Current Legal Issues Affecting Central Banks, Volume IV.
Chapter

Chapter 5 European Monetary Union and the European System of Central Banks

Author(s):
Robert Effros
Published Date:
April 1997
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Author(s)
CYNTHIA C. LICHTENSTEIN1

Introduction

On November 1, 1993, the Treaty on the European Union signed at Maastricht on February 7, 1992 (the Maastricht Treaty) came into force.2 Despite the difficulties in the summer of 1993 with the European Community’s system for holding most of its member states’ currencies in close alignment,3—the exchange rate mechanism—the European Union followed the provisions in the Treaty for the progressive stages of economic and monetary union. The Union took the steps provided for at the second stage (to begin January 1, 1994), namely, the creation of the European Monetary Institute (EMI).4 The European Council, meeting in Brussels on December 10–11, 1993, having previously decided that the EMI would have its seat in Frankfurt, appointed (in accordance with the procedures set out in Article 109f of the Treaty) Professor Baron Lamfalussy, former General Manager of the Bank for International Settlements, as the President of the EMI. It is the function of the EMI, among others laid out in Article 109f of the Treaty, to prepare for the third stage of Economic and Monetary Union (EMU).5

This chapter addresses the subject of what the EMI is not, and what, as a matter of Community law, it cannot do and cannot impose on the central banks of the member states. It then examines the nature of the European System of Central Banks (ESCB), which is scheduled to come into being at the third stage of EMU (under the Treaty, by January 1, 1999 at the latest).6 The central thesis of this paper is that, at that point, there will, in fact, be a Union central bank, a Community organ with “lawmaking” powers and access to the Court of Justice to enforce its law. The national central banks will, in effect, be its branches. To demonstrate this thesis, it will be necessary first to discuss briefly Community lawmaking structure and enforcement. The chapter will then discuss how the Treaty on European Union fits the ESCB into this structure as the Union’s independent central bank for monetary policy. It will then discuss how this absolute and unitary control over monetary policy does not pertain to the other role of many central banks: prudential supervision. Finally, the chapter addresses how the Treaty deals with the situation in which the third stage of EMU might begin for some member states but not for others, as well as the special provisions for Denmark and, if the United Kingdom does utilize its “opt-out” clause, the United Kingdom.

Lawmaking Capacity of the Community

It is not possible here to do more than skim the surface of European Union institutions and their lawmaking capacity in order to lay the foundation for understanding what will be the force of the instructions of the European Central Bank (ECB) to the national central banks (which together compose the ESCB) after the effectuation of EMU. A Community organ, such as the Commission or the Council, is given by the Treaty certain competencies, and those organs act (within the competencies) by making regulations, directives, decisions, recommendations, and opinions.7 Recommendations and opinions do not create law, in the sense that they do not create, under Community jurisprudence, rights of action in anyone. The other acts may be enforced, that is, they entitle persons, institutions, or enterprises affected or granted rights or obligations to go to the European Court of Justice (ECJ) for a judgment. The ECJ over the years has created through the development of certain concepts an overarching Community law that is superior to national law and to which the member states and their national organs are subject. Thus, the House of Lords of the United Kingdom has declared that the Parliament knew when it entered into the Community that it was accepting the Community rule of law and that, therefore, an Act of Parliament violating Community law could not stand.8

Even before the Treaty on European Union came into force, the Treaty of Rome, as amended by the Single European Act (to try to achieve the single market), had included a series of articles providing for Community legal control over Community law in accordance with the dictates of the Community organs under the Treaty. The ECJ has the power of judicial review over the question of whether the Treaty has been followed when the Community organs act.9 Moreover, several provisions of the Treaty provide for enforcement of Community law. Article 169 gives the Commission (the Community “executive”) oversight over whether a member state is fulfilling its obligations under the Treaty or under Community secondary legislation.10 The Commission must give the state concerned the opportunity to present its side of the matter and then issue a “reasoned opinion” on why it thinks the state is failing to comply with Community law. The Commission may take the matter to the ECJ if the member state does not comply with the opinion. Article 171 provides that, if the ECJ finds that a member state has failed to fulfill an obligation under the Treaty, the state “shall be required to take the necessary measures to comply with the judgment of the Court of Justice.”11 Paragraph 2 as added by the Maastricht Treaty provides a procedure for the Commission to review whether a member state has complied with a judgment and to go back to the ECJ if necessary to ask for a penalty payment.12 Article 173 provides the ECJ jurisdiction to review the “acts” of Community organizations, “other than recommendations and opinions,” at the instance not only of other organizations, but also of member states, and Article 175 relates to suits for failure to act.13 Article 176 provides an obligation upon a Community institution that has acted or failed to act comparable to the obligation upon member states in Article 171.14 Article 177, a frequently discussed provision in treatises on Community law, is the requirement that national courts refer up to the ECJ for “preliminary rulings” issues in their courts that implicate Community law.15 This provision of the Treaty ensures not only that Community law is supreme, but also that national courts do not give rise to divergent national views of what the Treaty means. Article 177 is a powerful weapon for creating a jurisprudential union, for ensuring that treaty interpretation and interpretation of “acts of the institutions of the Community” (that is, Community secondary legislation) are not considered to be political questions that are not subject to the Community legal order.16 Article 177 means not only that the Commission is a watchdog through its powers under Article 169, but also that a private party in a national court can claim that the matter before that court requires an ECJ preliminary ruling, and so have the ECJ rule on what the Community law’s view of the matter should be.17

The Treaty on European Union provided for the integration of a single central bank, a single monetary policy, and a single currency into the Community’s far-reaching system of jurisprudence. Arguably, if one understands the effect of establishing the ECB as a Community institution under these provisions, one understands why the United Kingdom demanded, as the price of its signature on Maastricht, an opt-out clause exempting it from the third stage of EMU at its option, (even if ultimately the United Kingdom does not exercise this option).

“Delicate” Task of the EMI

The second stage of EMU began on January 1, 1994, and, pursuant to it, the EMI came into existence. Professor Jean-Victor Louis has stated that “there is no transfer of power in the field of monetary policy during the second stage. The EMI Council cannot take monetary policy decisions, such as fixing interest rates or decreeing compulsory reserves.”18 The EMI is assigned many important tasks by the Treaty, not the least of which is to prepare for the third stage by specifying the “regulatory, organisational and logistical framework necessary” for the new monetary institution of the third stage, the ESCB, “to perform its tasks in the third stage.”19 However, as Professor Louis has noted, its role is “delicate because it has a power of influence more than a legal power of decision in a period in which Member States retain their competences in the field of monetary policy.”20 Thus, while Article 109f provides that during the second stage the EMI shall have all the power given to the ECB by the Maastricht amendments to the Articles relating to judicial control,21 the EMFs lack of power of decision over monetary policy means that the power to enforce, the power to go to the ECJ, is meaningless in that respect.

The power under Article 173 (of going to the Court “for the purpose of protecting [its] prerogatives”) might be useful to force the Council of the Community to “consult” the EMI “regarding any proposed Community act within its field of competence” or to force the authorities of the member states to consult it on “any draft legislative provision within its field of competence.”22 But what is the EMI’s “field of competence”? Its tasks are set out in Article 109f: to “strengthen,” “monitor,” “hold consultations,” “facilitate,” “prepare,” “promote,” and “supervise.”23 The last task suggests some power in the meaning of “competence.” The EMI is to supervise “the technical preparation of ECU banknotes.”24 Under the EMI’s Statute, made part of the Treaty by a Protocol, the EMI may perform the “legal acts” of delivering opinions and making recommendations and may “adopt guidelines, and take decisions, which shall be addressed to the national central banks.”25 Only “decisions” are “binding,” and then only “upon those to whom they are addressed.”26 Article 15.4 also refers back “[w]ithout prejudice to Article 3.1,” which provides that the EMI shall act “without prejudice to the responsibility of the competent authorities for the conduct of monetary policy within the respective Member States.”27

Sea Change of the Third Stage

The lack of power to enforce through judicial access of the EMI in the move to monetary union contrasts with the powers of the ECB in the third stage. The Treaty provides for the beginning of the third stage if a requisite number of member states fulfill “the necessary conditions for the adoption of a single currency.”28 It mandates January 1, 1999 as the latest date for attainment of the third stage and presumes that, before that date at the latest, the EMI will have vanished and the ECB and the ESCB have come into being, with the tasks and powers set out in the Treaty and the Protocol on the Statute of the European System of Central Banks and of the European Central Bank annexed to the Treaty.29 This Statute’s title contains references to both the ESCB and the ECB, and Article 1, Chapter I of the Constitution of the ESCB says that the two “shall be established in accordance with Article 4a of this Treaty,” which says no more than that they shall be established.30 It is necessary to turn to Articles 105 and 106 of the Treaty to ascertain the tasks and the legal structure of the ECB and the ESCB. The first task cited is “to define and implement the monetary policy of the Community.”31 The second task is “to conduct foreign exchange operations” as authorized by the Council under Article 109. The third task is “to hold and manage the official foreign reserves of the member states.” The fourth is “to promote the smooth operation of payment systems.”32 Article 105(5) and (6) relate to the role of the ECB and the ESCB with respect to “prudential supervision of credit institutions and other financial institutions,” which is discussed subsequently in this chapter.33 Article 105a gives the exclusive right to authorize the issuance of banknotes to the ECB, although the actual issuance may be by both the ECB and the national central banks.34

In the performance of these tasks, what is the relationship between the ECB and the national central banks? In carrying out these tasks, which of the two is given the lawmaking powers? The Treaty is very clear. The ESCB consists of the ECB and the national central banks, but the two are hardly in a relationship of equality. “The ESCB shall be governed by the decision-making bodies of the ECB which shall be the Governing Council and the Executive Board.”35 Article 8 of the Statute of the ESCB sets out the same phrase, namely, “[t]he ESCB shall be governed by the decision-making bodies of the ECB,” as the “General Principle.”36 Article 9.2 of the Statute states unequivocally that the ECB “shall ensure” that these tasks “are implemented either by its own activities pursuant to this statute or through the national central banks pursuant to Articles 12.1 and 14.”37 Article 14.3 states that the national central banks “shall act in accordance with the guidelines and instructions of the ECB.”38 The section then requires the Governing Council of the ECB to “take the necessary steps to ensure compliance with the guidelines and instructions of the ECB. . . . “This is a clear reference to the power of the ECB under Article 180 of the Treaty to take a national central bank to the ECJ if that bank does not comply with a reasoned opinion explaining why it is in violation of the ECB’s guidelines or instructions.39

However, it is not only in relation to the national central banks that the ECB has been given the power to resort to the ECJ to enforce its mandate of directing the Union’s single monetary policy in the third stage. Recall that, under Article 173 as amended by the Maastricht Treaty, the ECB may resort to the ECJ “to protect [its] prerogatives.”40 Under the Treaty, economic policy is coordinated by the Council while the ECB has exclusive control of monetary policy. The Treaty contains provisions for participation of the President of the Council and a member of the Commission in meetings of the Governing Council of the ECB, and for participation of the President of the ECB in Council meetings “when the Council is discussing matters relating to the objectives and tasks of the ESCB.”41 Suppose that the Council and the ECB differ as to whether the Council is discussing such a matter, and the Council fails to invite the President of the ECB to its deliberations. (In the United States, by way of analogy, such a matter might be held to be a political question on which the federal courts would not intervene.) There is no question that under Article 173 the ECB would have the right to ask the ECJ for a ruling on the question of whether the matter under discussion by the Council related to the ESCB and to obtain a judgment against the Council, ordering it to permit the President of the ECB to be present.42

Role of the ESCB in Prudential Supervision

Unlike its control over monetary policy, the ECB has only a limited role to play in the area of prudential supervision.43 This conclusion assumes the absence of Council action (which must be taken unanimously on a proposal from the Commission and after ECB consultation and assent from the European Parliament) under Article 105(6) to “confer upon the ECB specific tasks concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.” Article 105 of the Treaty provides that 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.”44 Just how this contribution is to be made is not spelled out in the Treaty. Thus, the scheme of prudential supervision remains within the jurisdiction of the national central banks or other national authorities. However, it will be recalled that Article 105(4) requires consultation of the ECB both on any proposed Community act “in its fields of competence” and by national authorities as to draft legislation, again within its fields of competence.45 Here, the Council of the Community is to set the limits and conditions of the consultation.46 Thus, if the Community were to enact legislation providing for prudential supervision of participation in the derivatives markets, the ECB would have to be “consulted.” Moreover, these provisions will give the ECB some limited input into national legislation on supervision of the financial markets. However limited the role, the fact remains that, if either the other Community organizations or a member state were to ignore the ECB in policing the markets and the actors in the markets, the ECB could request the Court to order it to be “consulted.” The judicial control mechanism gives more force to a vague prerogative.

ESCB in a Bifurcated Currency Union

Up to this point, the discussion has proceeded as if all the member states would, by the agreed final date for the third stage of EMU, give up their own system of monetary policy, adopt the single currency (the ECU or rather, as this goes to press, the euro), and be subject, as far as monetary policy is concerned, to the control of the ECB. However, the Maastricht Treaty recognizes that, in fact, not all the member states will necessarily meet the criteria for entrance into the single currency union; it also provides in separate protocols that Denmark and the United Kingdom need not participate in the third stage.47 How then will the ESCB operate in this eventuality? Article 109k of the Treaty provides for the situation, as does Chapter IX of the Statute of the ESCB.48 Those states (as well as Denmark and the United Kingdom if they so choose) that do not fulfill the conditions for the adoption of a single currency are called by the Treaty “Member States with a derogation.”49

Those states so designated are not subject to the rights over their monetary policy (and consultation obligations on their prudential supervision legislation) given the ECB in Articles 105 and 105a, the lawmaking authority of the ECB given in Article 108a, or the Community’s power over their foreign exchange policies given in Article 109.50 (The derogation also applies to other economic policy obligations.) A member state with a derogation does not participate in naming the members of the ECB’s Executive Board.51 This general scheme of nonapplicability of certain ESCB rights and obligations is set forth in Chapter IX of the Statute of the ESCB and the ECB, which specifies that the central banks of states with a derogation “retain their powers in the field of monetary policy according to national law.”52 Therefore, they are not subject to the instructions of the ECB noted previously. Article 43.4 lists specifically those Articles of the Statute that shall be read as applying only to national central banks without derogation. However, other activities and tasks of the ESCB (such as collection of statistical information and reporting activities) do not involve the authority of the ECB over the national central banks but involve only collaborative functions. To ensure that this collaboration is carried out at the level of the ECB, the Statute provides for establishment of a third decision-making body (the first two being the Executive Board and the Governing Council), the General Council, whose responsibilities are set out in Article 47 of the Statute.53

The main point is that in a bifurcated monetary union the governors of the central banks in the single currency sit on the Governing Council of the ECB; the governors of the central banks whose member states have a derogation sit on the General Council with the other governors. If one remembers that it is the Governing Council of the ECB that controls the ECB’s right of access to the judicial control mechanisms, the division of authority between the two decision-making bodies is clear.

COMMENT

ROSA MARIA LASTRA

European Monetary Union and Central Bank Independence

Introduction

This comment focuses on three issues: the process leading toward the creation of the European System of Central Banks (ESCB) in the third stage of Economic and Monetary Union (EMU); the steps already taken in implementing the Treaty on European Union (the Maastricht Treaty); and central bank independence. The first two issues, relating to EMU and Maastricht, are of particular interest for Europeans. The third one, crucial at the level of the European Union (EU), also is a key issue for other nations in the developed world and for developing countries.

Process Leading Toward the Creation of the ESCB in the Third Stage of EMU

The history of monetary integration in the European Community (EC), as well as the very history of the EC, shows how an organization gains and loses momentum in its gradual development and how the political will to move forward is at least as important as the economic benefits derived from the integration. Since its inception, the EC has been confronted with various challenges: the Customs Union in the late 1950s and 1960s; the consolidation of its institutions and the first enlargement in the 1970s; the single European market program and the second enlargement in the 1980s; and the deepening (not only in terms of economic union, but also of monetary and even political union) and prospective further enlargement of the organization in the 1990s. Additionally, the EC faces other problems today, including the alleged lack of democratic legitimacy of its institutions and the need for institutional reform, its increasing bureaucrarization, the need to define more clearly the requirements of the principle of subsidiarity, and the existence of regional economic imbalances.

Although the Treaty partially addresses the challenges of the 1990s, it fails to solve adequately some of the concerns of member states and prospective applicants. There are also constitutional constraints on the realization of the goals agreed in Maastricht. The European Union is not a federation. Neither the Maastricht Treaty nor the founding treaties of the European Communities provide a formal “constitution” to the Union. Moreover, the nonexclusive transfer of sovereign powers from the member states to the EU institutions in the third stage of EMU will result in a dual responsibility divided between EU institutions and national authorities.

It should be noted that the Maastricht Treaty is a rather complex legal document. Amendments to the Treaty Establishing the European Economic Community, which pertain, inter alia, to monetary union, comprise Article G of the Maastricht Treaty.1 The European Union is formed of the three existing European Communities, namely, the European Coal and Steel Community, the European Economic Community (now the EC) and the European Atomic Energy Community.2 The EU is supplemented by two forms of cooperation established by the Maastricht Treaty, the common foreign and security policy and the cooperation in the areas of justice and home affairs.3

While the Single European Act captured the momentum gained in launching the internal market program as “an area without internal frontiers in which the free movement of goods, persons, services and capital is ensured”4 and prepared the way for further monetary cooperation, the Maastricht Treaty tried to capitalize on the momentum gained on the road toward EMU.5 However, its drafting, signature, ratification, and implementation provide a good example of the ups and downs of the history of EC integration. The Treaty finally came into force on November 1, 1993, opening the way for the future establishment of the ESCB. Its forerunner, the European Monetary Institute (EMI), started operations in January 1994, at the start of the second stage of EMU. The EMI is conceived as a transitional and preparatory phase for entry into the third stage. It is a rather weak institution, whose operations seem to show a continuity with the Committee of Central Bank Governors that it replaced, rather than a substantial new approach to the realization of EMU.6 More monetary stability seems to be necessary in order to move ahead with the EMU plan, and, as the member states retain their monetary policy responsibilities in the second stage, it is uncertain whether the EMI has the powers to achieve its goal.7

Paradoxically, the Maastricht Treaty gained binding legal force at a time when some member states were more preoccupied with their growth prospects and unemployment problems than with the pursuit of price stability. The economic slowdown in many European countries at the beginning of the 1990s and the historical events that have changed the shape of Europe in the past several years, namely, German reunification, the breakup of the former Soviet Union, the transition in Eastern Europe and the Baltic countries, Russia, and the other countries of the former Soviet Union from centrally planned economies to market economies, and the breakup and war in Yugoslavia, have signified a change of priorities in the European continent.

Arguably, European citizens and their expectations have lost touch with the supranational objectives agreed in Maastricht. This criticism was evidenced during the period of ratification of the Maastricht Treaty. The Danish and French referendums, the British opposition to the Treaty, the legal challenges presented to the German Federal Constitutional Court,8 the rise of popular opinion in Germany against the prospective disappearance of the deutsche mark, and the general disenchantment across Europe with a community perceived as distant from its citizens were some of the difficulties that member states faced in that period.

Following the September 1992 currency crisis and the speculative movements in the ensuing months, the exchange rate mechanism (ERM) of the European Monetary System (EMS) was reformed in August 1993. The widening of the bilateral bands to plus or minus 15 percent (except for the bilateral relationship between the deutsche mark and the guilder, to which the previous 2.25 percent band still applies) has been characterized by some economists as a virtual breakdown of the system.9

As regards the future of the ERM, there are in theory several options10 besides the present status quo: reintroduction of exchange controls; accelerated movement toward EMU in a subset of core countries; the taking of alternative routes to EMU; and reversion to narrow bands. The last option seems to have been rejected as an official solution by the ministers of finance of the member states and by the President of the EMI because it would require a credible commitment to intervene to defend a currency that exceeds those bands (that is, a commitment made by the central bank of the strongest currency to support the weak currency).11 Unofficially, however, some member states, such as Belgium, the Netherlands, Luxembourg, Denmark, and Ireland, have been trying to operate within a fuzzy 2.25 percent narrow band, and the ERM has been relatively stable since its reformation.

The “convergence criteria” that member states must meet to qualify for monetary union, defined in Article 109j and further elaborated in a Protocol annexed to the Treaty, refer to price stability, nonexcessive government budgetary deficits, stability within the ERM, and (reflecting the durability of the convergence achieved under the ERM) stable, long-term interest rate levels.12 The EU is due to hold an Intergovernmental Conference in 1996 to revise the Treaty as far as seems desirable in the light of experience.13

According to the letter of the law, stability within the ERM (one of the four criteria of economic convergence) can be understood as stability within the wide bands and, therefore, can be managed in the context of Article 109j. However, the spirit of the law when the Treaty was signed in Maastricht in February 1992 was different.

The main problem ahead in achieving economic convergence lies in the size of government deficits, as most of the member states, including Germany, would not pass today the test of having a “sustainable government financial position,” strictly read. However, the language of Article 104c of the Maastricht Treaty, in combination with the Protocol on Excessive Deficit Procedure annexed to the Treaty, provides some room for interpretation: the sustainability of the government financial position is defined, first, by “whether the ratio of planned or actual government deficit to gross domestic product exceeds the reference value [3 percent], unless either the ratio has declined substantially and continuously and reached a level that comes close to [3 percent] or, alternatively, the excess … is only exceptional and temporary,” and, second, by “whether the ratio of government debt to gross domestic product exceeds a reference value [60 percent], unless the ratio is sufficiently diminishing and approaching [60 percent] at a satisfactory pace.”14 Therefore, a country (for example, Ireland) whose public debt-to-GDP ratio considerably exceeds the 60 percent reference value, would still be able to qualify for EMU if the debt ratio is considered to be “sufficiently diminishing” at a “satisfactory pace.”15 The Council of Ministers will decide whether an excessive deficit exists or not, acting on a recommendation from the European Commission.16

The criteria of economic convergence have been regarded by Germany as a condition sine qua non in order to move ahead with EMU. The ruling of the German Federal Constitutional Court of October 12, 1993 clearly reaffirmed that “the convergence criteria cannot be relaxed. . . . [T]he Federal Republic of Germany, by ratifying the Union Treaty, is not subjecting itself to unsupervisable, unsteerable, automatic pilot in its progress to a monetary union.”17 The wording of the German Federal Constitutional Court’s ruling is consistent with previous and subsequent declarations of the Bundesbank:

The key to further advance in monetary integration is a sufficient degree of convergence in economic development and economic policy between the member countries of the union. . . . [T]he Treaty stipulates that the European economic and monetary union shall enter its third stage on January 1, 1999. However, even then only those countries that meet the convergence criteria can participate.18

The skepticism reigning in the debate about Maastricht will probably pose difficulties in fulfilling the EMU timetable. According to Article 109j of the Maastricht Treaty, not later than December 31, 1996, the Council of Ministers, meeting in the composition of heads of state or government and “[t]aking due account”19 of the reports prepared by the European Commission and the EMI on the progress made by member states regarding these convergence criteria, and of the opinion of the European Parliament, shall decide, acting by a qualified majority, whether a majority of the member states fulfill the necessary conditions for the adoption of a single currency (that is, the convergence criteria) and whether it is appropriate for the Community to enter the third stage. If so, the Council of Ministers will set the date for the beginning of the third stage of EMU. If, by the end of 1997, the date for beginning the third stage has not been set, that stage shall start on January 1, 1999.20 Despite this Treaty provision, the ruling of the German Federal Constitutional Court firmly declared:

In the framework of the conditional nature of the content of the Treaty and the factual convergences it presupposes, the time for the commencement of the third stage of economic and monetary union must also be seen as a target rather than as a legally enforceable date.21

Any change in the EMU provisions made in the 1996 Intergovernmental Conference (because a revision of the timetable for EMU is in fact a revision of the Treaty) would probably open a “Pandora’s box” of questions, and a new ratification “by all the member states in accordance with their respective constitutional requirements” would probably mean years of discussion.22 The Maastricht Treaty represents a compromise between those who favor a federal Europe and those who oppose it. The ambiguity in many of its provisions is rooted in this difficult balance. Should the provisions on monetary union be revised in the 1996 Intergovernmental Conference, EMU may be postponed sine die. Seemingly, the only way to go ahead is thus to respect the principle pacta sunt servanda, perhaps by creatively reinterpreting the language in the Treaty pertaining to EMU. A consolidation of the incipient economic recovery in Europe may rekindle enthusiasm for EU integration and should help governments streamline their budget deficits, hence facilitating compliance with the Maastricht requirements.

The real challenge for the 1996 Intergovernmental Conference lies in the institutional reform of the European Union, particularly the future structure of the European Parliament, which will have to accommodate both the needs of a Community of 16 or more members and the new responsibilities entrusted to it in the monetary—and eventually the political—area. The roles of the Parliament, the European Commission, and the Council of Ministers need to be redefined, as well as the representation and voting powers of the states. Moreover, with a free flow of capital, a new policy on the fiscal means of the Community must be adopted. Together with the debate about the deepening of the institutions of the European Union, the debate about its widening is generating much controversy.23

Steps Already Taken in Implementing the Maastricht Treaty

The implementation of the requirements imposed by the Maastricht Treaty is on course, both at the level of the member states and at the level of the EU institutions. As regards the latter, some regulations came into force on January 1, 1994. Two of them specify definitions for applying the prohibitions contained in Articles 104 and 104a of the Treaty, which refer respectively to the prohibition of the financing of government deficits through central bank credit and to the prohibition of privileged access by public authorities to financial institutions.24 Another regulation on the application of the controversial Protocol on Excessive Deficit Procedure requires member states to report to the European Commission their planned and actual government deficits and levels of government debt twice a year.25 The procedure for avoiding excessive deficits is triggered whenever one of the reference values (the 3 percent ratio of government deficit to GDP or the 60 percent ratio of public debt to GDP) is exceeded or threatens to be exceeded.26

Furthermore, the Council of Ministers has made some decisions on the functioning of the EMI. One of them refers to the calculation, in terms of population and GDP at market prices, of the member states’ contributions to the financial resources of the EMI.27 Another important Council of Ministers decision refers to the consultation of the EMI by the member states on draft legislation related, inter alia, to currency legislation, status and powers of national central banks, clearing and payments systems, and rules applicable to financial institutions.28

At the level of the member states, some of them, such as Italy, France, and Belgium, already introduced legislation in compliance with the Maastricht requirements in 1993.29 Spain and Germany introduced legislation in 1994, and Greece is expected to enact its legislative proposals soon.30 The Bank of Spain Autonomy Law was finally enacted in June 1994, following a period of amendments to address some of the concerns posed by the corruption charges faced by a former governor of the Bank of Spain.31 In Germany, the Bundesbank Act was amended in July 1994, in order to comply with Article 104 of the Maastricht Treaty and the regulation implementing it.32 In particular, the authorization contained in Section 20.1 of the Bundesbank Act, which permitted the Bundesbank to grant short-term cash advances to the Federal and Lander Governments, has been revoked.33 In connection with the ban on cash advances, Section 17 of the Act, requiring public authorities to deposit their liquid resources with the Bundesbank, has also been repealed.34 The United Kingdom, whose central bank celebrated its tercentenary in 1994, is considering the idea of central bank independence without necessarily linking it to compliance with the Maastricht requirements.35 Two recent reports encouraging greater independence for the Bank of England, the so-called Roll Report and a report prepared by the House of Commons Treasury and Civil Service Select Committee, have not given rise to any legislative changes so far.36

Central Bank Independence

Central banks in Europe and in other parts of the world are experiencing a wave of change toward greater independence. It has become more widely accepted that the central bank should be committed to price stability and that, in order to control inflation, the central bank should be independent from political interference. The following paragraphs point out a few controversial points in the debate about independence.37

Central Bank Independence as a Political Decision

Despite the economic merits of central bank independence, the actual decision to grant independence is a political one. Relations between central banks and governments are not always easy; the link between economics and politics is a difficult and complex one, which changes across countries and over time. This is true both for European countries and other developed nations and also for the developing world.38

Three Dimensions of Independence

Central bank independence has three dimensions: an institutional or organic one; a functional or operational one; and a professional one. The first two dimensions require the protection of a binding legal framework. The third dimension is often part of the de facto independence, which is determined by the personalities of the governor and minister of finance (and in some cases of other high officials); by the frequency of change of the governor; by the actual practices of both the minister of finance and the central bank; by the depth and quality of economic and monetary analysis; by the political and economic circumstances (for example, economic expansion or recession); by the experiences of the country concerned; and by national priorities.

The Maastricht Treaty does provide a legal framework to protect central bank independence; the most significant provision is the prohibition against financing government deficits through central bank credit.39

Need for Accountability

Independence is only one side of the coin. The other side in a democratic state is accountability. Such accountability should be “diversified,” including through both parliamentary control and accountability to judicial bodies. Disclosure is another form of accountability, generally supported by countries, such as the United States or the United Kingdom, that encourage strong financial market discipline and transparency.40 Germany, whose model of corporate governance fosters close ties between banks and corporations, with a corresponding flow of confidential information, may not possess an equally strong tradition of disclosure.

Importance of Price Stability Vis-à-Vis Other Economic Goals

Central bank independence is often regarded as a basic premise for a monetary policy committed to monetary stability. Therefore, central bank independence may seem more attractive when a country is concerned about inflation than when a country is trying to fight recession and unemployment. For instance, the Bundesbank’s policy of high interest rates in the aftermath of German reunification was questioned in the rest of Europe, which was suffering from an economic slowdown, and even by some in Germany itself. The Bundesbank kept interest rates high in order to fulfill its legal mandate of safeguarding the value of the currency.41 This commitment to price stability is the essence of the case for central bank independence. It should be noted, however, that the ESCB will be committed to European price stability and not only to German price stability, and that, therefore, it will take into account the interests of all the member states of the Union.

Central Bank Independence and Foreign Exchange Policy

The conduct of foreign exchange policy involves determining the exchange rate and the exchange regime (or exchange arrangement) and managing the official monetary reserves. Responsibility for the formulation of the exchange rate policy typically rests with the government, while responsibility for its implementation is generally entrusted to the central bank. Central banks normally have more freedom to formulate monetary policy than they do exchange rate policy.42 However, the Swedish Riksbank is responsible for the determination and implementation of foreign exchange policy, according to Article 4 of the Swedish Central Bank Act.43

The government’s responsibility in formulating foreign exchange policy rooted in historical and political reasons,44 and in the consideration that the exchange rate is not only a nominal anchor for the domestic price level, but also a part of general economic policy, linked to the trade and employment objectives of a country.45

The Maastricht Treaty does not entrust the ESCB with clear responsibilities in the field of foreign exchange policy.46

Central Bank Independence and Banking Supervision

Independence is often advocated as regards monetary policy. It is also necessary in the conduct of banking supervision. Independence to pursue stable money should thus be accompanied by independence to pursue sound banking. If the central bank is not directly in charge of bank regulatory activities, the bank regulatory agency also needs to be independent from governmental guidelines.

According to the Maastricht Treaty, the national central banks or other competent authorities will keep their supervisory responsibilities.47

Independence Alone Does Not Guarantee Price Stability

Other factors need to be taken into account in order to make independence effective in terms of inflation control: fiscal restraint and a credible general economic policy; labor market discipline; the support of the financial and nonfinancial community for anti-inflationary measures; and the political stability of the country.

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