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

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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.

To be workable federalism needs checks and balances between the entities involved to prevent deadlock, but also to prevent dominance of one entity over the other(s). More specifically, we would expect to find a clear description of each entity’s own powers combined with checks and balances that keep the power of the other entity (entities) in check, that oblige them to consult each other, that require openness towards the other entities and, in cases of checks and balances vis-à-vis the political authorities, the people. To these traditional ingredients of checks and balances we added the important requirement of flexibility over time. This flexibility will serve the longevity of the system, because it allows for different degrees of power concentration, which could serve possible changing circumstances. Any system of checks and balances could be characterized by the elements (sub-categories) contained in the above definition. We would expect all five categories to be present for any system to be stable over the long-run.

The ESCB has been designed as a federal structure, consisting of the NCBs and a new centre. This was already proposed by the Werner Report and was repeated in the first proposals by Balladur and subsequently formulated as a condition by Stoltenberg, together with the requirement of independence. The centre was conceived by the Delors Committee and the Committee of Governors to be more than just a secretariat or a regulatory agency, at least potentially. We are interested in the question whether the designers of the ESCB used checks and balances as defined above. The absence of checks and balances would not bode well for the effectiveness of the system. As federalism and checks and balances relate to the relations between specific entities, we distinguish three groups of relations, each representing a non-hierarchical federal structure between entities operating at the same level: first, due to the required independence of the ESCB, its non-hierarchical relation with the other relevant Community institutions (the ‘political authorities’) had to be defined. This area is usually studied in terms of (too much) independence versus (too little) accountability. Instead we show that the Statute contains a number of features which increase both the System’s accountability and its independence, taking away the idea that institutional (political) independence and accountability are enemies.[iv] The second area covers the tasks of and the relations between the ECB and the NCBs. In theory the ECB and NCBs could be given own (exclusive) responsibilities, alternatively they could operate alongside each other. The third area is that of the relations within the Governing Council, i.e. between the Executive Board and the governors. The Executive Board has been given votes and some powers of its own.

Most articles clearly fall into one of the above mentioned areas (i.e. the System’s external relations, its operational aspects or its decision-making design), which allows us to study them systematically from the perspective of checks and balances.

The definition and categorization of checks and balances, developed in chapter 2, has been helpful in gaining insight in the way powers are defined, protected and controlled. In particular the overviews presented at the end of each cluster have been helpful. In diagram 2 , shown at the next page, we capture a rough image of the way the checks and balances are divided over the five categories ((a) to (e)).

If we were to present our most important conclusions and recommendations in a short way, we would present them as follows:

  1. The genesis shows that checks and balances played an important role in the discussions on the draft Statute, an aspect neglected until now in legal, economic and political studies on the ECB and on Monetary Union, which usually have focussed on one or at most a few aspects of the Statute and the related articles of the Treaty. In fact, the Statute contains many checks and balances, with mostly clearly defined responsibilities and many checks on each other’s powers, also vis-à-vis the external authorities.
  2. The central bank governors themselves played an important role in the genesis of these articles, because they were aware of the need for checks and balances. Indeed, a number of them had gone through the experience of attaining independence for their central banks in a national context and they knew therefore by experience which were the most important conditions for attaining political support for a (de facto or formally) independent central bank. This influence already showed in their contributions to the Delors Report, which report in many respects precedes and preludes the content of the ESCB Statute.

DIAGRAM 2: Categorization of checks and balances of clusters I, II and III

Diagram 2: Categorization of checks and balances of clusters I, II and III


I   (a1) Checks and balances protecting the prerogatives of the ESCB
(a2) Checks and balances protecting the prerogatives of the other EC institutions
(b)   Controlling (or blocking) mechanisms
(c)   Consultation mechanisms
(d)   Accountability mechanisms
(e)   Checks and balances allowing for intertemporal flexibility.

II (a1) Checks and balances protecting the prerogatives of the ECB
(a2) Checks and balances protecting the prerogatives of the NCBs (b), (c), (d), (e) – see above.

III (a1) Checks and balances protecting the prerogatives of the Executive Board
(a2) Checks and balances protecting the prerogatives of the Governors (b), (c), (d), (e) – see above.

See also chapter 2 (p. 18-21), and chapters 5.4.1, 8.3.1 and 11.3.1. We added for each category the number of articles containing checks and balances as presented in tables 5.3, 8.3 and 11.3, even though not all checks and balance-items are as important. Nonetheless, and at first sight, part I tentatively shows that none of the categories looks to be underrepresented, while category (a1) seems to be overrepresented. In part II the emphasis lies on flexibility. In part III most categories are well represented; category e is small, but in fact contains two articles with potentially far-reaching impact, while there is less need for specific articles under d.
(end of diagram 2)

  1. From chapters 5, 8 and 11 it follows that in all three clusters the checks and balances have been designed in relatively balanced and complete way with all sub-categories of checks and balances represented.
    • The least balanced cluster is cluster II with a strong presence of category e (intertemporal flexibility). More specifically, the division of responsibilities is too open-ended, even though the decentralization principle might be seen as protecting an operational role of NCBs. However, this is not an inalienable right, but based on the application (and interpretation) of a decentralization principle and therefore in the end not guaranteed. We propose that the Statute should have provided that standing facilities are by definition offered by NCBs, while the management of the System’s pooled foreign reserves should be completely centralized at the ECB. (We submit that the latter point was foreseen by the drafters anyhow.) At present, the ECB acts more as a US-style regulatory agency. This issue might become especially relevant when new (sometimes small) countries join the euro area, which could lead to a rearrangement of operational procedures, possibly triggering centralization or specialization. We nonetheless concluded that the present reliance on decentralized implementation of monetary policy is effective in practice and allows more commercial banks to contact their central bank directly, with whom they hold minimum reserves anyhow and in some cases are their supervisors allowing for synergy, than in a more centralized system with a limited number of primary dealers (see chapter 8.2.4). We also make the point that the decentralized set-up of the system, which is an important characteristic of its federal character, strengthens the independence of the system. We also noted from the overview presented in chapter 8.3.1 that the NCBs’ financial position is much better protected than that of the ECB, while the NCBs also have a strong financial leverage over the ECB’s expenditures, through the budget approval procedure. This makes their position relatively more powerful than that of the Federal Reserve Banks in the United States or the Landeszentralbanken in the pre-EMU Bundesbank system. This is related to the fact that the NCBs are the ECB’s (only) shareholders, whereas the FRBs’ capital is owned by their member banks and the Landeszentralbanken are branches of the Bundesbank. We also noted that the Federal Reserve System is not an example of a centralized system, but – as regards the open market operations – as an example of specialization with a large role for the New York Fed. We also noted that it is not correct to describe the history of the Fed as one of increasing centralization, but as one of increased decentralization at the early years (though unplanned), followed by a strong correction.
    • Cluster I shows all categories well represented. This might surprise, as the ESCB has been accused of being too independent and too little accountable. This easily creates the impression that these concepts are negatively correlated. However, we make the case that independence and accountability may in fact strengthen each other.[v] We conclude that the ECB is not only more independent, but also more accountable than the Bundesbank. (In passing we note differences with the Fed, one of which is that the requirements in the area of transparency leave a lot to leeway to the Fed, while another difference is that there are no government officials present at FOMC meetings.) We recommend that appointments of Executive Board members are formally subject to the consent of the European Parliament. This both increases the accountability aspect (because of the involvement of a directly elected body) and the ECB’s independence (as it makes the politically motivated appointments less likely). We see further room for improvement in the area of communication. We recommend less frequent communication, but at the same time more detailed information, better showing the arguments pro and con used in making interest rate decisions. We draw the line however at publishing the voting record, because of the traditional argument that this could lead to national pressure on NCB governors and because we support the idea that the Governing Council has a collegiate responsibility (versus the more Anglosaxon concept of individual accountability).
    • In fact this is in line with our recommendation under cluster III, where we advised to continue the present practice of consensus voting on monetary policy, because in case of a close call it allows the chairman to weigh the arguments, which possibility is absent in case of straight voting.[vi] The possibility to request for a vote should nonetheless be maintained as a safeguard – see chapter 11.3. The ECB is sometimes criticized in the financial press for being too slow in taking interest rate decisions. However, we have shown that theoretically larger groups do no digest information more slowly than smaller ones, neither do recent studies indicate the ECB being behind the curve (see chapter 11.3.2, and also chapter 11.2.2). More in general, we see few imbalances in the relation between the Board and the governors, even though on paper the powers of the Board are limited. In practice though, the Board’s position is more influential than its share in the votes of the Governing Council would suggest. First, governors, though they constitute a majority, seldom operate as block (neither has the Board, at least not in case of interest rate decisions). Second, the Board has a powerful position because of its responsibility for preparing the Governing Council meetings. Third, the ECB is chairing most of the ESCB committees. Fourth, the Board is relatively well endowed with staff, which has a size comparable to that of the Board of Governors of the Federal Reserve. Fifth, a Board member takes the lead in the monetary policy discussions by presenting an interest rate proposal at the beginning of the interest rate discussions in the Governing Council – though we recommend ending this practice, see also chapter 11.3.
  2. The role of committees deserves special attention, as this topic has been mentioned in both cluster II and III. In both clusters we recommended a stronger role for ESCB committees, not so much larger committees, but a role more conducive to generating new ideas and creating an atmosphere of cooperation and trust. In fact, the ECB should see it as her responsibility to manage the intra-System relations, for which a special functionary could be appointed, falling under one of the Executive Board members.
  3. A final observation relates to the external representation of the ESCB. We have seen that in the Federal Reserve System the external relations were completely centralized after a period in which New York had dominated the System’s international relations. A main difference with the Federal Reserve is that the NCBs of the ESCB, unlike the FRBs of the Fed, have remaining non-System responsibilities, which in many cases bring along external contacts (e.g. in the area of supervision, but also IMF-related matters, payment systems oversight, research and statistics). In fact, this outward orientation of many NCBs strengthens the level of knowledge, indirectly also in monetary affairs. This improves the contribution they can make to the monetary policy discussions, making for better decisions.
  4. In our description of checks and balances we stressed the importance of sufficient features of flexibility. Flexibility absorbs pressures which might otherwise lead to a break-up of the system. An example from cluster I is the possibility for political authorities to appoint, once the term of a current member has ended, a new member of the Governing Council (Board or NCB governor), and possibly one who is more of their political thinking. We have seen that cluster II provides a large degree of flexibility with regard to the division of labour, while cluster III contains Art. 10.6 which has been used to limit the share of votes for the governors, while Art. 12.1b allows for delegation of powers of the Governing Council to the Executive Board.

The overall outcome is a relatively balanced system as seen from the perspective of checks and balances, which bodes well for the System’s longevity. There is room for improvement. The direction in which these should go is given by our analysis of checks and balances, though the direction could also entail ‘more of category x’ instead of ‘less of category y’. Indeed, though the ESCB has a comparatively high independence, we reject for reasons indicated the idea that the political authorities should decide the quantification of the ESCB’s price stability objective (see chapter 5.4.2 and the last part (p. 31) of chapter 3). Likewise, we reject the introduction of an override mechanism (see chapter 5.4.1). The existence of so many checks and balances should not surprise us, as this concept was very much in the back of the minds of the governors when they discussed the design of EMU and the ESCB Statute. The importance of their role has until now been underestimated, as most studies look upon EMU as being the result of negotiations between France and Germany, with France aiming for monetary integration and Germany insisting on a German-styled design of the new central bank. However, the governors did more than copy the Bundesbank. They improved on it (improving on its accountability, but also on its independence)[vii] and they formulated views on the economic side of EMU. On this last issue they were to be less successful, as we will see below. First we pay some more attention to the role of the governors.

Role of the central bank governors
The Committee of Governors not only played a very important role in the drafting of the Statute, the governors were also involved in the earlier production of the Delors Report. Large parts of the Delors Report, which was written by two rapporteurs guided by chairman and Commission president Delors, were influenced by text proposals tabled by the Bundesbank. When two years later the Committee of Governors started to draft the articles for an ESCB Statute, not surprisingly many of its ideas coincided with those expressed in the Delors Report. The Delors Report had been agreed upon unanimously by all its members[viii] and had been welcomed by the Heads of State as ‘a’ basis for the preparation of a possible EMU. Even the economic part of the Delors Report, which lay outside the mandate of the Committee of Governors, can be found back in the Treaty of Maastricht, though not necessarily in a satisfactory way – we will come back to this later.

We also conclude that among the governors a major role was played by the German and French central banks, while at least the Dutch central bank also played an important role. The Dutch central bank aimed at preventing isolation of the Bundesbank. It played an important role in steering the Delors Committee towards a clearly formulated (single) objective for monetary policy, and it had (together with the German central bank) a keen sense for issues like political accountability. This last point can be explained by the fact that they – more than the other central banks – were experienced in the accountability demands which are placed on an independent central bank. The French central bank had accepted at an early stage (see box 2 in Art. 7) the independence of the ESCB as a sine qua non for the success of the whole enterprise. The other central bank governors shared this view – including the governor of the Bank of England, although he could not commit himself to the ultimate objective of establishing EMU, because his authorities objected to the creation of a federal central bank.[ix]

During the IGC no government had tried to limit the independence of the ESCB. As regards the internal design of the System, the most important objective of the Bundesbank was a guarantee that monetary policy in the single currency area would be one and indivisible (requiring in their view a strong presence of the central body in an otherwise federally organized system). For the Banque de France the most important principle was that of subsidiarity (read: decentralization) and for the Bank of England transparency and cost-effectiveness. Most smaller countries leaned towards the French view – explicitly described by the Spanish delegate in the IGC as the need to involve all NCBs in the execution of the ESCB’s policies.

The leading role played by the Bundesbank can be explained by three factors: first, it was the only central bank that was perceived to be able to block agreement at home, when the outcome would not be satisfactory for itself. This strong domestic position was based on its high degree of political independence and the strong support it enjoyed among the public as successful stability anchor for Germany. Second, its internationally recognized success also introduced the possibility to ‘borrow’ its credibility by borrowing its characteristics for the new central bank system, especially relating to its independence. Third, conceptually the Bundesbank model lent itself very well as an example for a federally designed European central bank system, because – despite its unitary structure[x] – it was very much a federally designed central bank system itself vested in a federally structured country. This is especially made clear by looking at the origins of the Bundesbank, described in appendix 3 at the end of chapter 11. This made the Bundesbank model a natural compass for the design of the ESCB, more by logic than by force. Therefore, the fact that the ESCB Statute resembles the Bundesbank law more than it resembles the statute of any other EC central bank statute of those days, should not be misread as simply a victory for the German participants. The Bundesbank-model itself was based indirectly on the design of the American Federal Reserve System, both as regards its internal structure and as regards its position as a relatively independent actor alongside other governmental branches,[xi] though for historical reasons the Bundesbank was endowed with relatively more independence. For this reason we have added to the genesis of each article a paragraph describing similar articles in the Federal Reserve Act.

Because the governors were able to rely on a natural and credible model and because they paid explicitly and consciously attention to the accountability aspect, they were able to present the IGC a model which was very balanced. Their draft allowed for both a high degree of independence and a high degree of accountability – in fact we conclude that both the ESCB’s independence and accountability are stronger than that of the Bundesbank[xii] – and it reconciled a high degree of federalism with effective decision-making and operational flexibility, while in addition the IGC ensured a sufficient check on its operational efficiency. As regards transparency, it was not an important issue these days, but according to the then prevailing standards the System allowed for a transparent way of making and communicating policy.

This is not to say that the design could not be improved – we have mentioned examples in the concluding chapters of each of the three clusters, a part of which we repeated above. As an essential feature however stands out the large number of checks and balances incorporated in the Statute. These checks and balances are not so much necessary to bridge opposing views, i.e. they do not constitute compromises, but they allow each party to play its role in the most effective way, promoting co-operation and not deadlock.

The fact that the governors were able to play an important role in shaping EMU is in our view due to two factors: first, Delors knew EMU would not have a chance when the Bundesbank would express its opposition;[xiii] second, the governors, or at least part of them, had an astute feeling for the political acceptability of their ideas on the independence of the ESCB. Though they might resemble an epistemic community, i.e. a network of likeminded experts, [xiv] it is stretching the argument a bit to contend that the governors were called in by national executives for being such an epistemic community which could achieve international policy coordination, because instead the purpose was rather to bind in the Bundesbank and also because the Committee of Governors was not invited, but volunteered itself to draft an ESCB Statute.[xv] This likemindedness was confined to a shared desire for independence, while for some – at least initially – the external component of EMU (breaking the dominance of the dollar and of the Bundesbank) was as important as price stability. This explains the initial emphasis by the French and Italian central bank on establishing a European Reserve Fund in stage two of EMU and on the possibility of a parallel currency.[xvi]

The system of checks and balances present in the ESCB Statute also complies with the basic norms to which in our view any system of checks and balances should comply. We refer to the eight basic norms mentioned in chapter 2. Indeed, the powers of the ESCB are narrowly circumscribed; it is accountable to the ‘democratic complex’ through various mechanisms (among which appointment procedures, reporting requirements towards the European Parliament and the executive branch); infringement on rights of others is very limited, because the system and its operating procedures are almost completely market-based;[xvii] the separation of powers doctrine holds; it has so far proven to be effective; its efficiency though is not clearly proven, though (1) well-informed governors (i.e. informed also by their own staff) make for better decisions, and (2) a small monetary policy decision-making body does not necessarily take better decisions. (In short, the federal structure has advantages from an economic and political point of view, but also brings along costs, mostly borne by the regional NCBs; some of these costs may be self-evident and worthwhile, like local research, collection of local monetary statistics and locally available money market standing facilities[xviii], other costs may not be as easily defendable. Finally, the rule of law applies (as the ESCB falls within the jurisdiction of the Court of Justice) and the system is democratically, because Treaty-, based.

The ‘E’ of EMU[xix]
We noted earlier that the effectiveness of the system is not completely ensured, because there are external risk factors. Even at the time of the Delors Report the governors were aware of these risks. Large parts of the meetings of the Delors Committee were devoted to describing the conditions for economic policy that need to be fulfilled in order to have successful monetary integration. The Delors Report made clear that binding fiscal rules would be indispensable (see Delors Report, par. 25, 30 and 33).[xx]

We could say that the introduction of national budgetary rules was felt to be a quid pro quo for the surrender of monetary sovereignty. This demand was understandable in view of the very high fiscal deficits then prevailing in some EC countries. Debts were very high too, and due to short maturities debt servicing costs were affected rapidly by changes in interest rates.[xxi] Budgetary rules were new to most EC countries, only Germany knew the so-called golden financing rule – which allows borrowing only for investment purposes (this rule existed at federal level (Art. 115 Basic Law (version 1969), with a conjunctural escape clause) and at the regional level (Delors Report, p. 104)). Therefore, the recent failure of some Member States to live up to the Treaty provisions regarding the limitation of the deficit (and of the Ecofin to enforce it) is a breach of the checks and balances underlying EMU, and in fact a breach of the conditions of the stability-oriented countries for surrendering their monetary sovereignty.

This breach brings to the fore that the ‘excessive deficit procedure’ (EDP) – laid down in Art. 104C-EC and clarified in the Stability and Growth Pact – contains a fundamental flaw. The flaw is that in the EDP Ecofin is both legislator, executive and judge.[xxii] This is in flagrant contradiction to the doctrine of separation of powers; any regime based on such a construction is bound to derail. In the United States discretionary powers are sometimes given to an independent governmental agency or regulatory commission, consisting of non-reappointable board members. This could be copied here, with such a body working on the basis of an authoritative interpretation of the EDP, e.g. taking over from the Ecofin the power to decide on the existence of an excessive deficit and on the imposition of sanctions, based on evidence by the Commission and possibly the Ecofin.[xxiii] (It would seem that at present the Commission cannot fulfil such a function, as in the end the Commission is not only a technocratic, but also a political body, also because it handles so many other politically sensitive dossiers at the same time.)[xxiv] In any case, one should extend a formal role to the European Parliament extending beyond consultation, in all cases where the Ecofin wants to amend the interpretation of the fiscal rules contained in the Treaty (or when it wants to amend the Pact). This would end the Ecofin being the only legislator in its own case. Such a solution would achieve a better balance between the Economic and the Monetary part of EMU.

Apart from the procedures one could also consider to improve the rule itself. More emphasis on structural deficits (i.e. corrected for the position in the business cycle) is imagineable, but these lend themselves less well for triggering sanctions, as the exact level of the structural deficit can only be determined with a considerable lag. One could however put more emphasis on monitoring the structural deficit over the whole business cycle, because the seed for excessive deficits is usually sown in the period of economic upswings.[xxv] In this respect one could give a strong role to the new autonomous body just referred to. However, because doing away with annual targets increases the risk of misjudgements, one should only apply such a rule to countries with a low debt ratio. As long as the debt to GDP ratio is at low levels, one could even consider allowing countries to opt for certain alternative rules, like a balanced current budget over the cycle, which allows borrowing for certain well-defined investment expenditures. But in all cases an independent body remains indispensable to take impartial decisions, including on sanctions. Finally, it is to be expected that tax reductions in a situation where a country is running a deficit close to the three percent of GDP ceiling will become increasingly less effective as an electoral tool to stimulate growth, as in those circumstances consumers will increasingly be aware of the need for the country to raise taxes (or to reduce expenditures) in order to respect the Treaty.[xxvi]

Checks and balances and the draft Constitution
The study of the genesis of the articles of the ESCB Statute fills a blank in the sense that the Treaty of Maastricht does not contain an Explanatory Memorandum – in fact Treaties never do. The closest one can get to such a Memorandum is the Commentary of the Committee of Governors accompanying their draft ESCB Statute of 27 November 1990. Our study allows for a better understanding of the articles, the reasons for their inclusion in the Statute and for their precise formulation. Many articles can only be fully understood when seen in relation to other articles – the cross-references at the beginning of each article show the most important links.

The ESCB came into existence in June 1998. In 2003 a Convention was convened to look inter alia into a simplification and reorganisation of the EU Treaty structure, which would affect the parts agreed in Maastricht as well. The discussions in the Convention resulted in a draft Constitutional Treaty, which was taken up in the subsequent IGC of 2004. The text of the protocol containing the Statute of the ESCB and of the ECB has remained relatively unchanged; whereas the Convention had focussed on the Treaty text, the presidency of the IGC only once tried to amend the text of the Statute (see chapter 5.3, p. 249), and the ESCB focussed its comments on the texts produced by the Convention, while also suggesting some technical amendments and requesting for the introduction of the term ‘Eurosystem’ in the Statute (which was granted). The suggestion of the Convention to introduce a first shortened part of the Treaty with the basic (basic in the sense of ‘constitutional’) articles was adopted by the IGC.

A substantial part of Part III of the draft Constitutional Treaty (i.e. Title III containing all articles relating to the Union’s Internal Policies and Action, among which the chapters on the Internal Market and Economic and Monetary Policy) can be slightly more easily amended than the other parts of the Treaty, viz by unanimity of all Member States including national ratification, but without the need to convene a full-scale IGC first.[xxvii]

Taking a step back we first present which elements relating to the ESCB should in our view have been mentioned upfront in Part I of the Constitution for reasons of visibility and legal protection, because the articles relating to the ESCB and EMU are either mentioned in Part I or Title III of Part III of the Treaty:

  • the establishment of the ECB and of the ESCB, consisting of the ECB and the NCBs, to indicate that the monetary competence of the Community (or the Union) has been endowed to the Union itself and not to the executive or legislative branch of the Union
  • the ESCB’s independence and its (limited) price stability mandate; a broader mandate (e.g. aiming for exchange rate stability or employment objectives) would make the ESCB’s independence less acceptable to the political authorities and will reduce its ability to pre-commit to low inflation (see p. 255 in chapter 5.4 for a full list of arguments); the System’s secondary objective could be mentioned too
  • the concept of stable prices, being a social good and being in the interest of the weaker in society, should also be mentioned among the Union’s general objectives
  • the ESCB’s federal structure not only hinges on the operational role of the NCBs, but also on the membership of the NCB governors of the Governing Council; it would seem important to define in Part I the composition of all institutions mentioned in Part I of the Constitution. The federal decision-making structure of the ESCB also strengthens the system’s independent status, reducing the risk it becomes seen and treated as a mere governmental agency.

In addition, one should not lose sight of the fact that monetary policy has been surrendered to supranational level within the context of EMU, i.e. under the proviso of simultaneous economic union. Therefore, the existence of fiscal rules should have Constitutional status (i.e. Part I) as well, the precise form could be spelt out in Part III of the Constitution relating more in detail to the Union’s policies.

The draft Constitutional Treaty, which has been approved by the Heads of State or Government in June 2004, can be commented upon in the light of the above. We establish that some very important elements have become part of Part I of the Constitutional Treaty, while others have not, and that in our area in no way improvements have been made.

The points that have been taken up in Part I are the establishment of the ECB and of the ESCB (defined as encompassing the ECB and the NCBs) with price stability as its primary objective; stable prices are mentioned as one of the (many) objectives of the Union; and the ECB is independent.

A number of important points though are missing. To begin with the last issue mentioned in the one before last paragraph, i.e. EMU, it occurs that the concept of Economic and Monetary Union, which was still mentioned as one of the Community’s objectives in Art. 2-EC [xxviii] has altogether disappeared from Part I of the new Treaty text. A logical place to mention EMU would have been Art. I-3 of the new Treaty on the Union’s objectives, following the example of Art. 2-EC. This would have safeguarded the idea that Monetary Union does not stand on its own and requires the partly surrender of economic power, which idea has now been disregarded. The only place where ‘economic and monetary union’ appears is in Articles III-88 and 99 of Title III of Part III, which Title falls under a different (lighter) amendment procedure. Furthermore, we note that the text of the draft Constitutional Treaty puts the ECB and the ESCB in the category Union’s Institutions, because they are mentioned under Title IV of Part I (“The Union’s Institutions and Bodies”),[xxix] while they fall outside the institutional framework of the European Union, because the ECB and the ESCB are mentioned in chapter 2 of Title IV of Part I after chapter 1 (titled “The institutional framework”). This contradicts a recent Judgment by the Court of Justice in a case involving the specific competences of OLAF (Office européen de lutte antifraude), the Community’s anti fraud bureau, with respect to the ECB, in which the Court of Justice puts the ESCB ‘squarely within the Community framework’. [xxx] This issue can be solved by naming Title IV ‘The Union’s Institutional Framework’ and chapter 1 ‘The Union’s Institutions’, while keeping the ESCB and the Court of Auditors in chapter 2 covering ‘The other Union Institutions and Bodies’. We also note that the composition of the Governing Council is missing in Part I, whereas the compositions of other institutions (the Council of Ministers, the Commission, the Court of Justice and even the Court of Auditors) are mentioned in Part I.

We also observed that the Convention and the IGC did not provide improvements in the checks and balances in the monetary area – in fact they only took some steps backward. The role of the ESCB is a difficult one in this respect, as it is hesitant to produce suggestions for improvement, for fear of opening a Pandora’s box. Nonetheless, a well-prepared report pointing to (the need for) improvements might be useful input for any future IGC. This would prevent the ECB from having to operate from the defensive only.[xxxi]

More in general, we learn from the above, in particular from the ease with which changes in the monetary part of the Treaty can be realized, that a central bank is only as independent as its environments accepts, and that the importance of legal independence is easily overstated (because amendments are possible, especially when part of larger package deals).[xxxii] At the same time, changes should remain possible, otherwise the system might risk breaking. To paraphrase a Dutch saying: What bends, does not break. However, changes should be costly in political terms, otherwise the Treaty or Statute does not provide stability.

In sum, we conclude the ESCB Statute is full of checks and balances, as defined in chapter 2. We distinguished three areas of checks and balances: checks and balances vis-à-vis the outside (political) world, intra-System checks and balances (i.e. between the ECB and NCBs) and checks and balances within the Governing Council (i.e. between the Executive Board and the NCB governors). We developed a definition and categorization of checks and balances, which allows us to study in a systematical way federal structures, characterized by non-hierarchical relations between entities sharing power. The definition and categorization led us to find a number of instances where the checks and balances could be improved.

Finally, we think that the concept of checks and balances, which formed the looking glass through which we looked at the design of the European System of Central Banks, is better approached by Churchill’s words of 1946, when he said “The structure of the United States of Europe, if well and truly built, will be such as to make the material strength of a single state less important. Small nations will count as much as larger ones and gain their honour by their contribution to the common cause” [xxxiii] than by Thucydides’ words of around 400 BC when he wrote “Our Constitution ….. is called a democracy, because power is in the hands not of a minority but of the greatest number.” (Thucydides II: 37, cited in the Preamble of the draft Treaty establishing a Constitution for Europe by the European Convention (July 2003).)

[i] Officially called the Statute of the European System of Central Banks and of the European Central Bank. The study is based on material covering the period of the Delors Committee until 1992 (the signing of the Treaty of Maastricht). In 2000 it was decided to add an Article 10.6 to the Statute (Treaty of Nice). This article has been added to Annex 4 containing the ESCB Statute. Our study also shows the genesis of the Treaty articles relating to Monetary Union. Since Maastricht most Treaty articles have been renumbered. This is shown for the relevant articles in Annex 5.
[ii] In the typical intergovernmental structure all entities keep their veto power on important decisions.
[iii] See our definition of federalism in chapter 2.
[iv] See chapter 5.2.2.
[v] The best example being the ESCB’s limited mandate – see also chapter 5.2.2.
[vi] Another argument against voting is the risk of leakage, and national pressure on the national central bank presidents. Therefore, voting on interest rate, should be the exception.
[vii] Improved transparency, larger role parliament, sharper objective, Treaty-based statute. See examples mentioned in chapter 5.3 after tables 5-1 and 5-2 in cluster I.
[viii] Much to the dismay of Mrs Thatcher, the UK prime minister. Later the UK Treasury would present alternative options for monetary integration, based on the idea of competing (and parallel) currencies.
[ix] In the final stage of the IGC the UK would negotiate an opt-out clause for itself.
[x] The Landeszentralbanken are branches of the Bundesbank.
[xi] See appendix 3 on the Bank deutscher Laender, the predecessor of the Bundesbank, at the end of cluster III.
[xii] See chapter 5, section 5.2.2 and 5.3.
[xiii] See chapter 1 under ‘Description of the main documents, committees and historical setting’, and section II.1A of Art. 7 in cluster I.
[xiv] See Amy Verdun (1999), p. 311-312, who refers to other arguments used to explain the important role of the governors, one reason being ‘the structural changes in the nature and structure of capitalism’, which refers to the increased openness of the economies and the increased importance attached to price stability and another reason being the high level of trust among the central bankers – a point also made by us earlier.
[xv] See chapter 1.
[xvi] See also D. Cameron (1995), p. 48.
[xvii] Exceptions only exist in non-exclusive System functions, like banknote production.
[xviii] See also Appendix 2 (cluster II)
[xix] See chapter 2 in the paragraph on ‘checks and balances’, Art. 21-ESCB, section II.3 (cluster I), chapter 5.1 and 5.2.1 (under Article 109C).
[xx] Par. 25: “…. an appropriate balance between the economic and monetary components would have to be ensured for the union to be viable.” Par. 30: “binding rules are required that would: firstly, impose effective upper limits on budgetary deficits of individual member countries of the Community, although in setting these limits the situation of each member country might have to be taken into consideration; secondly, exclude access to [monetary financing].”
[xxi] Expansionary deficits could not only feed into debt dynamics and possible pressure on the central bank to lower interest rate costs, but such behaviour would also become more likely as the elimination of the national currency took away the exchange rate as disciplining factor – in other words EMU would increase the possibilities for beggar-thy-neighbour policies, in which a country with an expansionary deficit would reap most of the benefits, while the costs, e.g. in terms of higher long-term interest rates, would be shared out over the other EMU members.
[xxii] The Court of Justice is explicitly sidelined for a large part of the EDP, see Art. 104C(10), though it remains possible to bring the Council of Ministers or the Commission to the Court for reason of ‘failure to act’ (Art. 175-EC, (Art.232 according to new numbering)), but not Member States for infringement of the rules. The Ecofin, if unanimous, may change the protocol on the Excessive Deficit Procedure containing the specification of the reference value for the fiscal deficit (i.e. 3% of gdp) and may specify (and therefore respecify) the implementation provisions of the EDP, following a proposal from the Commission and after consulting the European Parliament and the ECB; see Art. 104C(14).
[xxiii] One could also imagine this body being responsible vis-à-vis the European Parliament for taking or not taking action.
[xxiv] One could counter that such an independent body would lack authority, whereas the Commission might develop towards a directly elected body or its president might be elected directed, in which case the Commission president would politically come at par with the Heads of State. This would increase his weight and independence. However, this requires a much broader movement towards more supranationalism and less intergovernmentalism.
[xxv] See also M. Buti, S. Eijffinger and D. Franco (2003), ‘Revisiting the Stability and Growth Pact: grand design or internal adjustment’, European Economy, Economic Papers, No. 180, January 2003. When the structural deficit is under control and at a right level, automatic stabilizers can be allowed to work, i.e. the deficit may breath along with the business cycle and there is no need for pro-cyclical fiscal measures.
[xxvi] The so-called Ricardian equivalence, implying that if the government dissaves more, the public will save more and vice versa.
[xxvii] Compare Art. IV-7 and IV-7b of the draft Constitutional Treaty.
[xxviii] “The Community shall have as its task, by establishing a common market and an economic and monetary union …, … a harmonious and balanced development of economic activities, sustainable and non-inflationary growth, …” (Art. 2-EC).
[xxix] Listing the ESCB (or the ECB) as Community (or a Union’s) institutions could constitute a route for the legislative branch to force rules on the ESCB which could be detrimental to its independence (think of an obligation to publish voting, but also rules governing the languages).
[xxx] C-11/00, Commission v European Central Bank, paragraph 92. See also Elderson and Weenink (2003), ‘The European Central Bank redefined? A landmark judgement of the European Court of Justice’, Euredia 2003/2
[xxxi] The ECB does not have the right to propose amendments to the Statute other than technical ones covered by Art. 41-ESCB.
[xxxii] See also Issing in De Haan ed. (2000), p. 154-5. In this respect we can point to calls by the Italian prime minister Berlusconi and French president Chirac to broaden the mandate of the ECB to include the promotion of economic growth (Handelsblatt, July 15, 2004), to the aborted efforts by the Italian presidency of the IGC to introduce a simplified amendment procedure for a few core articles of the Statute, and to the way the enabling clause relating to Art. 10.2-ESCB was tabled at a very late moment of the 2000-IGC (see p. 465-7 in chapter 11.2.4)
[xxxiii] Winston Churchill, speech Zürich, Switzerland, 19 September 1946.

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