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)

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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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

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 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

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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