in Article 2 of this treaty.20

Many provisions echo this objective, which comes back like a leitmotif in the Treaty. Article 2 of the Treaty includes the basic objectives of the European Community, a collection of mostly economic and social but also political (solidarity) aims of the Community. The clause “without prejudice” means that the objective of price stability takes an absolute priority in general economic policies. This objective has to be taken into account and will justify the preference for measures that respect both principles of price stability and the support for economic policies. The imposition of one predominant objective supports the independence of the European Central Bank; if it had to make a choice among a whole set of objectives, it could not have enjoyed such a large degree of autonomy.

Finally, the ESCB must respect the principle of an open market economy with free competition.21 The reference to the market principle will lead the ECB to avoid recourse to non-market-oriented instruments of policy and guide the ECB and the NCBs in the fulfillment of their role as lenders of last resort for the banking system.

Tasks of the ESCB

The tasks assigned to the ESCB are listed in Articles 3, 4, 5, and 6 of the Protocol. The basic tasks of the ESCB are included in Article 3, paragraph 1. The first task is “to define and implement the monetary policy of the Community.”22 The definition of monetary policy is clearly an exclusive responsibility of the ECB. As far as implementation is concerned, decentralization of operations to the NCBs is recommended.23

The second task is “to conduct foreign-exchange operations consistent with the provisions of Article 109 of this Treaty.”24 This article relates to external monetary policy. It gives important responsibilities to the political authorities of the Community, acting with the advice of the ECB, for either the conclusion of formal agreements related to exchange rate arrangements (possibly, a system of parities) or the adoption of general orientations for exchange rate policy.25 “Formal agreements” between the main currencies of the world are not probable in the present international monetary system. “General orientations” deriving from such international gatherings as the meetings of the Group of Five or Group of Seven are more likely. They are not legally binding and are adopted without prejudice to the objective of price stability. The ECB is not bound to respect these orientations, but it is evident that it will have to take them into consideration in conducting foreign exchange operations.

The third task concerns the holding and management of the official foreign reserves of the member states.26 Article 30 of the Protocol bears on the transfer of reserves, which will be effected by stages.27 There are also exceptions: foreign exchange working balances will remain at the disposition of governments. A first transfer of reserves will amount to ECU 50 billion of foreign reserve assets (including gold), other than member states’ currencies, ECUs, IMF reserve positions, and SDRs. Article 30, paragraph 5, provides, nevertheless, that the ECB “may hold and manage IMF reserve positions and SDRs and provide for the pooling of such assets.”28 While Article XVII, Section 3, of the IMF’s Articles of Agreement would appear to allow the ECB to be designated as an “other holder” of SDRs,29 further consideration may need to be given as to whether reserve positions of Fund members can similarly be pooled by the ECB.

The fourth basic task to be achieved through the ESCB relates to promoting the smooth operation of the payments system, obviously not an exclusive competence for the ECB but a concurrent one.30

It is remarkable that prudential supervision is not mentioned as a basic task of the system, contrary to the first draft by the Committee of Central Bank Governors. Under Article 3, paragraph 3, of the Protocol, the ESCB “shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.”31 This provision has been drafted in a very general and cautious way. The ESCB has “to contribute” to the supervision, which could be the responsibility of other specialized institutions. Article 3, paragraph 3, is to be read in conjunction with Article 25, which provides not only for an advisory capacity for the ECB in these matters but also for the possible attribution to the ECB by a legislative act of the Community (adopted unanimously by the Council with the consent of the European Parliament) of specific tasks “concerning policies relating to the prudential supervision of credit institutions and other financial institutions, with the exception of insurance undertakings.”32 These provisions concerning prudential supervision reflect the inability of the central bank governors and of the Intergovernmental Conference to agree on a more precise and effective wording. Different views were expressed, reflecting the variety of regimes within the member states. Further discussion is needed, and perhaps an evaluation of the deficiencies of the rules will help strengthen these provisions. Also among the tasks of the ECB are an extended advisory capacity,33 statistical functions,34 and the issue of ECU notes,35 which will have to be authorized by the ECB.

Independence of the European Central Bank and National Central Banks

A basic feature of the organizational arrangement of the ESCB is the independence of both the ECB and the NCBs as provided by Article 107 of the Treaty and Article 7 of the Protocol.36 Independence is defined as autonomy with respect to instructions by political or other organs. The prohibition of monetary financing under Article 104 of the Treaty strengthens the position of the ECB and the NCBs in this regard. The member states have an obligation to conform their laws, and especially the statute of their central bank, to the requirement of independence and, in general, to the provisions of the Treaty and the Protocol.37

Independence from instructions is only one requisite for complete independence. There are others, such as personal independence (in relation to the duration of the mandates), institutional independence (legal personality), functional independence (autonomous regulatory power), financial independence (own budget and resources), and organizational independence (staff statute and policy). The ECB enjoys all these types of autonomy to a significant degree.

Organs of the ESCB

The organs of the ESCB are those of the ECB: a Governing Council and an Executive Board.38 The Governing Council includes the governors of the NCBs and the members of the Executive Board.39 The members of the Executive Board (a maximum of six persons including the President and Vice-President) are appointed by the Heads of State or Government on a recommendation by the Council of Ministers, after having consulted the European Parliament and the Governing Council.40

Votes within the Governing Council are not weighted except for certain financial decisions listed in the Protocol.41 The principle “one man, one vote” accentuates the independence of the Council as a college of experts in charge of monetary policy.42 The Governing Council is responsible for the formulation of the European Community’s monetary policy, including, as appropriate, decisions relating to intermediate monetary objectives and key interest rates.43 The Executive Board shall implement monetary policy in accordance with the guidelines and decisions taken by the Governing Council.44

During the negotiations of the Treaty, there was a debate between those who would have liked to keep the bulk of responsibilities in the Council, where the central bank governors have a clear majority, and those who favored systematic delegations to the Executive Board. Article 12 of the Protocol seems to have decided for a centralization of powers in the hands of the Council, but it should be observed that the delegation of competencies in favor of the Executive Board is possible in every field of competence of the ECB. The texts are flexible enough to respond to the necessities of the moment. This evolution clearly depends on the type of instruments that the ECB will use in conducting its monetary policy.

Role of National Central Banks

Article 12, paragraph 1, of the Protocol provides that “[t]o the extent deemed possible and appropriate … the ECB shall have recourse to the national central banks to carry out operations which form part of the tasks of the ESCB.”45 The formula in this provision shows that the objective of decentralization, which is a basic rule of the ESCB, has to be balanced with the imperative of efficiency. The role of the NCBs is to vary according to the type of monetary policy instruments chosen. Compulsory reserve requirements are more compatible with decentralization than a policy based on fine-tuning interventions.

NCBs are an integral part of the ESCB and are to act in accordance with the guidelines and instructions of the ECB.46 It is for the Governing Council to ensure compliance with these guidelines and instructions. The NCBs are truly agents of the system. If the NCBs are charged under national law or otherwise with functions that do not form part of the system, the Governing Council can object if and when these functions interfere with the responsibilities of the NCBs under the system. The NCBs can use their remaining foreign exchange reserves above a certain amount, subject to approval by the ECB, to ensure consistency with the exchange rate and monetary policies of the Community. Therefore, the ECB is not just a thirteenth central bank; it is at the top of the system.

The ECB can appeal to the European Court of Justice when a member central bank does not respect the obligations deriving from the Treaty and the Protocol.47 This possible intervention by the Court is one element of a complete system of legal control over the acts of the NCBs, a system that also provides for a variety of rights of ECB access to the Court. It underlines the adherence of the NCBs to the European Community legal order. Judicial review also appears as a counterweight to independence. It is particularly required because of the existence of the regulatory power of the ECB.

Reporting Requirements

Other counterparts to the independence of the ECB consist of the required interinstitutional collaboration and the requirements stipulated for the ECB to report to political authorities of the Union (European Council, European Parliament, Council, and Commission).48 These reporting requirements are based upon the U.S. experience of the Humphrey-Hawkins procedures, whereby the Chairman of the Board of Governors of the Federal Reserve System is asked to appear, twice a year, before the monetary subcommittees of both the House of Representatives and the Senate in order to present and explain the objectives and results of monetary policy.49 Interinstitutional collaboration will be realized through the participation of the President of the Council and a member of the Commission in the meetings of the Governing Council of the European Central Bank. The President of the ECB will attend the meetings of the Council. The President of the Council will have the right to propose a motion for deliberation by the central bank. He or she will have neither a right of veto, which would be contrary to independence, nor a right to suspend the execution of a decision.


In conclusion, we have seen that the ECB will be independent, perhaps even to a greater degree than the Deutsche Bundesbank, which was a source of inspiration for the authors of the Protocol. But the building of the EMU is not only a legal achievement. It needs the realization of the economic convergence across the member states envisioned in the Maastricht Treaty. This convergence requires the adoption of strict measures of budgetary discipline and macroeconomic policies. It is the severe reality with which most of the member states are presently confronted.

    Other Resources Citing This Publication