The Making Of The Statute Of The European System Of Central Banks ~ Preface

This study explores the genesis of the most important parts of the Statute of the European System of Central Banks (ESCB). This genesis and a comparison with the national central bank laws at the time of the drafting of the ESCB Statute can contribute to a better interpretation of the ESCB Statute and therefore a better understanding of the functioning of the ESCB. This is a first study covering in full detail the genesis of the ESCB Statute.

The study also shows the significant influence which the governors of the central banks have had on the design and formulation of the statute by comparing the texts of the Delors Report (April 1989) up till the final outcome of the Intergovernmental Conference (IGC) in December 1991. The governors’ text went almost unscathed through the IGC process, especially because the governors had appreciated from the beginning the importance of incorporating checks and balances in the draft ESCB Statute.
The governors knew the European central bank had to be both independent and accountable. This study shows independence and accountability are not opposites, but they are complementary to make for a balanced system of checks and balances. In this sense the study purports to contribute to the increasing amount of literature on central bank independence.
The governors were also careful in designing a balanced internal structure, i.e. they opted for a federal system within which neither the new European Central Bank nor the existing national central banks would be dominant.

To be more specific the study is, like Gaul, divided into three parts: the first covering the ESCB’s external relations, the second covering the intra-system relations between the ECB and the NCBs, and the third covering the internal relations within the Governing Council (i.e. between the Executive Board and the national central bank governors).
The study is based on publicly available documents. Some new material has been made available for research purposes, including the draft versions of the Delors Report. The study is basically an intertextual and chronological comparative analysis. Comparisons with the Federal Reserve System are also included, as the FRS is also a federally structured central bank system and because the Federal Reserve Act is full of checks and balances. Read more

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The Making Of The Statute Of The European System Of Central Banks ~ Chapter 1 – Introductory Chapter

Zur Thematik
The creation of the Economic and Monetary Union (EMU) is one of the most profound steps in the monetary history of Europe, which has significance not only for professionals, politicians and academics, but also for everyday life. Among the accomplishments that stand out are the establishment of a federally structured European System of Central Banks (ESCB)[i] and the introduction of a single currency. The opinions and decisions of the European Central Bank (ECB)[ii] are almost daily topics for the national newspapers, discussions on its accountability (or perceived lack thereof) are recurrent topics in the European Parliament and political and academic circles. In short, the ECB has become a reality for almost everyone within a couple of years since its establishment. Technically it has been successful: the transition from national currencies to a single currency, the euro, has been a remarkably smooth process despite the gigantic scale of the operation. Though it is too early to evaluate how effective the ECB is in implementing its mandate, for the Monetary Union as a whole inflation rates are lower than they were during a large part of the nineties.

The legal underpinnings of the System and its independence have been extensively studied, see e.g. Stadler (1996), Smits (1997) and also Endler (1998). Also, from a political angle, the degree in which the negotiations leading up to the signing of the so-called Treaty of Maastricht in February 1992 could be characterized as a success for the German or for the French negotiators has been analyzed, e.g. by Viebig (1999) and Dyson/Featherstone (1999). In many respects these authors have concluded that it was a German success. However, the ESCB is not a copy of an existing central bank, not even the Bundesbank. It has been established on the basis of a unique Statute.[iii] This Statute will guide the ECB, also in the future. But like many texts, the Statute is sometimes ambiguous. For a right interpretation of the texts it is important to know their genesis. Sometimes wording was copied from existing other texts, sometimes texts are a delicate compromise, sometimes texts have a difficult technical history.

What distinguishes this study from these other studies is that these studies analyzed the ESCB from only one perspective, i.e. either from a legal, political or economic point of view. This study aims to show how political, economic and institutional considerations were combined and have found their way into the (legal) wording of the ESCB Statute. To this end I focus on each article, describing the economic rationale behind it as well as its genesis, systematically using historical sources which until now have not been used for these purposes. The perspective I take in order to interpret, analyse and assess the Statute of the ESCB is that of checks and balances. We will identify and study the ‘checks and balances’ which have been introduced in the Statute of the ESCB. ‘Checks and balances’ are an important characteristic of any federally designed system. They are part of the ‘rules of the game’, which have to be taken into account by the components of the system, which rules should ensure the system’s stability and effectiveness. For instance, ‘checks and balances’ prevent the possibility of ‘winner takes all’, because this would mean the end of the federal character. A clear normative framework for checks and balances for federal central bank systems is not available, though there are general notions which any workable system of checks and balances has to accord with. Therefore, we will develop a framework to describe the checks and balances in central bank systems.

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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 ~ 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 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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