11A. The Economic and Monetary Union and the Introduction of the Euro


My presentation is in two parts. The first concerns the monetary law of the Community and the introduction of the euro. The second will address the institutional aspects of monetary union.

I would like to start by addressing the question of where the monetary law of the Community is found. The treaty of Maastricht contains two pertinent provisions. One is Article 109L(4), which states that at the start of Stage Three the governments shall fix in an irrevocable manner the parities of the participating currencies. This provision, moreover, states that at that moment the Council may adopt the acts necessary for the rapid introduction of the euro as a single currency. This is the basis for the monetary law of the community. But other aspects of the introduction of the euro need to be addressed not only regarding the participating member states, but also regarding the nonparticipating member states of the Community. In this context, another provision of the treaty is useful, Article 235, which gives the Community power to enact legislation in all areas necessary to achieve its objectives, where there is no other specific legal basis to adopt legislation.

Article 109L(4) and Article 235 are the two main provisions on which the monetary law of the community is based. Chronologically, the first was Article 235, used in 1997 to approve a regulation on certain provisions concerning the introduction of the euro. This regulation was based on Article 255, which means that it could be adopted before the start of the monetary union when member states were still competent to legislate on monetary matters and the Community did not yet have specific competence to enact legislation concerning monetary affairs. This legislation addressed three topics: first, what the fate of the ECU basket would be; second, continuity of contracts; and, third, rounding issues.

First, the replacement of the ECU. The ECU is a creation of Community law. It is legally defined in a Council regulation of 1994 as a basket of currencies to be the unit of account of the Community for the budget of the Community. This is the official use of the ECU. But as soon as it was established, the ECU created a large market as a currency traded among agents outside the official institutions of the Community and cleared by the European ECU banking association and the BIS. It became a proper currency in capital and currency markets.

The ECU can be traded in two forms. First, it can be traded as an open basket, deferring to the definition of the ECU by the Community, which means that every time the Community changed the definition of the basket, contracts had to be amended. Open-basket trades comprise, I would say, the bulk of ECU basket contracts. Second, contractual parties can also agree to use the ECU as the unit of account for contracts and permanently accept the composition of the basket at the moment they enter the contract. This is the closed ECU. Successive amendments to its composition would be of no consequence to the contractual parties. The distinction between the open and the closed ECU was important in drafting the provision for the replacement of the ECU, which concerned not only the official ECU but also the private ECU traded in the financial markets.

The provision for the replacement of the ECU by the euro states that whenever the name ECU is used in a contract, it is assumed to be the open ECU. The closed ECU survives as a proper contractual index, but is unaffected by this presumption.

Second, this regulation also addressed the continuity of contracts. Within market organizations the effect of introducing the euro on the continuity of contracts was much debated. There have been many monetary reforms throughout the world, but continuity of contracts has normally been a minor problem, because one currency is usually quickly replaced by the new currency.

In the case of the Economic and Monetary Union (EMU), certain peculiarities meant that the changeover was a problem for the continuity of contracts. (i) The existing currencies did not disappear. The euro was introduced, but the national currencies still remained. (ii) The euro was introduced without legal tender—without banknotes and coins. (iii) The euro entailed a changeover not only in currency but also in the money markets, the capital markets, and foreign exchange markets.

In the money markets the euro is issued by a single monetary authority, the European System of Central Banks, and traded in real time through real-time payment systems. In the capital markets there will be a huge redenomination of securities relative to the euro and securities will be traded in a wider, deeper market. In the foreign exchange market, because trading national currencies between themselves will stop, central banks will organize the trade of the euro against third-country currencies.

It was finally agreed that in the regulation for replacing national currencies a provision should state that the introduction of the euro does not affect the continuity of contracts, except when the parties have agreed otherwise. The sanctity of contracts will thus be preserved.

In the debate about the need to have a continuity provision in the regulation, there was discussion about whether the provision should be mandatory or declaratory. The solution was to make the provision declaratory, meaning that it confirmed the existing general principle of continuity of contracts recognized in the preamble of the regulation. A new provision ensuring the continuity of contracts would be a kind of confirmation of that principle, with declaratory effects.

Third, the regulation of 1997 addressed rounding. Early legislation on this topic was needed because all information systems have to be adapted to a rounding technique well before the start of Stage Three. As this could not be delayed until January 1999, it was included in Article 235. It establishes six significant figures for rounding. Conversions between national currency units have to be made in a triangular manner, meaning that one currency has to be converted to the euro, and from the euro to the other currency, rather than being converted directly into the other currency. Direct conversion could raise insoluble arithmetical problems.

Article 235 has been in force since June 1997. It was adopted with the intention of applying it to all member states of the Community. Nevertheless, there was also a debate on whether the ECU could be considered a currency, and therefore Article 235 could be a monetary law with an effect beyond the frontiers of the Community.

Of course, the ECU basket has no central bank of issuance. It is not legal tender. It is not represented in banknotes. But it could be said that it is defined in legislation, that it has official use, and it is traded in the market as if it were a currency. Nevertheless, because of doubts about the nature of the ECU, it was decided to include provisions about the ECU in Article 235, which is not properly monetary law. It is based, as I mentioned, in the general competence of the Community to achieve its policy objectives.

With regard to continuity of contracts, there was also concern about whether the provision in the regulation would have extraterritorial effects or would apply only to member states of the Community.

We in the European Monetary Institute thought that continuity is a consequence of the equivalence of the new currency to the former currency. By establishing the conversion rates, a “recurrent link” is established between the former currency and the new currency in a manner that renders the two currencies equivalent. Being equivalent means that the obligations of contractual parties are not subject to subsequent amendments. Ensuring this equivalence obviated the need to have continuity provisions.

Continuity belongs to contracts law and not to monetary law. To us it is a consequence of the lex monetae and of the equivalence of the new currency. But because it pertains to the lex contractus, it may be argued that it cannot have extraterritorial effect. This is the reason why some countries outside the Community have enacted legislation to ensure continuity. This has been the case in the United States, where a New York law has established the principle of continuity of contracts, following the introduction of the euro. And similar laws are forthcoming in the states of Illinois and California.

These laws are not strictly needed. They may give reassurance to the markets, but continuity is ensured by the equivalence of the currencies, because, in addition, the Maastricht Treaty provides that the euro be introduced only in countries with economic convergence, whereby there is no change in the economic conditions in which the currency operates.

The Maastricht Treaty provides that the conversion rates to be approved by the end of 1998 will have to be calculated at market rates. This ensures that the value of the euro will not alter the economic balances of contracts. Therefore it is not necessary for states to enact laws aimed at ensuring the continuity of contracts denominated in a currency replaced by the euro.

But the most important section of monetary law of the Community is the euro regulation adopted on May 3, 1998 by the Council of Ministers. This regulation states that, as of January 1, 1999, the currency of the participating member states of the EMU is the euro. This is the law that changes the official currency of the participating member states. The law applies exclusively to the participating member states. This monetary law should be recognized by all countries because it is in the competence of the issuing states to replace their currencies. Since the lex monetae, mentioned in the preamble of this regulation, is of universal effect, the replacement of the participating currencies by the euro should have universal recognition.

When this regulation was discussed, there were two theories. One theory regarded the euro as an additional common currency of the participating member states that will in the course of time replace national currencies. The alternative position saw the euro as a currency that merged the participating currencies and replaced them.

That second option was adopted in the euro regulation, which clearly states that the euro becomes the currency of the participating member states. The regulation allows national currencies to be retained, but legally recharacterizes them as subdivisions of the euro.

I now turn to how the transition is organized. There are three phases. The first phase will start on June 1, 1998 with the establishment of the European Central Bank (ECB). The Maastricht Treaty provides for the establishment of the ECB as soon as its decision-making bodies are appointed. This appointment is now being adopted. What does this mean? It means that the ECB is there, but as a preparatory entity, and it will remain so until January 1, 1999. Meanwhile, monetary policy is still within the competence of the national central banks.

The second phase of the transition starts January 1, 1999, and ends in January 2002. During this time, the ECB will exercise full authority over monetary policy. The national central banks also become different entities, which involves their legal reform. During this period the euro will coexist with national currency units, and it is only in 2002 that the euro becomes legal tender, with coins and banknotes put into circulation.

Third, the final phase of six months ends on July 1, 2002, when legally speaking, the national currencies disappear and only the euro will be seen in the participating member states.

For this transition, some basic principles were agreed to by the heads of states and government in the summit held in Madrid at the end of 1995. This agreement is called the Madrid Scenario. The principle of “no prohibition–no compulsion” was accepted, meaning that during the transitional period economic agents would be free to use either national units or euro units. The idea was that each economic agent would change to the euro according to its own wishes without being constrained to change in a “big bang.”

For the transition period, a second principle approved at Madrid was the principle of legally enforceable equivalence between the euro and the national currency. First, legally speaking, both the euro unit and the national unit would be of the same nature in legal terms. Second, the relationship between the euro and the national unit would be at a fixed rate, which should not be changed during the period of the transition.

These principles were enshrined in the euro regulation by characterizing the national currencies, as of January 1, 1999, as subdivisions of the euro. Moreover, national currency units are still valid, and therefore national banknotes and coins will continue to be legal tender during this period. There is a certain contradiction in characterizing the national currencies as subdivisions of the euro, since national currencies are legal tender only in the issuing countries and cannot be used in different jurisdictions. This is provided for in Article 9 of the euro regulation.

But apart from this, there are important rules establishing fungibility between the euro unit and national unit. The euro is a currency without banknotes and coins, but it can discharge monetary debts in either euros or national currencies. A creditor with a debt denominated in the national currency could be paid by using a euro, and vice versa, as established in Article 8.3 of the euro regulation. The banking community has to prepare itself for this, because it is obliged to accept payments in either unit and to credit the account of the creditor in the unit in which this account is denominated.

There is a similar provision concerning netting. Normally netting is restricted to reciprocal obligations denominated in the same currency. The regulation established the rule that netting can also occur in reciprocal monetary obligations, which are denominated in national units and in euro units for equal amounts. These are the domains of fungibility. Apart from this, the general rule is the rule of nominalism, meaning that, in principle, obligations have to be met in the unit in which they have been agreed. The freedom of contract is also safeguarded: parties are free to agree to any manner of settlement of their monetary debts.

Another provision concerns the redenomination of securities, which provides that, without the need to have the agreement of both parties (the issuer and the investor), the issuer may unilaterally redenominate the debt in euro terms. This may be done under the conditions laid down in Article 8, paragraph 4 of the euro regulation, which gives the leading role to the member states in redenominating the public debt. The purpose of this provision, of course, is to create as quickly as possible a capital market denominated in the euro units throughout the euro area.

The regulation also provides a regime for banknotes and coins, establishing their introduction for January 1, 2002. Afterwards, there will be six months in which to change old banknotes for new banknotes. Designs for the new notes will be officially approved by a decision of the European Central Bank, published in the Official Journal of the Community.

And apart from that, the regime of the banknotes flows from several provisions of which Article 105 (a) of the Treaty is the most important. This states that banknotes may be issued either by the national central bank or by the European Central Bank. Whether the European Central Bank will ultimately be the sole issuer of the banknotes is still to be decided by the European Central Bank. Any issuance has to be submitted for the authorization of the European Central Bank. The euro regulation also provides for the withdrawal of the banknotes and enjoins member states to enact provisions to fight the counterfeiting of the euro banknotes, either through Europol or through the European Commission. The regime for banknotes is still pending finalization by the European Central Bank.

Member states will be requested to adapt their laws concerning banknotes. Most member states now have laws giving the monopoly of issuance to the national central bank. The new system provides for an oligopoly of issuers—the European Central Bank and other national central banks. The oligopoly is to be protected in the same manner as the monopoly is now protected. Therefore, member states should enact appropriate laws to sanction any nonauthorized issuer of banknotes.

And a final word concerning how the euros will be issued. As I mentioned before, until the start of Stage Three, monetary policy competence belongs to the national central banks. To qualify to enter monetary union, the member states had to adapt the statutes of the national central banks and to provide for the integration of the national central banks in the European System of Central Banks. That means they had to adapt monetary policy provisions to designate the ECB as supreme authority in organizing the single monetary policy.

The ECB will organize the single monetary policy in a decentralized manner by establishing a common framework that each national central bank will have to implement. The content of the national framework will be similar in each member, according to an ECB guideline. An ECB guideline is an instrument that has a legally binding effect on the national central banks. This guideline will establish (i) the eligible counterparties to monetary policy, (ii) the eligible assets for monetary policy, and (iii) the instruments and the frequency of use of these instruments for monetary policy. These provisions of the guideline will have to be enshrined in the national legal implementation of each national central bank.

The guideline is now ready and therefore the EMI is monitoring its implementation by the national central bank. We are examining and comparing how, for instance, repos are to be handled by the national central banks, how counterparties are going to be selected, and what collateral is going to be admitted.

What everybody will see is national documentation, which any counterparty may examine to see how monetary policy is implemented in the different member states. The substance will be similar even if national peculiarities will show in the legal language describing how each member state will implement the guideline.

The usual instruments for carrying out monetary policy are open-market operations, the issuance of debt securities, and setting upper and lower limits for interest rates. As an optional instrument for the ECB, reserve requirements may be imposed on banks, but this is still to be decided by the ECB.

11B. Institutional Aspects of the European Central Bank


First of all, I would like to explain what the European System of Central Banks (ESCB) is. It is composed of all national central banks (NCBs) of member states of the European Union (EU), including those that have not adopted the single currency, the euro, and the European Central Bank (ECB). It is a common confusion of the general public that the ESCB is only for the NCBs of the EU that have adopted the euro. The ESCB is a system of both bank categories with different rights, of course, and different internal organization. All NCBs are shareholders of the ECB but capital is paid in only by the NCBs that have adopted the euro.

The ESCB has no legal personality, but the ECB is a legal person, as is each NCB. The ESCB is established according to the principle of centralized decision making and decentralized execution. The authority lies in the ECB, but the NCBs are the arms of the system and the counterparts of the banking community. The NCBs will continue to supply banks with liquidity.

NCBs will continue to occupy a powerful position in the system because they have expertise not only in the local financial market but also larger and more financial resources than the ECB. They have important research departments and more statisticians and analysts than the ECB, which is a comparatively small organization.

In arriving at decisions, the ECB will rely very much on the input from the national central banks. When a decision is adopted, its execution belongs to the national central banks.

The statute of the ESCB states clearly that the ESCB is governed by the decision-making bodies of the ECB. That means that the central point for decision making in the system is the ECB. But that the Maastricht Treaty foresees a decentralized approach to implementation also flows from Article 9.2, which assigns the implementation of ESCB tasks either to the ECB or through the NCBs.

Article 12.1, moreover, states that to the extent possible, the execution of the task should be entrusted to the national central banks. There are good reasons for this approach. Member countries have different legal systems and different financial markets. The implementation of monetary policy needs to take into account the peculiarities of each national market. This is why there is a need to rely on the national central banks in implementing monetary policy. Decentralization is limited by a need to have a single monetary policy and the need to have a level playing field to ensure that liquidity is provided in all markets under similar conditions to all counterparties.

In having this role as arms of the ECB, the national central banks are legally subordinated to the ECB. A provision in the statute ensures this subordination, providing for the obligation of the national central banks to act in accordance with the guidelines and instructions of the ECB and establishing for the Governing Council of the ECB the obligation to ensure compliance with its guidelines and instructions. The system is organized with a clear hierarchy of the ECB and a subordination of the national central banks.

On many occasions, I have heard that this organization derives from the subsidiarity principle, a phrase much used in Community circles. The subsidiarity principle is one of the principles enshrined in the Maastricht Treaty. It applies to all activities of the Community where both the Community and the member states have a competency to act. It says that the Community should do nothing that could be better done at a national level. The Community should take action only when there is clear value in addressing an issue at the Community level.

But this is not the case for monetary policy where member states will have no competence, since monetary policy is the exclusive competence of the Community. Subsidiarity is a principle that does not apply to monetary policy. The national central banks operate through delegation. The competence lies with the Community; the implementation is delegated to the national central banks.

The whole structure also relies on another important principle, the principle of independence. One of the topics discussed during the adaptation of statutes of the national central banks to allow them to join in monetary union was their independence. The national central banks are often subordinated to the political authorities, either the parliament, as was the system in the Scandinavian countries, or to government, as in most other cases. Central bank independence is clearly a principle provided for by statute, and it is the basis of avoiding any kind of national bias in the conduit of a single monetary policy.

As I mentioned, the statutes of all the NCBs had to be amended. The European Monetary Institute (EMI) in particular analyzed the principle of independence in a more in-depth fashion. It ascertained requirements for personal independence of the members of decision-making bodies, institutional independence, and functional independence. These were the main features of the independence of the NCBs, with which they comply in order to qualify to enter monetary union. The principle of independence applies, of course, also to the members of the ECB and to the staff. The staff cannot seek any kind of instructions, and the governments and any political body of the Community cannot give any instructions for the conduct of ESCB tasks.

Two kinds of legal instruments organize the operation of the central banks: guidelines and instructions. Both are intra-ESCB instruments. The guidelines are adopted by the Governing Council and are binding. They take the form of a normal legislative act, article by article, and all mandatory provisions have to be complied with by the NCBs. If the NCBs do not comply with the guidelines, the statute provides for the right of the ECB to take the recalcitrant national central bank to the European Court of Justice. The instructions are also a binding act; they are adopted by the Executive Board and normally address specific activities. For example, instructions will be the instrument used to ask the NCBs to undertake a specific operation with foreign exchange reserves, or another activity in monetary policy operations. Both guidelines and instructions are not for the public, but are purely internal for the ESCB and will be fairly informal.

Conversely, there are acts that the ECB can adopt vis-à-vis parties external to the ESCB, the most important being the regulation. The regulation is a kind of law in the sense that it has general application, is published in the Official Journal of the Community, in all the official languages of the Community, and has direct effect. It supersedes conflicting national law, and thus is a kind of federal law. The capacity for the ECB to enact a regulation is limited only by its scope. It can enact regulations only concerning monetary policy, payment systems, and statistics.

Decisions are also legally binding acts of the ECB. These put the addressee of the decision under the legally binding obligation to abide by the content of the decision. And, finally, and this will be the normal way that the ECB will establish legal relationships with the external world, there are contracts. The ECB will, in exceptional cases, be able to enter into monetary policy operations, and these will be done by way of contracts. The ECB will receive from the national central banks significant foreign assets, and the ECB may use these assets by way of contracts with selected counterparties outside and inside of the community.

The ECB, as I mentioned before, will be established on June 1, 1998, but will start to exercise monetary powers only on January 1, 1999. So during the course of this year, it will prepare the framework, finalize its organization, and adopt the regulatory framework of the whole ESCB. But it will not start to implement monetary policy operations or foreign exchange operations or payment systems operations until the start of Stage Three in January 1999.

The authority of the ECB is a supreme authority vis-à-vis the national central bank but is a supreme authority limited to ESCB tasks. The NCBs have many tasks other than the tasks foreseen in the statute of the ESCB. These ESCB tasks are monetary policy, foreign exchange, the management of foreign reserve assets, payment systems, the contributions to supervision policies, statistical support, and the organization of the external representation of the ESCB.

Everything that is not within this list is not an ESCB task. That means that the NCBs will remain completely autonomous to organize themselves. This is quite common, for instance, in the task of prudential supervision. Many NCBs do have this role and they could keep it without any interference from the ECB. They also have investment policies and supervisory roles. These tasks too can be retained without interference by the European Central Bank.

The two important decision-making bodies of the ECB are the Governing Council and the Executive Board. A third decision-making body, the General Council in which all governors of the 15 central banks take part, continues the tasks of the EMI, by providing a forum in which monetary policies are coordinated between the different NCBs and the ECB. But the main decision-making bodies are the Governing Council and the Executive Board. The Governing Council is the supreme authority of the ESCB, acting with majority voting according to the principle of one-person one-vote. It is composed of the governors of the participating member states and the six members of the Executive Board. All have the right to cast their votes.

The Executive Board is an organ, vested with the capacity to prepare the meetings of the Governing Council. It is also entrusted with the implementation of the decisions of the Governing Council as well as the current business of the ECB. All these roles have to be defined in the rules of procedure of the ECB which, besides defining these concepts, will organize the respective roles of the Governing Council and of the Executive Board.

An exception to the general rule of one-person one-vote and majority voting is found in questions concerning the finances of the ECB in which a system of weighted vote according to the weight of each NCB in the capital of the ECB operates. This system applies to the distribution of profits, to increase in capital, and to questions related to the internal finances of the ECB.

The ECB, as the central decision-making body of the whole system, organizes the NCBs at levels below the top decision-making body, which is the Governing Council. This is organized by way of several intra-ESCB groups, following the practice of the EMI.

The EMI has been functioning through a constellation of groups of NCB representatives. The ECB will continue this practice in which the NCBs will supply the expertise and will make their views known so that when the proposals are put to the Governing Council for decision, they have already been discussed at a lower level by the experts on the staff of the NCBs.

The Governing Council of the ECB will decide on the way the ECB is going to be organized. It will have some seven general directorates and nine directorates, all of whom report directly to the Executive Board, following the model of the Bundesbank, with each of its executive members in charge of several areas of the ECB. Therefore these general directorates and directorates will depend on one of the members of the Executive Board.

Member states that have not adopted the euro as a single currency will participate in the General Council. They may also be invited to intra-ESCB groups on matters such as statistics, a domain that concerns all NCBs. The General Council intervenes in the budget of the ESCB to the extent that these members will have to put up some resources for the administrative finances of the ECB.

The General Council will be the forum in which NCBs of member states that have not adopted the euro will cooperate in limited functions, not related to monetary policy or foreign exchange operations, which are restricted to the Governing Council.

11C. The Economic and Monetary Union and the International Monetary Fund


On January 1, 1999, the Economic and Monetary Union (EMU) is scheduled to be established within the European Union (EU). In accordance with the EC Treaty,1 as amended by the Maastricht Treaty on the European Union, the EMU will involve

  • the introduction of a single currency, the “euro”;

  • the creation of the European Central Bank (ECB) and the European System of Central Banks (ESCB); and

  • the transfer of certain competencies in the economic and monetary fields from individual EU members to the EMU level, where they will be allocated to specific institutions responsible for EMU matters.

These changes will result in a corresponding limitation on the ability of individual members and their respective central banks to conduct independent economic and monetary policies.

A number of provisions of the EC Treaty are relevant to the future relations between the euro-area members and the International Monetary Fund. Some of these provisions deal with the participation of euro-area members in international organizations. Others deal with the adoption of a common currency and with economic and monetary policies within the EMU. Both will have an impact on euro-area members’ relations with the IMF.

Although the meaning of some of the provisions of the EC Treaty is not entirely clear and their implementation will require further decisions of the euro-area members or EMU institutions, it is possible to identify the main legal issues they will raise as far as the IMF is concerned.

It may be stated from the outset, however, that the implementation of the EC Treaty—in particular, the introduction of the “euro” as a single currency of euro-area members of the IMF—and the shift of power in the economic and monetary field from individual members participating in EMU to EMU institutions may affect the manner in which those members may exercise their rights, or comply with their obligations under the IMF’s Articles,2 but it cannot affect those rights and obligations as such.

Membership in the IMF, participation in IMF organs, and all membership rights and obligations are determined by the IMF’s Articles. The Articles may be amended, but an agreement between certain IMF members does not constitute an amendment. Moreover, even if such an agreement contained provisions incompatible with those of the IMF’s Articles, it could not exempt the parties to the agreement from their obligations or deprive them of their rights vis-à-vis the IMF and other IMF members.

An agreement entered into by a group of IMF members is res inter alios acta vis-à-vis the IMF; that is, it can have no effect on the IMF or on the relationship between those members and the IMF because the IMF is not a party to such an agreement.3 Nor could such an agreement transfer its participants’ membership in the IMF or their membership rights and obligations to a designated entity. The only way such an agreement could affect those countries’ membership or membership rights and obligations would be by creating a situation that is itself relevant for the application of the Articles, such as a merger of two IMF members that gives rise to a successor state. This is not the case with the EMU: the adoption of a common currency and other provisions of the Treaty do not, by themselves, create a situation affecting membership or membership rights and obligations under the Articles.

This chapter will examine only the effects of the EMU on issues of membership in the IMF and participation in the IMF’s organs.

Effect of the EMU with Respect to Membership and Participation in IMF Organs

Article 109, paragraph 4 of the EC Treaty provides that the Council, on a proposal from the Commission and after consulting the ECB, shall decide, acting by a qualified majority, “on the position of the Community at the international level as regards issues of particular relevance to economic and monetary union and, acting unanimously, decide its representation .…” Under Article 6.1 of the Statute of the European System of Central Banks, the ECB shall decide how the ESCB shall be represented “in the field of international cooperation involving the tasks entrusted to the ESCB.”

Although these two provisions may affect the manner in which euro-area members of the IMF coordinate their actions among themselves and with the institutions of EMU on the above-mentioned issues, neither provision will affect the membership in the IMF of euro-area members nor the rules on appointment of Governors of the IMF or appointment or election of Executive Directors.


Article II, Section 2 of the IMF’s Articles of Agreement provides, in part, that: “membership shall be open to other countries at such times and in accordance with such terms as may be prescribed by the Board of Governors.” Thus, membership in the IMF is only open to countries, and the word “countries” in that provision is understood as referring to independent states, that is, those that have a permanent population, defined territory and effective government, and are in control of their external relations. No provision is made in the Articles for the joint membership of two or more countries that remain distinct political entities as countries. Membership, therefore, is only open to individual countries. In this circumstance, membership of the EMU in the IMF could only be considered if the IMF were to determine that the EMU is a country in the sense of Article II, Section 2, and such a determination will imply necessarily that participants in the EMU have ceased to be countries in the same sense, since the EMU and its constituent parts could not both coexist as members of the IMF.

Although the transfer of certain powers by IMF member countries participating in the euro area to EMU institutions relates to areas of particular relevance to the IMF’s mandate—currency, definition, and conduct of monetary and exchange rate policies—such a transfer will neither affect their status as independent countries under international law nor result in the creation of a new country under international law. Thus, the establishment of the EMU may require the development of new practices by the IMF in carrying out its mandate under the Articles to try to accommodate this new reality, but it will not alter the membership of euro-area members in the IMF. Moreover, although the Treaty may impose some limitations on euro-area members concerning the exercise of rights under the IMF’s Articles, compliance with those limitations is a matter for the members concerned and the competent EMU institutions, but not for the IMF.


As a consequence of the principle that membership in the IMF is open only to countries, each individual euro-area member of the IMF will retain its quota in the IMF, because Article III, Section 1 of the IMF’s Articles requires that each member be assigned a quota. It also follows that quotas of euro-area members in the IMF cannot be amalgamated or pooled since they serve as the basis for the determination of a series of individual rights of a member, such as the size of the member’s subscription,4 its voting power in the IMF,5 its share in the allocation of SDRs, provided that the member is a participant in the SDR Department,6 and its access to the IMF’s resources.

Board of Governors

Irrespective of how the relevant EC Treaty provisions are to be interpreted, another consequence of the continued individual membership in the IMF of euro-area members will be the inability to appoint a single Governor or Alternate for the group as a whole to the Board of Governors.

Article XII, Section 2(a) provides, in part, that “the Board of Governors shall consist of one Governor and one Alternate appointed by each member in such a manner as it may determine.” Thus, each member must appoint one Governor and one Alternate, and as a corollary, each Governor or Alternate is entitled to cast the number of votes allotted to the member making the appointment. Article XII, Section 2(a) cannot be understood to allow the appointment by several members of the same person as Governor. Such an appointment would be inconsistent with the intended structure of the Board of Governors as evidenced in a number of provisions in the Articles, such as Article XII, Section 2(d) on the quorum for a meeting of the Board of Governors—majority of the Governors having not less than two-thirds of the total voting power; Article XVIII, Section 2(e) on the right of a member to opt out of an SDR allocation; and Article XXVI, Section 2(c) on the application of sanctions on a member—majority of Governors having 85 percent of total voting power.

Under the IMF’s Articles, the determination of whom to appoint and the manner of appointment of Governors are left to each member. It would thus be open to euro-area members to agree on which officials to appoint, or to agree among themselves that the appointment be made in consultation with, or with the consent of, EMU institutions, provided that the actual appointment is made by each member. The nonfulfillment by euro-area members of their internal commitments concerning those appointments would not invalidate the appointment, which would remain in place until changed by the member making the appointment. Governors appointed by euro-area members will have the option to coordinate their votes and present common views at the Board of Governors through formal or informal arrangements of their own choosing. Membership in the committees of the Board of Governors is determined by the Board of Governors; for instance, the Interim Committee reflects the constituencies of the Executive Board, but different rules could be adopted.

Executive Board

Pursuant to Article XII, Section 3(b), the Executive Board consists of Executive Directors with the Managing Director as Chairman. Five of the Executive Directors must be appointed by the five members having the largest quotas, and 15 must be elected by the other members.7 Member-countries participating in the EMU that are among those having one of the five largest quotas in the IMF would have to continue appointing their respective Executive Directors. It is clear from the language of Article XII, Section 3(b) that the appointment of an Executive Director by each country having one of the five largest quotas is not a right that may be waived but an obligation that must be performed. For instance, two or more of those members could not agree to appoint a single Executive Director, because such an agreement would alter the intended elective structure of the Executive Board. Moreover, if one of those members failed to appoint an Executive Director, it would have no “representation”8 on the Executive Board because it could not qualify as one of the “other members” that elect Executive Directors.

In accordance with the provisions of Schedule E, the maximum number of votes that can be cast toward the election of an Executive Director is 9 percent of the eligible votes,9 and a minimum of 4 percent of eligible votes is required to elect an Executive Director; this minimum, however, is only relevant if there are more candidates than positions to be filled. The proportion of votes required to elect Executive Directors under the provisions of Schedule E may be modified by the Board of Governors for an election of Executive Directors. However, unless there were to be a substantial increase in the maximum number of votes that can be cast for the election of one Executive Director, it would not be possible for euro-area members of the IMF participating in the election of Executive Directors to elect only one Executive Director.

Each Executive Director may cast only the number of votes of the member or members that have appointed or have elected him.10 Therefore, it would not be possible for a member or a group of members to abstain at an election of Executive Directors, and then delegate their votes to an appointed or elected Executive Director.

Appointment and election are two alternative forms of selection of Executive Directors. An Executive Director is either appointed by one member and casts the votes allotted to that member, or is elected by one or more members and then casts the allotted votes. Therefore, it is not possible for an Executive Director who has been appointed by one member to be elected also by another member or vice versa because he is already an Executive Director, and the so-called election or appointment in such a case would not achieve the proper purpose of filling a vacancy on the Executive Board. Such an arrangement would only be a delegation of votes in disguise, which, as previously explained, is not permitted by the Articles.

Thus, although common representation by one Executive Director of euro-area members at the Executive Board would not be possible under the present Articles, it would be open to euro-area members of the IMF that do not appoint Executive Directors to organize as few or as many constituencies of their own as permitted by the regulations for the election of Executive Directors. For example, all euro-area members, except those entitled to appoint an Executive Director, could form one or two constituencies for the election of Executive Directors. Within each constituency, the views of the other euro-area members and of the common institutions of the EMU may be taken into account in the selection process of Executive Directors. In addition, arrangements may be made for Executive Directors appointed or elected by euro-area members to coordinate their views on any given issue.

In order to ensure a more direct involvement of EMU institutions, such as the ECB, in the functioning of the Executive Board, EMU members of the IMF could give consideration to appointing an official of one of these institutions to the Executive Board, for instance, as an Alternate Executive Director. Article XII, Section 3(e) provides that each Executive Director shall appoint an Alternate with full powers to act for him when he is not present. When the Executive Directors appointing them are present, Alternates may participate in meetings but may not vote. The Alternate Executive Director is a representative of the Executive Director appointing him and, as such, should act in accordance with the instructions given by that Executive Director. The Articles leave it entirely to each Executive Director to determine whom to appoint as his Alternate, and the Alternate serves at the pleasure of the Director appointing him. In this context it would be possible for euro-area members of the IMF to agree on a system under which, on a rotational basis or otherwise, one of the Executive Directors appointed or elected by them would appoint as his Alternate an official of the ECB or of other EMU institutions. Such an Alternate, however, as already mentioned, would have to act in accordance with any instructions given to him by the Executive Director making the appointment.

Observership in the IMF for Institutions of the EMU

The Board of Governors, the Executive Board, and the Interim Committee will have the option of granting institutions of the EMU, such as the ECB or the Commission, status as observers in their respective meetings, either on an ad hoc or a permanent basis. However, observers do not vote and may speak only at the invitation of the Chairman. Moreover, in matters that involve the IMF, where the institutions of the EMU have either exclusive or shared competence with the members of the union, the IMF could elicit the views of the institutions directly through bilateral contacts, or indirectly through the offices of Executive Directors appointed or elected by members of the union, or by inviting these institutions to send representatives to those meetings at which these matters are being discussed.



I shall discuss two issues concerning the EMU that touch directly on the IMF: the representation of EMU members on the IMF’s Executive Board and the access of EMU members to the resources of the IMF. I have no competence to deal with the legal aspects of these issues, but shall concentrate on their economic and efficiency aspects from the points of view of both the IMF and the EMU.

Representation of EMU Members on the IMF Executive Board

I shall start out from the generally accepted view that, at least for a long period ahead, countries that join the EMU will remain separate members of the IMF. This would make it possible to maintain the present representation of these countries on the Executive Board, and that seems indeed likely for the foreseeable future. But it is questionable whether that is desirable. Whatever the historical origins of that representation, it might be considered as definitely odd in the light of the close association that EMU countries—and the slightly wider grouping of EU countries—are pursuing.

On the Board of the IMF, the 15 EU members are represented by nationals of nine different countries, who occupy nine of the 24 chairs around the Board table. Three countries (Germany, France, and the United Kingdom) appoint directors. Four others (Belgium, Italy, the Netherlands, and Sweden) elect heads of constituencies, which include six other EU countries (Austria, Denmark, Finland, Greece, Luxembourg, and Portugal). Ireland and Spain are teamed up on the Board with countries in the Western Hemisphere, those of the Canadian and the northern Latin American constituencies respectively.

This manner of representation has drawbacks from at least three points of view. (i) From the side of the EMU, it is hard to reconcile with the principle of the Maastricht Treaty that “the Community expresses a single position.” (ii) It is one of the factors responsible for the size of the Board, which is too large from an efficiency point of view, but difficult to reduce while maintaining an adequate representation of regional groupings throughout the world. (iii) It also strikes one as curious from the point of view of democratic governance of the IMF, because it institutionalizes the fact that one (and only one) major region of the world is represented by outsiders from that region. While the countries of Africa are represented by two African directors, and the countries of Latin America by three Latin Americans, the whole eastern half of Eurasia, outside Russia, is represented on the Board by directors from five Western European countries. This situation carries a flavor of neocolonialism and it is for this reason unlikely to be acceptable in the long run.

From all these points of view it is desirable to move in the direction of a consolidated EMU or EU representation—a step that would still fall far short of what might or might not be the ultimate aim of the Union, namely single membership. The technique by which consolidation on the Board is to be achieved is a matter of secondary importance.

I had hoped that full consolidation into a single EMU directorship might be possible within the present Articles of Agreement, with the three largest members of the Union appointing the same person as their executive director and the others then either electing that same person as their director or asking her to represent their interests without exercising their votes.1 However, the paper just presented by Mr. Elizalde shows overwhelming legal difficulties with this approach.2

An alternative solution, which I understand does not encounter legal difficulties from the present Articles, could achieve some of the same objectives. The three largest countries would appoint three different persons as their executive directors, and the other EU members would form a constituency and elect a fourth director. The four would act as a single EU bureau. They would make arrangements that only one of the four would speak on any one issue and it would be understood that the speaker conveyed the views of all four to the sense of the meeting. If this is felt to be too complicated, or if a cleaner solution is wanted, an amendment could be considered. The formation of the euro group is of sufficient importance to the system to justify the effort of a small amendment.

Use of IMF Resources by EMU Members

As long as EMU countries are members of the IMF, they have obviously all the rights of IMF members, including access to IMF credit if they qualify under the general criteria applied by the IMF for this purpose. Can they qualify? Can a country without its own currency have “balance of payments problems” for which it can seek IMF assistance?3

The economist’s answer to this question is “Yes.” A deficit in the balance is, by definition, an excess of out-payments over in-payments. To experience a deficit is not a privilege limited to a nation state. Even though balance of payments statistics are more frequently compiled for sovereign states than for smaller political or geographic entities, it is conceptually just as possible for a region, a province, or a county as for a national state to suffer from payments difficulties. By the same token, whether a state has a national currency or not is irrelevant to the question whether it can experience balance of payments problems.

For any area, the consequence of a payments deficit is a loss of money to the rest of the world and, if the deficit is on current account, a loss of income and the threat of a deflationary spiral. These effects will be felt by the area in deficit whether the loss is one of foreign exchange or of the domestic currency of the country to which it belongs. In the context of the EMU, in any event, the distinction between foreign and domestic money is irrelevant as far as the payments situation of any area is concerned, given the fact that the euro is both a fully convertible and a reserve currency. A comparable situation prevails within the United States: if, for example, the oil industry in Texas is depressed, that state is likely to move into a payments deficit and a recession, even though the drain on its money supply is in dollars, not in some foreign currency.

A second question arises not so much for the IMF as the EMU: Does access to credit from the IMF make sense from the point of view of the EMU? My answer to that question is also in the affirmative. In the past, the Common Market offered balance of payments credit on terms similar to, and probably rather more attractive than, those of the IMF to those of its members that experienced balance of payments difficulties. But under Article 109h of the Maastricht Treaty, such credits will no longer be available to any country that joins the EMU. This less forthcoming attitude of the Treaty toward EMU members than toward other EU members is presumably inspired by the concern to establish beyond any doubt, on the part of either the markets or member countries, that a member of the EMU will not be rescued from the consequences of its own profligate financial policies. This concern is also embodied in the so-called “no bail-out clause” of the Treaty (Article 104) that forbids any central bank credit to EMU governments or their lower public bodies.

The “excessive deficit” provisions of the Treaty are designed to make it unlikely that a member’s fiscal policies will lead it into a balance of payments deficit, and the common central bank prevents any member from engaging in lax monetary policies that might have the same effect. But there still remain many ways for countries to end up in payments difficulties. They may price themselves out of world markets by wage or social policies more generous than those of their competitors. They can fail to adjust with sufficient speed to changes in the international demand for their products. They can become adjusted to a steady flow of capital from abroad and find it difficult to reverse course when that flow subsides, or turns into an outflow, for reasons that may or may not be related to their economies or their policies.

A sensible application of the no bail-out clause in any of these circumstances would not be to deny any assistance to the member concerned, but to make sure that any financial support be linked to an agreed package of the member’s adjustment policies. If these policies are found to be acceptable, the Union would presumably abstain from pushing the country affected further into the red by the imposition of financial penalties under Article 104c. And it should also welcome a measured access of the country in difficulties to the financial resources of the IMF, under the safeguard of IMF conditionality designed to restore the country’s finances to balance.

With these conditions present, the potential access of EMU members to the resources of the IMF could be a useful component of the international monetary system as it is reformed by the creation of the EMU.


Treaty establishing the European Community, 1992 O.J. (C224) 1, 43.


International Monetary Fund, Articles of Agreement (April 1993).


Article 5 of the Vienna Convention on the Law of Treaties provides that, with respect to the charters of international organizations, the Convention applies “without prejudice to the rules of the organization.” Moreover, Article 234 of the EC Treaty (which was not amended by the Maastricht Treaty) reserves rights and obligations under existing agreements between members of the European Union and other countries, until these agreements are made compatible with the Treaty.


Articles of Agreement, supra note 2, Art. III, § 1.


Id. Art. XII, § 5.


Id. Art. XVIII, § 2.


The number of elected Executive Directors may be increased or decreased by the Board of Governors for the purpose of each regular election by an 85 percent majority of the total voting power. It may also be reduced by one or two when appointments are made in accordance with Article XII, Section 3(c). There are currently 19 elected Executive Directors.


Although Executive Directors are entitled to cast the votes allotted to the members appointing or electing them and may communicate to the IMF the views of the authorities of those members, they are not representatives of those members. Executive Directors are officials of the IMF and vote in such a capacity; their fiduciary duty is to the organization.


The number of eligible votes is the sum of the voting power of members that do not appoint an Executive Director minus the voting power of members whose voting rights have been suspended if they would have been otherwise eligible to participate in such election.


Articles of Agreement, supra note 2, Art. XII, §§ 3(i)(i) and (iii).


Jacques J. Polak, “The Significance of the Euro for Developing Countries,” UNCTAD, International Monetary and Financial Issues for the 1990s, vol. IX (United Nations, 1998) at 57–69. Even without the votes of the smaller EU countries, an “EU executive director” would have more than 15 percent of the voting power (that is, a blocking vote on issues requiring an 85 percent majority) and voting strength close to that of the United States, id. at 67.


See herein Hector Elizalde, The Economic and Monetary Union and the International Monetary Fund, Chapter 11C.


See International Monetary Fund, Articles of Agreement, Art. V, § 3(a) (April 1993).