The Making Of The Statute Of The European System Of Central Banks ~ Chapter 8: Conclusions To Cluster II

8.1 Introduction
This cluster has dealt with the articles determining the System’s operational functions and the division of labour between the ECB and the NCBs. There might be some tension between the ECB and the NCBs as regards this division of labour. It would increase the ECB’s position considerably, if it were conducting large part of the System’s operations with the banks and in the markets. A complete centralization (in all areas, e.g., open market operations, domestic facilities, foreign exchange operations, payment services, banknote issuance) would be unlikely, as this would be tantamount to merging all balance sheets, thus ending the federal character of the System. Complete decentralization, on the other hand, would not seem to be incompatible with a federal central bank system. Complete decentralization allows for concentration of activities with one of the central banks. Mixed systems are possible too. The centre could act as one of the central banks, offering all central bank services or conducting only a few types of transactions. To understand the way the Statute has been drafted we need to know what the drafters were aiming for when designing the Statute.

Some of the contours of the system though date from before the Delors Committee, because Germany had indicated (and France had supported this)[1] that the system should be federal, i.e. with a clear role for the existing NCBs. Taking the Bundesbank as an example, NCBs could be expected to participate in the highest decision-making body and to have local operational functions. The Delors Committee did not go into details as regards the internal division of labour – this was not the core of their report. Nonetheless, already at this stage the Delors Committee agreed on pooling of reserves at the centre – some had in mind the final stage, others (among whom Delors and the French central bank) already the intermediate stage.

The Committee of Governors concentrated on the final stage: they agreed to pool a substantial part of the reserves and to make the management of the remaining reserves subject to central guidelines. Pooling would create a pool of directly available foreign reserve assets, lending credibility to the System’s exchange rate policy, and indirectly contributing to creating a ‘strong’ centre. A strong centre was considered desirable, because the System would probably have to operate – at least in its formative years – in a difficult environment, in a political sense. While the governors clearly had in mind that monetary policy would be implemented using the NCBs and that the System itself should decide on the division of labour within the System, they could not agree on the degree of decentralization (i.e. strong or very strong) and neither on which body should ultimately have the final say as regards the actual division of labour (the Executive Board or the Governing Council). Most of the governors wanted the Governing Council to decide, a small minority (mainly the Bundesbank) favored the Executive Board. Behind this was the fear that NCBs could undermine the singleness of monetary policy. The governors did agree though that in order to ensure the singleness of policy the Governing Council should be able to adopt guidelines, upon which the Executive Board could base instructions to NCBs, which NCBs were required to obey (see Art. 12.1, first and second paragraph and Art. 14.3).

The IGC quickly found a compromise, choosing for the strong option (and not the very strong option) and placing the decision in the hands of the Governing Council (and not the Executive Board). The IGC did not express a specific opinion on the desired degree of centralization or decentralization of the System’s operations. The IGC devoted some time to the topic of banknote issuance, basically to accommodate peculiarities of a few countries (relating to the issuing of banknotes by a few private banks and to the issuance of coins). Overall, the governors made a considerable mark on the final design of the System. Read more

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The Making Of The Statute Of The European System Of Central Banks ~ Chapter 9: Introduction to Cluster III

CLUSTER III
Checks and balances between the Governors and the Executive Board (relations within the decision-making bodies)

Chapter 9: Introduction to Cluster III
In this cluster we will look for checks and balances within the System’s highest decision-making body, the Governing Council. In fact what we have in mind is the relation between the representatives of the NCBs (the governors) and the representatives of the central body, the Executive Board. While both share the same objective, i.e. achieving price stability for the euro area, there are many issues, like organizational issues and issues how to react to political pressure, where the interests of the governors and the board members do not necessarily run parallel. This is reflected in the fact that in the preparation of the Statute there has indeed been an extensive debate on the composition, the voting system and the own (i.e. non-delegated) powers of the Executive Board. Questions were posed like should only the president of the Executive Board be member of the highest decision-making body or all Board members?; should the votes of the NCB presidents (the governors) be weighted and what would that mean for the vote of the Executive Board?; should the Executive Board be a secretariat or an executive arm of the Governing Council, or should it have ‘own powers’? Behind these questions lay the ultimate question on how powerful the Executive Board should be.

For our study we take as a starting point an executive board, and a council in which the federal elements of the System are represented, i.e. the governors. In this council the executive board could be represented, or not. What we will be looking for is whether the drafters envisaged a role for both governors and executive board members, and how they envisaged this role could be protected against intrusion by the other party. In other words, did they design a stable system of checks and balances? [i]

The drafters intended to find a middle ground, i.e. rejecting the extreme of giving all powers to the governors or to the central body. A supranational element was considered important, because it increased the level of accountability (as the board members were to be appointed by European authorities), it helped giving the system a ‘face’ (important vis-à-vis the political authorities and the financial markets), it would provide leadership and help create unity within the System. There were also arguments against putting all decision-making powers in the hand of the new board. These were partly political, partly technical by nature. For instance, it was considered unacceptable to the German electorate to hand over the monetary powers of the mighty Bundesbank to an unknown body, while not retaining a presence in that new institution.[ii] But also countries that feared a too independent ECB had reason to propose strong federal elements, which could contain the power of a possibly too independent centre. Technically it made sense to use the expertise of the incumbent governors, supported by their staff. Another point usually overlooked is that the Governing Council does not only decide on monetary policy, but also on issues like the external positioning of the System, the degree of decentralization, the annual budget of the ECB, legal opinions, the ordering of new banknotes, payment system regulations. Here the active involvement of the governors is called for. More arguments in favour of a regional presence in the decision-making body of a federal bank are mentioned by Goodfriend (2000): it facilitates surveillance of the economy and helps a central bank to communicate with the public. Furthermore, a federal build-up enhances competition in research and innovative thinking. The above arguments do not indicate whether the governors should have a majority of the votes in the council, or not. One could point to two different, both successful examples: the Bundesbank (with a majority for the LZB-presidents) and the FOMC (with five of the twelve votes reserved for the FRB presidents). In either case, it takes special skills of the ECB president to chair these meetings with central and regional members, because he should both stimulate debate and be able to achieve consensus.

Both the Executive Board and the Governing Council are attached to the ECB and the System is governed by these decision-making bodies of the ECB. The reason for attaching the Governing Council to the ECB was that the System itself would not receive legal personality, which would make the Governing Council, if attached to the System, resemble an agency of the Community.[iii] This explains why in many documents, including the ECB’s Annual Report, the words ‘the ECB’ are used as short for the ECB’s highest decision-making body, the Governing Council. Read more

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The Making Of The Statute Of The European System Of Central Banks. Chapter 10: Selected ESCB Articles (Cluster III)

10.1 Introduction
10.2 Genesis of selected articles (cluster III)

Selected articles: Article 10.1 and 10.2a (Composition Governing Council, voting in personal capacity), Article 10.2b-c (‘One person, one vote’), Article 10.3 (Weighted voting), Art. 11.6 (Executive Board responsible for current business of the ECB), Article 12.1a-b (Delineation of responsibilities of Governing Council and Executive Board), Article 12.2 (Executive Board prepares Governing Council meetings), Article 12.3-5 (Some other Governing Council competences).

The genesis of Article 11.1 (Size and composition Executive Board) has been dealt with under Art. 11.2-ESCB, section II.2.

10.1 Introduction

We follow the structure we used before, that is for every article we will look for the main considerations which lay behind its formulation, starting with the relevant parts of the Delors Report, then analyzing the drafts of the Committee of Governors and the outcome of the IGC. This shows which relative powers of the Executive Board and of the governors the drafters had in mind. For each article the description of the genesis is preceded by a general introduction, placing the article in a wider context, and by a short description of the comparable features of the Federal Reserve System, where helpful for understanding the choices made in drafting the ESCB Statute.

The description in this chapter will be as factual as possible. In Chapter 11 we conclude how checks and balances were established and mention a few recent developments, i.e. relating to the voting regime of the Governing Council.

The Committee of Governors designed the draft Statute as a whole. The Commission’s text for a draft Treaty mentioned, apart from the establishment of the ‘Eurofed’ (Commission wording for the ESCB), its tasks and relations with the political authorities, also that the Council of the Bank would be made up of the governors of the NCBs and six Executive Board members, and that voting would take place according to the rules laid down in the Statute. The French draft Treaty text stayed close to the Commission’s text. The German draft repeated as little as possible the ESCB Statute, because the German government had decided to accept the draft ESCB Statute as the outcome of complex negotiations, which should be left as untouched as possible. In its view Treaty texts should not be used as an excuse to reopen the debate on the Statute. The Luxembourg non-paper of June 1991, following the example of the Commission, gave the composition of the Council a place in the Treaty. The Luxembourg presidency added a paragraph describing the powers of the Council of the Bank and the Executive Board, and the compromise found for the use of NCBs in the execution of the tasks of the System (‘to the extent deemed possible and appropriate’). The Dutch presidency, however, decided to duplicate as little as possible the text of the Statute in the Treaty; this implied that articles relating to the internal organization of the System were only mentioned in the Statute.

10.2 Genesis of Selected Articles of the ESCB Statute (CLUSTER III)
Article 10.1 and 10.2, first paragraph

Article 10: The Governing Council

“10.1 In accordance with Article 109a(1) of this Treaty, the Governing Council shall comprise the members of the Executive Board of the ECB and the Governors of the national central banks.

10.2 (first par.) Subject to Article 10.3, only members of the Governing Council present in person shall have the right to vote. By way of derogation from this rule, the Rules of Procedure referred to in Article 12.3 may lay down that members of the Governing Council may cast their vote by means of teleconferencing. These rules shall also provide that a member of the Governing Council who is prevented from voting for a prolonged period may appoint an alternate as a member of the Governing Council.”

(to be read in conjunction with Article 10.2-ESCB, second and third paragraph (Normal voting procedure); Article 10.3-ESCB (Weighted voting); Article 12.1-ESCB, first and second paragraph (Division of competences between Governing Council and Executive Board); Article 12.3-ESCB (Rules of procedure); Article 14.1-ESCB (NCBs) ) Read more

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The Making Of The Statute Of The European System Of Central Banks. Chapter 11: Conclusions To Cluster III (Assessment)

11.1 Introduction

Whereas the previous cluster dealt with the division of operational power within the System, this cluster deals with the division of decision-making power. A system of central banks needs a central decision-making body. Initially the drafters of the Delors Report and of the ESCB Statute did not exclude that – with non-fully integrated financial markets – some local decisions might still be needed, e.g. as regards the timing of liquidity operations, but in the course of 1990 it became clear that the system could only be based on a structure in which there would be only one decision-making centre with overriding powers. It was acquis from the start that this central decision-making body should be composed of at least the NCB presidents and possibly the Executive Board members of the new central institution, the European Central Bank, though initially names circulated like ‘agency, or ‘board’. Board members were necessary to run the daily affairs of the new institution (whether large or small) and see to the execution of monetary policy. This issue of allocating decision-making power was not seen as a way to restore national decision-making power. It was accepted by all (also all governors) that monetary policy would be centralized and be made supranational – there would be no veto power. Once this had been agreed the drafters needed to decide on the composition of the highest decision-making body and the relative competences of this Council and the Executive Board.

The governors played an important role in devising the articles covering the internal checks and balances. We make four observations. First, the Delors Committee had not discussed the internal organization in detail, implying that the Committee of Governors could largely shape the internal organization itself. The Delors Report had nonetheless given two important guiding principles: the ESCB Council was to encompass the NCB governors and the Board members, and the decisions would emanate from the Council, while the Board was linked to ensuring the implementation. Second, the governors not only discussed the balance between the governors and the Executive Board, at the same time they had to decide on the relations between themselves, i.e. between the governors: would governors from big and small countries have the same weight? The governors opted to be equal, when not deciding on financial issues of a patrimonial nature. This can be seen as a major concession by the NCBs of the larger countries, though two factors weighed in heavily: the governors were afraid that differentation in voting rights on the basis of ‘country size’ would introduce regional elements distracting from the desired euro area focus and possibly even triggering political pressures, because each governor would be seen as representing his/her country; and, as importantly, their relationships were characterized by a high level of mutual trust, as they (and their predecessors) had met since 1964 on a monthly basis and as they had gone through a number of currency crises, during which they had learned to understand and trust each other, and as they had participated together in the Delors Committee. Third, the governors were not able to solve one crucial issue, that is the degree of discretionary powers to be given to the Executive Board. Only the president of the only federally organized central bank in Europe, the Bundesbank, advocated giving the centre some unequivocal and irreversible powers, the others preferring or accepting a delegation model. Here the IGC would agree quite easily, by opting basically for the Bundesbank’s formulation which gave the Executive Board some own (and not only delegated) powers, establishing the Executive Board as a decision-making body in its own right, though not in terms of policy-making, but implementing policy. Fourth, apart from the above the IGC made very little changes in the governors’ draft of the articles covering the internal relations. Apparently, there was no political need to change the balance which the governors had reached as to the respective roles of the Executive Board and Governing Council. Read more

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The Making Of The Statute Of The European System Of Central Banks ~ Chapter 12: Conclusions

Conclusions
In the previous chapters we have studied the genesis of the articles of the Statute of the European System of Central Banks (ESCB),[i] which allowed us to come to a clear understanding of their meaning both from an economic and a text-interpretative perspective. This covers most of the pages of this study, and should be of interest to practitioners and academics. At the same time we have tried to make a map of the checks and balances present in the Statute. Checks and balances would seem indispensable for an institution like the ESCB, which is designed as a federal central bank system with a centre and regional banks, neither of which was supposed to be dominant, though at the same time monetary policy has to be one and indivisible. The ESCB’s external relations are also characterized by checks and balances; for example while the ESCB is independent, its Board members are appointed by he political authorities. In fact, right from the beginning the designers of the Statute (basically the governors) took great care to introduce adequate checks and balances, in order to make the ESCB’s independence politically acceptable. On the basis of the description of the genesis of the articles of the Statute, we conclude that the Statute has a good measure of checks and balances. These checks and balances fall into different categories. We distinguished five categories, which followed from reviewing the concept of and the literature on federalism. The checks and balances concept is a new method of describing the ESCB Statute and the relevant Treaty articles on Monetary Union. It allows us also to discover possible weak spots in the design and from this we can derive suggestions for features to be improved.

As an intermediate step we reverted to the literature on economic integration, in a search for criteria for optimal forms of international organizations, allowing us to assess the design of the ESCB. In fact, most studies on international organizations are limited to providing a factual description, and do not provide a framework or criteria for the optimal design of international organizations. A distinction made by the neo-functionalist theory of economic integration is that between purely intergovernmental organizations and supranational organizations. The first category is of a purely voluntary nature and consists basically of its members, a place to meet and a secretariat.[ii] The basic thesis of the neo-functionalists is that cooperation in one functional area will spill over in other areas, thus cascading into deeper integration. This process will only flourish though, when there is a supranational body with some own (though possibly reversible) powers and preferably a mandate for furthering integration in general. The neo-functionalist theory could explain the first decennia of post-war European integration (starting from the Schuman plan), but not the subsequent standstill from the mid-seventies until the mid-eighties – for which reason this particular theory lost much of its glamour. Other integration theories however also failed to describe (and predict) the uneven process of European integration. The pure intergovernmentalists for instance cannot explain the surrender of sovereignty. However, it would seem that even when progress takes places, possibly at uneven steps and maybe strongly dependent on persons (Adenauer, Kohl, Mitterrand) and events (unification), no such progress can be permanent without embedding it in institutions with a formal mission with an expansive element.

Economic integration theories did not provide a framework for the optimal design of supranational institutions. Therefore, we turned to the literature on federalism, looking for concepts allowing us to assess the design of the ESCB. Indeed, monetary integration in Europe has taken a federal form – federal as opposed to unitary and also as opposed to hierarchical.[iii] We find that an important element of federalism is power sharing and not just separation of powers. The American political system is usually taken as the prototype of a system of checks and balances, with a distinction made between executive, legislative and judicial powers. At the same time though there are many interlinkages, for instance the president appoints members of the Supreme Court, but needs the approval of the Senate; the president has full executive powers, but for his budgetary appropriations he needs Congressional approval (see chapter 2 for more examples). A main fear of the drafters of the American Constitution was that the branches would develop their own powers, indirectly encroaching on the domains of the others; one example being the absolute monarchs in Europe, but also the British Long Parliament, largely overlapping with the Cromwell period, which assumed executive and judicial (prosecuting and sentencing) powers. These principles of balancing powers are also visible in the design of the Federal Reserve, where public interest (with rampant anti-financial sector feelings) had to be balanced with private sector interests (banking sector), both sides fearing dominance by the other. This fear pervades the set-up of the system (Federal Reserve Banks and a Board) and the internal distribution of powers. Read more

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The Making Of The Statute Of The European System Of Central Banks ~ Annex 1: Selection Of Articles (And Division Over Cluster I, II And III)

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