The Making Of The Statute Of The European System Of Central Banks ~ Chapter 2: Integration Theory, Federalism And Checks And Balances

Integration and transfer of power
Economic and political integration has been studied by a number of European authors. These studies related to the desirability for economic integration (a.o. Tinbergen)[i] and to ways to achieve political integration, on a worldwide scale or a regional scale (Mitrany, Haas).[ii] And there were ‘practioners’ (Monnet and Schuman). As to the academic writers occupied with questions relating to political integration, they were especially concerned with the issue of the optimal form of international organizations – intergovernmental or supranational. The proponents of supranational forms have won, be it of course dependent on the areas to be covered. Specific attention for the institutional aspects of integration (e.g. which powers to transfer, which decision-making procedures) is usually reserved for writers specialized in law, especially those specialized in European law (Lenaerts, Kapteyn and VerLoren van Themaat and more typically Dutch scholars like Barents and Brinkhorst)[iii] or American constitutionalism (Vile, Boon).[iv] But usually their emphasis is describing and explaining how the institutions actually work (and possibly recommending improvements) rather than putting down an overall framework for the institutional arrangement of those institutions – probably also because many institutions are seen as sui generis or otherwise historically determined. Below we will touch upon relevant elements of the work of those who have written in this area and this will lead us to a description of the concept of checks and balances, which will enable us to develop a framework to assess the role of checks and balances in the framework of the European central bank.

Above we have mentioned Tinbergen. In his book International Economic Integration (1965) Tinbergen argues that a central agent is primarily needed where one government may adversely or favourably affect the interests of other nations. However, he does not deal with the institutional aspects of this agent. Other writers were more focused on the issue of political integration. In Beyond the Nation-State (1968) Ernst Haas deals with the questions such as ‘what kind of international organization is required in order to maximize a process of international integration’ (defined as a process of growing mutual deference and institutional mingling[v]). To answer this question Haas turns to study the dynamics of intergovernmental types of organizations. Intergovernmental organizations, which can only act on behalf of their members and within a limited technical mandate on behalf of themselves, had been recommended by Mitrany, the founder of the functionalist school, as a way to propagate international integration. According to Haas, intergovernmental organizations are only successful, as long as there is mutual trust between the participants, for the delegates remain representatives of their respective governments. Haas applies this approach to the International Labor Organization (ILO), which confirms him in his view that a process of international integration will only have a chance of succeeding when the central organizations are supranational, as opposed to international, in character – the crucial difference being that the supranational organ would be autonomous, having independent rather than intergovernmental powers within its own domain and would have the capacity and desire (or better: a natural propensity) to expand its activity into adjacent sectors.[vi]

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The Making Of The Statute Of The European System Of Central Banks ~ Chapter 3: Introduction to Cluster I

Checks and balances between the ESCB and the public authorities – (the political relations of the ESCB)

Chapter 3: Introduction to Cluster I
The ESCB, consisting of the ECB and the national central banks of the Member States, has been inserted, as a new institution sui generis, among the existing Community institutions.[1] We note there was no attempt to amend or change the existing institutions to the new EMU environment, e.g. there was no attempt to create an independent ‘gouvernement économique’ (an idea alluded to in the Werner Report), which would have taken away responsibilities assumed by the Ecofin Council and could have led to a reduced involvement of national parliaments, as Member States were reluctant to hand economic powers to the Community. [2] The relations of the ESCB with these other institutions will develop over time, but they will always have to be based on the Protocol on the Statute of the European System of Central Banks and of the European Central Bank and a number of relevant EC Treaty articles.[3] In this and the following two chapters we will select and study those articles of the Protocol and of the Treaty, which constitute the framework for the ESCB’s relations with the other branches of government.

First we will take back a few steps and ask ourselves a few seemingly elementary questions, such as ‘what is the basic Community structure’ and ‘what makes the ESCB different from the existing Community institutions’? Their treatment will constitute a useful general background for chapter 4, where we reconstitute the genesis of the wording of the most important articles governing the external relations of the ESCB. Because of the relative importance of the concepts of independence and accountability for the System’s external checks and balances we pay some attention to them as well by referring to the existing literature on these topics. We do not develop new frameworks, as we focus on the concept of checks and balances, of which they constitute a part, though a familiar part. Part of our contribution will be that we do not look at them as antitheses, but as somehow complementary in terms of checks and balances. In chapter 4 and following reference will be made to US Federal Reserve System, i.e. where this might help us understand, and assess, better the solutions found for the ESCB.

Basic Community structure
The basic Community structure has developed out of the structure of the European Coal and Steel Community (ECSC), established in 1951 on the basis of the ideas of Jean Monnet.[4] The ECSC was managed by the High Authority, which had executive, but also regulatory powers. However, important decisions needed political backing in the form of approval by a Council of Ministers.[5] A Court of Justice was established to ensure lawful application and interpretation of the Treaty (and the regulations). An Assembly with representatives of the Member States was established (which met once a year) with consultative powers. The structure of the European Economic Community and Euratom, each established in 1957 by a Treaty of Rome, resembled this institutional design: a Council of Ministers which decides, but which can only do so on the basis of a proposal or recommendation of the Commission.[6] The Commission has the important right of initiative and forms the executive branch of the Community structure. The roles of the Court of Justice and the Assembly [7] were the same as under the ECSC.[8] The Single European Act (1986) introduced some important changes: the Assembly was renamed into European Parliament and most decisions in the area of the internal market could as of then be taken by a qualified majority in the Council and in co-operation with the European Parliament (instead of requiring unanimity among the ministers and only consultation of the Assembly).[9] Read more

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The Making Of The Statute Of The European System Of Central Banks. Chapter 4A: Selected ESCB Articles

4.1 Introduction
4.2 Genesis of selected articles (cluster I)

Selected articles: Article 1 (Constitution), Article 2 (Objectives), Article 3.1 and 3.2 (Basic tasks), Article 7 (Independence), Article 10.4 (Minutes), Articles 11.2, 11.3, 11.4, 11.5 and 11.7 (Personal and financial independence executive board members), Article 14.2 (Personal independence NCB governors), Article 21 (Operations with public entities), Article 27 (Auditing), Article 28.2 (ECB’s shareholders), Article 41 (Simplified amendment procedure). [By covering these articles we also cover the following articles of the EC Treaty: Article 4a(1) (=Art. 1-ESCB); Article 104 (=Art.21-ESCB); Article 105(1)-ESCB (=Art. 2-ESCB); Article 105(2) (=Art. 3.1-ESCB); Article 105(3) (=Art. 3.2-ESCB); Article 105a(1) (=Art. 16-ESCB); Article 106(1) (=Art. 1.2-ESCB); Art. 106(2) (=Art. 9.1-ESCB); Article 106(3) (=Art. 8-ESCB); Article 106(5) (=Art. 41-ESCB); Article 106(6) (=Art. 42-ESCB); Article 107 (=Art. 7-ESCB); Article 109a (=Artt. 10.1, 11.1 and 11.2-ESCB); Article 109b(3) (=Art. 15.3- ESCB). Art. 109m will be touched upon under Art. 109-EC.
Observations are also made on the following EC Treaty articles (we refer to the Article Index for the exact location): Articles 3a (activities of the Community), 103 (economic policy coordination), 104a (no priviliged access), 104b (no bail-out clause), 104c (no excessive deficits), 105a(2) (issue of coins), 109d (right to request the Commission to make a recommendation or a proposal). 

Additionally selected articles from EC Treaty: Articles 109-EC (Exchange rate policy), 109b-EC (Inter-institutional provisions) and 109C(2)-EC (Economic and Financial Committee).

Article 4 (Advisory functions) will be dealt with in passing under Art. 109C(2)-EC; Article 11.1 (Composition Executive Board and prohibition personal unions) and Article 50 (Initial appointment of Executive Board members) under Article 11.2, and Article 42 (Complementary legislation) under Art. 41.

4.1 Introduction 
For this chapter we have selected those articles which have a bearing on the position of the ESCB vis-à-vis the ‘other’ branches of government. Communication with the public (and press) is included in this cluster, as this aspect is related to the issue of accountability of the System. [See especially under Art. 10.4-ESCB] Articles belonging to this cluster but which are of minor importance will not be dealt with.

Structure
For every article the description of its genesis will be preceded by (i) an introductory paragraph, describing the main economic reasons (raison-d-être) for including the article in the Statute and the main sensitivities around its formulation, and (ii) in some cases by a description of comparable features of the Federal Reserve System, which can be illuminating for understanding the issues and choices made in designing the ESCB. We then continue with the description of the history of the article, starting with the deliberations in the Delors Committee, followed by a description of the drafting process of the ESCB Statute within the Committee of Governors and its committees (finalised in November 1990) [An extended version, also including inter alia the chapter on financial provisions, was offered to the IGC in April 1991] and a description of the discussions in the IGC.
It should be noted that the central bank governors had been meeting and co-operating already for many years in the context of the Committee of Governors, established in 1964. [Council Decision of 8 May 1964 on cooperation between the central banks of the Member States of the European Economic Community (64/300/EEC)]. They had established not only good relations, but their views on the world had also converged as they had been shaped by the same developments (ERM crises, success or non-success in fighting inflation). Nonetheless, national preferences and traditions must have influenced the way the governors looked at the world. For instance, their views on the role of central banks in supervision was probably to a large extent determined by traditions at home. For this reason, in a number of cases tables will be presented showing the national differences. It will become clear that the views of the governors had converged a lot more than their national central bank laws might suggest.

The descriptions will be as factual as possible. The conclusions we want to draw – also in terms of checks and balances – are presented in chapter 5. This procedure is repeated for cluster II and III in chapters 6-11.
As regards this chapter, it is advisable to read Articles 1 and 7 first (on the constitution and the independence, respectively) in view of their overriding importance and then the other articles. In every cluster the articles are presented in numerical order.

4.2 Genesis of Selected Articles (Cluster I)

Article 1:
Article 1: The European System of Central Banks
“ 1.1 The European System of Central banks (ESCB) and the European Central Bank (ECB) shall be established in accordance with Article 4A of this Treaty; they shall perform their tasks and carry on their activities in accordance with the provision of this Treaty and of this Statute.
1.2 In accordance with Article 106(1) of this Treaty, the ESCB shall be composed of the ECB and of the central banks of the Member States (‘national central banks’). The Institut monétaire luxembourgeois will be the central bank of Luxembourg.”

(to be read in conjunction with: Article 2-EC (Community principles), Article 3a-EC (Community activities); Article 7-ESCB (independence); Article 8 (decision-making bodies); Article 9-ESCB (legal capacity ECB); Article 12.1, first and second paragraph (division of labour between ECB Governing Council and Executive Board); Article 28 (capital ECB); Article 34-ESCB (legal acts); Article 105(1)-EC (which is a copy of Article 2-ESCB); Article 106(1-3)-EC (mirroring Articles 1.2, 8, 9.1 and 9.2-ESCB)) Read more

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The Making Of The Statute Of The European System Of Central Banks. Chapter 4B: Selected ESCB Articles

Article 7:

Article 7: Independence
“In accordance with Article 107 of this Treaty, when exercising the powers and carrying out the tasks and duties conferred upon them by this Treaty and this Statute, neither the ECB, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State of from any other body. The Community institutions and bodies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the ECB or of the national central banks in the performance of their tasks.”
(to be read in conjunction with Article 2 (Objectives); Article 10.2 (Voting procedure); Articles 11.2, 11.3 and 11.4-ESCB (Executive Board); Articles 14.1 and 14.2-ESCB (NCBs and their governors); Article 107-EC (Independence); Article 109-EC (Exchange rate policy); Article 109b-EC (Relation with Ecofin Council, Commission and European Parliament))

I. Introduction
I.1 General introduction
For the ESCB this is one of the most important articles of the Statute. It defines the institutional independence of the system: it is not allowed to take instructions from its political masters, neither from the executive nor from the legislative branch (both national and communautaire).[See also section I.1 of Article 2-ESCB and chapter 3].  The Treaty even prohibits political bodies or persons to seek to influence the ESCB, though sanctions in case they do are lacking. Therefore, de facto we are talking of self-restraint, and at occasions politicians will cross the borderline. These politicians risk that the Governing Council of the ECB will feel that it has to postpone certain measures in order to prove its independence.[Two possible cases which come to mind are the interest rate reduction the ECB decided to early 1999 only after the resignation of Oskar Lafontaine (who had pressured the ECB to lower interest rates) and the interest rate reduction in May 2001, a few weeks after the Belgian minister of finance (in his capacity of chairman of the Ecofin Council) had stopped publicly encouraging the ECB to do so.] Attempts to influence members of the Governing Council can also be made behind the screens. This should be prevented. We will make a recommendation in this respect in section 4 of Chapter 5.

At the same time the Treaty specifies ways in which the ECB and the political authorities could and should communicate. The dialogue with the ministers of finance takes the form of the presence of the chairman of the Ecofin and a member of the Commission in the meetings of the Governing Council of the ECB and the presence of the president of the ECB in the Ecofin Council whenever this Council discusses matters relating to the objectives and tasks of the ESCB.[They have the right to speak (and even the right to submit a motion – which has until now never happened), but not the right to vote. See Article 109b-EC] This allows the ministers of finance to take best possible informed decisions in their field of responsibility. [There are many more channels of communication between the ECB, the central banks and the Treasuries, one example being that both central bank board members and high officials of the Treasuries are member of the Economic and Financial Committee, a committee which delivers opinions (asked for and unasked for) to the Ecofin Council (Article 109C(2)-EC)] Read more

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The Making Of The Statute Of The European System Of Central Banks ~ Cluster II – Chapter 6: Introduction To Cluster II

Checks and balances between the ECB and the NCBs (the relations within the System)

Chapter 6: Introduction to Cluster II
In this cluster we focus our attention on the issue of checks and balances within the System. At an early stage major players expressed their preference for a federally construed central bank system; cf. Werner Report of 1971; Balladur’s Memorandum of December 1987; Stoltenberg’s reaction to Genscher’s memorandum of February 1988; Pöhl’s contribution to the Delors Report and the Delors Report itself.

The Werner Report mentions that ‘the constitution of the Community system for the central banks could be based on organisms of the type of the Federal Reserve System operating in the United States.’ Stoltenberg stressed the need for an ‘ausgewogenes Verhältnis von zentralen und föderativen Elementen bei der Willensbildung.’ Pöhl advocated a federal structure of the central bank system, which ‘would correspond best to the existing state of national sovereignty and would additionally strengthen the independence of the central bank.’ The Delors Report (par. 32) favoured ‘[a] federative structure, since this would correspond best to the political diversity of the Community.’

It is not surprising that the federal character of the new European central bank was relatively undisputed. Apparently, a centralized structure with no regional elements, i.e. consisting only of an ECB, was seen as an unacceptable risk to those Member States with a tradition of independent central banks and price stability. There would be no guarantee that such institution would not be taken over by politically appointed board members, whereas in a federal European central bank system power would at least partially rest with the governors of the NCBs.

The issue of a federative structure raises the question of the relative roles of the centre and the existing NCBs and the division of labour between them. A major element in this respect has been the conviction, especially expressed from the German side, that monetary should be completely centralized, though the decision-making centre should be composed of persons both from the centre and the regions, thus upholding the federal character. This relates in particular to the issue of the relative roles of the Executive Board and the governors in the decision-making process, which is dealt with in cluster III. Monetary policy making being centralized still leaves undecided the division of labour between the centre and the regions in the area of monetary policy operations, the focus of this chapter.

The division of labour in the operational area relates to mundane questions such as who issues and distributes banknotes, to what extent are NCBs free to conduct non-System functions, what would the ECB’s balance sheet consist of, would it own foreign reserves and would it be allowed to deal directly with banks – many of these issues relating to the ‘standing of the centre’. The division of labour issue played against the following background, best explained by confronting the German and French views as they came to the fore in especially the Committee of Governors meetings during the drafting of the ESCB Statute. Read more

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The Making Of The Statute Of The European System Of Central Banks ~ Chapter 7: Selected ESCB Articles (Cluster II)

Content
7.1 Introduction
7.2 Genesis of selected articles (cluster II)

Selected articles: Article 3.3 (Prudential supervision and financial stability), Article 5 (Collection of statistical information), Article 6 (International cooperation), Article 12.1, third paragraph (Decentralized execution), Article 14.3 (NCBs as integral part of ESCB), Article 14.4 (Non-System functions of NCBs), Article 16 (Banknote issuance), Art. 17-24 (Monetary functions and operations), Art. 25 (Prudential supervision), Art. 29 (Capital key), Article 30-33 and 51 (Financial articles relating to foreign reserves and the System’s income allocation). [1]

Articles 9.2 (ECB) will be dealt with under Art. 12.1c, and Art. 25 (Prudential supervision) under Art. 3.3.

7.1 Introduction
For every article covered in this chapter, we will follow the structure used in Cluster I, i.e. the description of its genesis will be preceded by (i) an introductory paragraph, describing the main economic reasons (raisons-d’être) for including the article in the Statute and the main sensitivities regarding its precise formulation, and (ii) in most cases by a description of comparable features of the Federal Reserve System, where this is considered illuminating for the understanding of the article. We then continue with the description of the history of the article, starting with the deliberations in the Delors Committee, followed by a description of the drafting process of the ESCB Statute within the Committee of Governors and its Committee of Alternates and, finally, a description of the discussions in the IGC. As regards the articles treated in this cluster, most of the discussions on these articles took place within the Committee of Governors, as the Delors Committee focussed on the overall design of Economic and Monetary Union – and not so much on the internal structure and instruments of the ESCB.[2] Though the IGC did cover all articles of the draft ESCB Statute, the IGC discussion on the Statute concentrated on the interinstitutional relations (treated in Cluster I), the formulation of the tasks of the ESCB and the transitional arrangements (i.e. the position of the NCBs of Member States with a derogation or opt-out), including the institute to be established during stage two (which would be called the European Monetary Institute).

Art. 3.3 on prudential supervision is dealt with in this cluster, because its genesis shows Member States were afraid of losing power to the System and NCBs were afraid of losing power to the centre of the System, while the Bundesbank objected to putting monetary and supervisory responsibilities in one hand. We will not describe the genesis of the articles containing the monetary functions and instruments (i.e. most articles of Chapter IV of the ESCB Statute (‘Monetary functions and operations of the ESCB’), as these articles do not contain indications for where implementation should take place, centrally or locally – the important feature of these articles being that they allow both. Of these articles we summarize their content, and we will only refer to the genesis, when this adds to understanding the article. Section 2.3 of chapter 8 will contain a table summarizing which operational tasks befall on the ECB and which on the NCBs (as decided by the Governing Council at the start of EMU in 1999, but including the later arrangements relating to the issuing of euro banknotes, which were issued only as of 2002). The financial articles 26 to 33 will be dealt with also relatively succinctly, as their meaning for the balance of power between the ECB and the NCBs is rather limited. Read more

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