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

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4.1 Introduction
4.2 Genesis of selected articles (cluster I)

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

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

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

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

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

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

4.2 Genesis of Selected Articles (Cluster I)

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

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

This section also deals with the genesis of Article 4a of the EC Treaty:
“Article 4a-EC
A European System of Central banks (hereinafter referred to as “ESCB”) and a European Central Bank (hereinafter referred to as “ECB”) shall be established in accordance with the procedures laid down in this Treaty; they shall act within the limits of the powers conferred upon them by this Treaty and by the Statute of the ESCB and of the ECB (hereinafter referred to as “Statute of the ESCB”) annexed thereto.”

I. Introduction
I.1 General introduction
An important decision made by the Delors Committee was to propose to establish a System of central banks, and not a new Central Bank replacing and/or absorbing all existing central banks. Within this new System an entity would be created (the European Central Bank) to act as the central coordinating and decision-making point and with (at least the possibility of) operational tasks.[See section II infra.] Delors envisaged a System with a federal nature. Federal in the German sense of the word, with all elements of the System participating in the decision-making (the precise balance between the centre and the NCBs, for instance in terms of voting rights, being left open), though effective and decisive decision-making should be guaranteed. A federal nature for the System was a German demand. [See for instance the Memorandum of the German Minister of Finance Gerhard Stoltenberg (‘The further development of monetary cooperation in Europe’, dated March 15 1988), in which he reacts on earlier memoranda of Amato, Balladur and Genscher hinting at the possibility of Economic and Monetary Union. According to Stoltenberg “An Economic and Monetary Union also includes a European Central Bank, which in our opinion should meet in particular the following criteria: – It must be committed to the goal of price stability; – In fulfilling its task it must be independent of instructions from member governments or other Community bodies; – The decision-making process must strike the proper balance between central and federative elements.” Printed in German in HWWA 1993. Cf. also the internal position paper of the Bundesbank of April 1988, Sektion IIB.4: “Ohnehin ist vor dem Endstadium einer Einheitswährung nur ein föderatives Zentralbanksystem denkbar.” This text reappears in a paper submitted by Pöhl to the Delors Committee (‘The further development of the European Monetary System’ (September 1988)), printed in the appendix to the Delors Report.]

Germany itself had been an effectively governed, federal state since 1949. The UK, especially then prime minister Margaret Thatcher, resented federalism, which she equated with concentrating and handing over power to anonymous, not accountable bureaucrats. Here national traditions played a role:  government in the UK is relatively strongly centralized, whereas in Germany the Bundesrat (in which the Prime Ministers of the governments of the Laender play an important role) does exert political influence. [For a further discussion on the concept of federalism as applied to States and central banks, see Zilioli and Selmayer (1999b), pp.190-200.] 

We will come to the decision-making structure later (Article 8-ESCB and Article 106(3)-EC), but it is useful to refer to the diagram below which maps out the governing structure of the Eurosystem. The IGC decided that the central banks of EU Member States with a derogation (i.e. not fulfilling the conditions for the adoption of the single currency) [The UK and Denmark negotiated a special position, allowing them to hold a referendum on the question
whether or not to adopt the single currency – see Protocols nr 11 and 12 of the Treaty of Maastricht] would nonetheless be part of the ESCB, though – of course – they would not take part in the operations and the decision-making of the System (see Chapter IX of the ESCB Statute on the Transitional and other provisions for the ESCB, esp. Articles 43, 45 and 47). This explains why the Article 1- ESCB refers to the (i.e. all) EU central banks.
Many articles only apply to the ECB and the NCBs of the participating countries, which can only be seen by reading these article in conjunction with articles 43 and 47. This group has later been labelled by the term ‘Eurosystem’.

Diagram 1 [There is an important difference between this representation and that by Smits (1997), p. 145, and Zilioli (1999b), p.203. Both put the ECB in the top of the hierarchy, where our figure puts the Governing Council at the top.]
(‘Eurosystem policy making process’) (= Figure 8.1 of ‘The Economics of the Euro Area’, van Bergeijk (2000), next page; on January 1, 2001 Greece entered the euro area)

The diagram shows the ECB is not standing over and above the NCBs. It is the Governing Council (GovC) which decides on policy. The ECB, apart from being endowed with the competence to carry out operational central bank functions itself, [Actual participation of the ECB in the regular monetary policy operations would require a decision by the Governing Council, as at the moment these operations are carried out by the NCBs. See ‘The Single Monetary
Policy in Stage Three – General Documentation on ESCB monetary policy instruments and procedures’, ECB, September 1998, Chapter 1. See also Art. 12.1. third paragraph in cluster II.] is instrumental in seeing to it that the policy-decisions of the GovC are carried out. To this end the Executive Board may – and where necessary will – issue guidelines and instructions to the NCBs. The tasks and competences of the Executive Board (relative to those of the GovC) are dealt with under Article 12.1, first and second paragraph). The Executive Board also prepares the meetings of the GovC (Article 12.2-ESCB). The GovC has established a number of committees in which experts participate of both the ECB and the NCBs. The Statute does not refer to the role (or the existence) of such committees. The committees are established under the rules of procedure of the GovC (see Article 12.3). The committees do not prepare the meetings of the GovC, but do give input for their decisions and discussions – and in this sense add to the federal character of the System. Committee reports are presented to the GovC via the Executive Board, which may comment on it. More on the internal structure of the System can be found in Cluster II.

Initially when drafting the first versions of the ESCB Statute the Committee of Governors gave legal personality to the System as such. This was rejected – see section II.2 below – by their legal experts. Only the ECB and the NCBs were to have legal personality. Legal personality, either for the System or the ECB, is necessary for the System/ECB to be endowed with capital and to hold, buy and sell assets. Without legal personality the System/ECB could only act on behalf of the Community – the foreign reserve assets would have fallen under the control of the European Community and it would have weakened the role of the System/ECB in exchange rate matters.
A by-product of not giving legal personality to the system was that the governing bodies of the ESCB (composed of the ECB and NCBs together) had to be allocated to either the ECB or an NCB, because for legal reasons they could not be allocated to a body without legal personality.[This would have created the risk that the Governing Council and the Executive Board would have become Community institutions, like the Commission, which also does not have legal personality, but acts on behalf of the European Community. The European Community does have legal personality on the basis of Article 210-
EEC/EC: ‘The Community shall have legal personality.’]

This explains that Article 8-ESCB states: ‘The ESCB shall be governed by the decision-making bodies of the ECB.’ This is cause for a lot of confusion. From the above it should be clear that the Governing Council and the Executive Board are governing bodies for the System as a whole, with decision-making by the EB being limited to implementing (or making NCBs implement), and not deciding on, monetary policy (Article 12.1, second paragraph). In the same vein, it is not the System which becomes party to a contract, but the ECB on behalf of the System (see Article 39-ESCB and Article 13.2-ESCB). The financial provisions are also in line with this structure (Article 32 and 33). It is not the System which generates income, but the NCBs and the ECB. The seigniorage of the NCBs and the profits of the ECB are distributed over the NCBs. In case of losses by the ECB, the Governing Council can decide to offset these losses against the monetary income generated by the NCBs.

An alternative option, though only considered for a short time, [See section II.2 below and Art. 12.1, first and second paragraph, section II.2 in cluster III on the respective roles of the Board and the Governing Council.] was to limit the role of the central institution to being merely a management committee, while the System would represent a group of central banks. The balance sheet of the ‘System’ would consist of the aggregated balance sheets of the NCBs, while the highest executive body would consist of the governors and the management committee. The question would still have been: who owns the shares of the system? One obvious possibility would have been the Member States. Now it is the other way around: the NCBs own the shares of the ECB, which strengthens both the independence and the federal character of the system, because it strengthens the hand of the governors relative to the Board members.

I.2 Relevant features of the Federal Reserve System
In the US the situation is as follows. [Based upon: “Federal Reserve System: Purposes and Functions” (1994) and “The Federal Reserve Act & other
Statutory Provisions Affecting the Federal Reserve System (As Amended Through August 1988)”.] The Federal Reserve System (FRS) consists of the
twelve Federal Reserve Banks (district banks) and the Federal Reserve Board (Washington D.C.). Each district bank is a banking corporation operating under a charter issued by the U.S. Federal Government (Federal Reserve Act, Section 1.4). The stocks of these Federal Reserve Banks are owned by local banks. [The nation’s banks can be divided into three types according to which governmental body has chartered them and whether or not they are members of the FRS. Those chartered by the federal government (through the Office of the Comptroller of the Currency in the Department of the Treasury) are national banks; by law, they are members of the FRS, they are stockholder in the FRB of the district they are located in and they have a say in the appointment of part of the board of directors of the district bank. Banks chartered by the states are divided into those that are members of the FRS (state member banks) and those that are not (state nonmember banks). See also sections I.2 of Art. 16- and 28-ESCB.]

The Board of Governors is a separate legal entity; it is an independent agency within the government responsible to the U.S. Congress (Federal Reserve Act, Section 10.1, 10.3 and 10.4). The System as such does not have legal personality. In fact, the original Federal Reserve Act of 1913 did not use the phrase ‘Federal Reserve System’. This only appeared in 1935, when the composition of the Federal Reserve Board was changed and it was renamed into ‘Board of Governors of the Federal Reserve System’. [See Art. 12.1-ESCB, third paragraph, section I.2 and Appendix 1, for a further description of the evolution of
the Federal Reserve in its early years.] The Board of Governors is accountable to the Congress (Federal Reserve Act, Section 10.7). The status of the Board of Governors is different from a ministerial agency, such as a Treasury Department, which is part of the Executive Branch and ultimately under the authority of the President. Since the U.S. have distinctly separate Executive and Legislative Branches of the Federal Government, it is possible to have agencies within the Legislative Branch that are accountable to Congress. The Board of Governors is one such agency. (A similar constitutional structure does not exist in the European Union.)

A major question for the founders of the FRS had been the degree to which the U.S. central bank should be a public or a private institution. We quote former governor Meyer (2000) on this: ‘Bankers wanted a largely private central bank. Populists wanted a public institution. President Wilson and Congressman Glass steered a middle course. There would be a Federal Reserve Board which was completely public and Federal Reserve Banks that would have significant characteristics of private institutions.’

A major component of the FRS is the Federal Open Market Committee (FOMC), established in 1933. [See also section I under Article 12.1, third paragraph, which is dealt with under Cluster II.] The FOMC sets operational targets for the federal funds rate, that is the operational money market rate against which banks borrow reserves held by other banks at their local FRB. More specifically, the FOMC instructs the New York Fed to influence the conditions in the reserve markets through open market operations in such a way that these conditions are consistent with achieving the desired federal funds rate. The FOMC is composed of the seven members of the Board of Governors and five of the twelve Reserve Bank presidents. [Federal Reserve Act (FRA), Section 12A.] The president of the New York Fed is a permanent member; the other presidents serve one-year terms on a rotating basis. All the presidents though participate in FOMC discussions, contributing to the Committee’s assessment of the economy and of policy options, but only the five presidents with voting power can take decisions. [For more details, see section I of Article 10.2, second paragraph infra.]

Comparing the Fed and the ESCB
We note here that both in the US and the eurosystem all components of the central bank system including the central institution have legal personality – and not the system as such. A difference is that the Board of Governors, unlike the Executive Board of the ECB, is not empowered to perform operational tasks itself. US Congress aimed, inter alia, at reducing the dominance of New York City, and not at creating a new dominant financial centre. [See under Art. 12.1, third paragraph, section I.2 in Cluster II. At the same time one had to bring the banks in the System, as until then the banks had been used to manage their reserve positions without a central bank, with the Treasury exercising some benevolent, but ineffective influence through the (re)placement of its deposits. See A. Jerome Clifford (1965), ‘The Independence of the Federal Reserve System’, pp. 48-55 and 73-75. See also Article 16, section I.2 in cluster II for a description of the American banking system before 1913.] In Europe, it was not parliament drafting the draft Statutes, but the governors themselves. Their aim was not to break down the power of one particular financial centre, but to create a centre which would be impressive both vis-à-vis the political authorities and effective vis-à-vis the financial markets. Therefore, they gave the ECB a balance sheet and the possibility of operational powers. This last decision might have been facilitated by the fact that the decision on the location of the ECB was postponed. [In the Governors’ draft the seat was left open. In the version adopted by the IGC the decision was referred to the Heads of State, to be taken before the end of 1992 (Art. 37-ESCB). Under strong pressure from Germany the choice would fall on Frankfurt, even though this was already the seat of the German Bundesbank.] Though both the ESCB and the Fed have legal personality, the ESCB is more independent, because it is not an agency ‘within the government’. It is an institution sui generis with constitutional status. [This also effects its relation with parliament – see under Art. 10.4-ESCB and Art. 109b-EC.]

II.1 History: Delors Report
The Delors Report notes that ‘a single monetary policy is an inescapable consequence of monetary union.’ The responsibility for the single monetary policy would ‘have to be vested in a new institution.’ [Delors Report, par. 24.]
This new institution should be ‘placed in the constellation of Community institutions (European Parliament, European Council, Council of Ministers, Commission and Court of Justice).’ [Delors Report, par. 31. The inclusion of the European Council (which brings together the Heads of State or Government and the President of the Commission) in the list of Community institutions surprises, because the European Council is not one of the Community institutions or organs. It is not part of the Community decision-making structure. Its role would be defined formally by Article D of the Treaty of Maastricht: ‘The European Council shall provide the Union with the necessary impetus for the development and shall define the general political guidelines thereof.’ The Heads of State or Government can take decisions in two forms: as the Council (of Ministers) in the composition of the Heads of State or Government or when a decision is called for ‘by common accord of the governments of the Member States at the level of Heads of State or Government.’]

The Delors Report chose for a federal form: ‘Considering the political structure of the Community and the advantages of making existing central banks part of a new system, the domestic and international monetary policy-making of the Community should be organized in a federal form, in what might be called a European System of Central Banks (ESCB). This new System would have to be given full status of an autonomous Community institution. It would operate in accordance with the provisions of the Treaty, and could consist of a central institution (with its own balance sheet – emphasis by the author) and the national central banks. At the final stage the ESCB – acting through its Council – would be responsible for formulating and implementing monetary policy as well as managing the Community’s exchange rate policy vis-à-vis third currencies. The national central banks would be entrusted with the implementation of policies in conformity with guidelines established by the Council of the ESCB and in accordance with instructions from the central institution.’ [Delors Report, par. 32. The Delors Report did not give a name to the central institution.]

The Delors Committee put emphasis on the creation of a System, of which both the new central institution and the existing NCBs would be parts. It is also useful to quote the section of the Delors Report on the structure of the ESCB:
‘Structure and organization [of the ESCB]
– A federative structure, since this would correspond best to the political diversity of the Community;
– establishment of an ESCB Council (composed of the Governors of the central banks and the members of the Board, the latter to be appointed by the European Council), which would be responsible for the formulation of and decisions on the thrust of monetary policy; modalities of voting procedures would have to be provided for in the Treaty;
– establishment of a Board (with supporting staff), which would monitor monetary developments and oversee the implementation of the common monetary policy;
– national central banks, which would execute operations in accordance with the decisions taken by the ESCB Council. [Delors report, ibidem. For more information on the discussions on the division of labor between the NCBs and the centre see Article 12.1, third paragraph.]
– Delors Report, par. 32

The Delors Committee also clearly envisaged that establishing EMU would require an amendment of the Treaty of Rome establishing the European Economic Communities (Delors Report, par. 18 and 54). This followed from the fact that the EEC did not have competences in monetary affairs. Therefore, a European central bank could not be established by means of normal Community legislation. Any such decision would require a Treaty change. This was also safeguarded by the wording of Art. 102a-EEC, inserted in the EEC Treaty in 1985. This wording had been chosen so as to block an effort by Delors to create a potential monetary competence for the EEC. [In 1985 Delors had tried to use the Single European Act to insert a monetary capacity in the Treaty of Rome as a first step towards establishing EMU. Kohl brokered a compromise between on the one hand Delors and Mitterrand and on the other hand Bundesbankpresident Pöhl, Bundesfinanzminster Stoltenberg and Thatcher, who had resisted Delors’ proposal. Kohl pressed successfully for a Treaty provision (Article 102a-EEC) on ‘monetary capacity’ which stopped short of providing the EEC with formal competence in monetary affairs and which gave no new role to the EC Commission in this respect. He had asked Tietmeyer, then under-Secretary of the German Ministry of Finance, to draft a text acceptable to all parties. The new article (Article 102a) contained a phrase stating that, in furthering co-operation in economic and monetary policy, Member States ‘shall respect existing powers in this field.’ This phrase was seen as safeguarding the Bundesbank’s independence. (Dyson/Featherstone (1999), p. 319.) The last paragraph of Article 102a is important in its own respect. It read:  ‘Insofar as further development in the field of economic and monetary policy necessitates institutional changes, the provisions of Article 236 shall apply. The Monetary Committee and the Committee of Governors of the Central Banks shall also be consulted regarding institutional changes in the monetary area.’ (Article 236-EECs determines that a Treaty change has to be prepared by an Intergovernmental Conference and has to be ratified by the Member States according to their national ratification procedures.) This formulation ruled out that in these fields new institutions could be created by the Council of Ministers using Article 235-EEC, as Delors had proposed in his earlier draft of Article 102a. (Szász (1999), p. 94.) Article 235 allowed ministers to take – by unanimity – all these measures not provided for by the Treaty, but deemed necessary for the realization of the internal market. This article had been used to establish the European Monetary Co-operation Fund, which according to the recitals of the Regulation establishing the EMCF was ‘to be integrated at a later stage into a Community organization of central banks’ – see recital of Council Regulation (EEC) No 907/73 of 3 April 1973. The EMCF played a role in facilitating the smooth operation of the exchange rate arrangements in the Community (the Snake). This procedure was clearly seen as a dangerous precedent by the central bank governors.]

The Delors Report envisaged that the ESCB would be established in stage two of EMU. It would absorp the EMCF and the Committee of EEC Central Bank Governors. However, the Committee of Governors would not be able to come to a unanimous view on the question as to when to establish the ESCB. [The background of this was that the German and Dutch NCBs feared monetary integration would risk never reaching stage three, in which case an ESCB already established in stage two with for instance operational tasks in the field of foreign exchange management could undermine the independent position of the Bundesbank. And, would an ESCB-in-stage-two already be as independent as in stage three? Moreover, the Dutch and German NCBs feared that some countries might even actively wish to stay in stage two, once an ESCB-in-waiting owning foreign exchange reserves was established. See also section II.1 of Art. 12.1, third paragraph, in cluster II.] In the end the IGC was to decide that the ESCB be established just before the start at the third stage to allow it to prepare the regulatory, organizational and logistical framework necessary for the ESCB to perform its tasks in the third stage (Article 4.2 of the Statute of the EMI).

II.2 History: Committee of Governors
The Committee of Governors took – as had been proposed by the Delors Committee – the federal structure of the new system as their starting point. The discussion in the Committee of Governors (and the committee of their Alternates) centered on a few (related) issues: the name of the system (should it be European Central Bank System or European System of Central Banks – the first name putting more emphasis on it being one unity); the status of the
System within the Community framework (should it be added to the list of existing Community institutions or should it be listed separately); the position of the ECB within the ESCB (should it be prominent or dominant?). These questions had not been listed in advance, they came to the fore during the discussion on the draft texts, which were continuously being revised on the basis of the discussions.

In the very first draft of the ESCB Statute (dated 11 June 1990) [For a description of the main players and committees, see the Introductory Chapter.] two alternatives were mentioned for the name of the System: European System of Central Banks and European Central Bank System, as used in the German translation of the Delors Report (Europäisches Zentralbanksystem). Some Alternates supported this last name because it reflected more adequately the unity of purpose and action which is required for an indivisible monetary policy in the Union. [Taken from draft versions dated 22 June and 3 July 1990] The name of the central institution was also discussed. The first draft had used two alternative formulations: “a central monetary institution/ [European Central Bank]”. The term “central monetary institution” was criticized by some, because it suggested the new centre, and not the system as such, would decide monetary policy. The term “European Central Bank” was criticized by others, because it seemed to imply that the central body would carry out a substantial share of the financial operations of the system. In their view a name reflecting a lower profile (Authority, Board, Council, Agency) should be
adopted to reflect a more decentralized pattern of operations, in line with the principle of subsidiarity. [Ibidem]

We quote the draft for Article 1 as it looked at the end of June 1990:
“Article 1 – The [ESCB][ECBS]
A [European System of Central Banks] [European Central Bank System], consisting of a central monetary institution [European Central Bank] and the national central banks [whose currencies participate in the monetary union], is hereby established.
The ESCB shall be governed by the provisions of the Economic and Monetary Union Treaty and by these Statutes.”
– draft 22 June 1990

As of July the central banks’ legal experts had started to delve into the questions of legal personality. The experts discussed questions such as: does the inclusion of the NCBs into the System (“the NCBs are an integral part of the System”) [Sentence prepared by the Secretariat of the Committee of Governors following their discussion on 10 July, during which it was stressed that the centre should not have ‘large number of operational and supporting staff’, while it should be made clear the ‘NCBs [would be] acting as an operational arm of the Council [of the ECB].’ The sentence would become part of Art. 14.3-ESCB.] imply (only) a limitation of the use of their own legal personality, or the acquisition of a dual personality (one founded on national law, the other on the European law), or the transfer of their legal personality to the System (or the central institution within it)? Does the System as a whole need legal personality?

This is specific legal ground. However, the following considerations can be understood easily: [Taken from (1) a note called List of questions (and preliminary answers), dated 2nd August 1990 and prepared by the Legal Department of the National Bank of Belgium as background for a meeting of the legal experts, (2) the report of that meeting, and (3) the chairman’s (Gunter Baer) summary of that meeting.]

1) Legal personality is a basic requirement in order to assume ordinary functions of central banks (to acquire assets and liabilities).
2) If legal personality were attributed only to the System, the national central banks would have to be subsumed by the System. This was not in line with the current thinking of the governors. [Apart from this, subsuming NCBs in the System would have been politically undesirable, if not unacceptable:
Germany would not have giving up the Bundesbank.] It would also have been impractical, because most NCBs als perform non-System tasks (e.g. supervision of banks, printing banknotes), and efficiency would have been affected negatively (e.g. in the field of collecting statistics and overseeing national payment systems, both of which have national and ESCB-related elements).
3) If both the System and the NCBs had their own legal personality, but not the central institution, it would still not be possible to shift operations to the central institution. In the eyes of the experts the draft statute implied that the central institution should at least be able to perform directly the principal activities of a central bank. [One could dispute this. At that moment the draft statute still left open the possibility that the central institution would be merely a management committee.]
4) It follows that the experts recommended that the central institution should have legal personality. It was considered an advantage that this solution left open the future distribution of power and operations between the central institution and the national central banks.

The experts discussed in more detail the issue whether the System should be added to the list of Community institutions in Article 4, or be treated differently, like the European Investment Bank and the Court of Auditors. The legal experts basically listed four arguments in favour of not adding the System to the list of Community institutions:
– unlike the listed Community institutions the ECB is a functionally limited body; [According to the legal experts, the four institutions mentioned in Article 4 (European Parliament, Council of Ministers, Commission and Court of Justice) could be regarded as “Constitutional organs”, “Verfassungsorgane”, of the Community. The ECB and the EIB (European Investment Bank) were seen a functionally limited bodies.]
– listing the ESCB as a Community institution could lead to complications as some Treaty provisions generally applicable to Community institutions should not apply to the ESCB (e.g. budget approval); [Many provisions in the EC-Treaty mention the institutions (e.g. financial provisions, provisions on
professional secrecy, languages). The legal experts observed that in some cases the references to institutions clearly concerned only the four main organs, while other provisions are applicable to every Community organ.] 
– classifying the System as a separate institution would not imply the System would fall outside the Community legal framework; [In the words of the legal experts, classifying a body not as an Community institution does not mean such a body is exempt from the application of general rules of Community law (under the case law of the Court of Justice some general provisions of Community law have been applied to autonomous organs like the EIB and the
Centre for Vocational Training. Cf. a ruling of the Court of Justice on the EIB: the high degree of operational and institutional autonomy of the EIB ‘does not mean the EIB is totally separated from the Communities and exempt from every rule of Community law.’ (Sentence take from a ruling by the Court of Justice on the legal status of the EIB. See R. Smits (1997), page 93.)]
– in order to avoid uncertainty arising from the possible implicit application to the System of general provisions relating to Community institutions, the System should not be classified in Article 4.1 (but be mentioned in a new paragraph 2 of Article 4) [This became Article 4a-EC Treaty.] and the draft Statute should include specific provisions on each topic for which they were needed, relating, for example, to staff, budgetary issues, auditing, secrecy and judicial control.

The governors agreed with the proposal that the central institution and the NCBs should have legal personality, after the chairman of the Alternates (Rey) had explained that such a solution would be compatible with the assumption that the System should operate through both the central institution and the NCBs. [Governors’ meeting of 11 September 1990. The legal personality and capacity of the ECB would come to be mentioned in a new article (Art. 9). The statute did not need to extend legal personality to the NCBs, which already existed as legal personalities. Article 9-draft Statute is quoted at the end of this section.] The governors also went along with the suggestion that the System should be inserted in a new par. 2 of Article 4 of the EEC Treaty.

The legal experts gave special attention to the question of whether the decision-making bodies (the Council and the Executive Board) should be attached to the System or the ECB. They favoured placing them inside the ECB. It was considered legally unclear to attach them to a body without legal personality, which would have created a serious risk that in the process of negotiations in the IGC the decision-making bodies would be regarded as “Community
bodies”. [Or as “authorities of the Community” (similar to the existing Community institutions) which itself is an institutional legal person. ‘Thus, in a law case coming out of a decision taken by the Council [of the ESCB] and/or the Executive Board, they may be involved as “representatives” of the Community, just as the Commission and the Council of the Community may be sued if EC decisions are challenged.’ Taken from the Report of Legal Experts, dated 8th October 1990.] Such might have had two consequences: the ECB Council might have become a Community institution, which – in turn – could be seen as a justification for including (only) non-central bank members in the Council of the ECB. [Therefore, (then) Article 7 (‘The decision-making bodies of the ESCB shall be the Council of Governors and the Executive Board’) was changed into Article 8 (‘General principles’): ‘The System shall be governed by the decision-making bodies of the ECB.’ (Draft version of 5 October 1990.) Article 8 underlines that the authority of the Council and the Executive Board, which are the decision-making bodies of the ECB, extends to the whole System. (Commentary with draft ESCB Statute of 27 November 1990.)]

The decision to give legal personality to the new institution and the NCBs, and not to the System, had implications for the draft Statute. This was explained in a letter by the chairman of the legal experts to the Alternates Committee [Letter dated 8 October 1990]: “[T]he use of the term System must be restricted to those passages of the Statute where it describes (like “a label”) the co-existence of the ECB and the NCBs, which are governed by common rules and which jointly pursue the objectives of the System and the tasks entrusted to it. [Therefore, the objective and tasks are attributed to the System (ESCB)] [See also Article 14.4.] However, whenever reference is made to decisions, advisory functions and operations, these must be clearly attributed to the
ECB (or the Council and the Executive Board) and the NCBs.” [The System, not being a legal person, could not perform tasks nor conduct operations. Therefore, a number of articles were revised. For instance Article 3 (“The basic tasks of the System shall be”) was changed into “The basic tasks carried out through the System shall be”. Article 4 (“The System shall be consulted regarding any draft Community legislation (in its field)”) was changed into “The ECB shall be consulted …”. Here the ECB would act as the System’s central institution (in which the NCBs are represented through their governors). In other articles the term “the System” was replaced by a reference to both the ECB and the NCBs. For instance, Article 8 (later Article 7) stated that “neither the System, nor any member of its decision-making bodies may seek or receive any instruction etc”. This was to be changed into “neither the ECB nor a national central bank nor any member of their decision-making bodies etc”. Another example is Article 17 (later Article 18), according to which “the System shall be entitled (to operate in the financial markets by buying and selling etc.)”. This was to be replaced by “… the ECB and the NCBs may etc.” All changes were first introduced in the version of October 8. For the same reason Article 15 (later Article 16) which read “The Council shall have the exclusive right to authorize the issue of notes within the Community which shall be the only legal tender” was changed into “The Council shall have the exclusive right to authorize the issue of notes within the Community. The notes issued by the ECB and the national central banks shall be the only legal tender for any amount.” This change was introduced in the draft of October 25th.]

These changes did not affect Article 1. Tietmeyer considered that the amendments proposed by the Legal Experts (changing System into ECB and/or NCBs in many places) altered the balance of the text arrived at by the Governors in earlier discussions and were to the detriment of the System.
While recognising the legal arguments for locating the Council inside the ECB (legal simplicity and clarity of responsibility in case of litigation), Tietmeyer noted that the Legal Experts had nevertheless concluded that it was feasible to position the Council outside and above the ECB and the NCBs. He felt that this latter approach had some important presentational advantages. In any event, he felt that the powers to make decisions and issue instructions for the System as a whole should be vested explicitly in the Council, rather than in an organ of the ECB. [At the same time – but not inconsistent with the foregoing – Pöhl and Tietmeyer favored a clear position of the Executive Board vis-à-vis the Council to avoid the situation they knew from home, where in the Zentralbankrat it was sometimes difficult to adopt certain decisions due to the presence of the presidents of the Landeszentralbanken who also had a majority in the Zentralbankrat. See discussion on Article 12, first and second paragraph (responsibilities of the decision-making bodies), especially the comments made in the draft versions of October 19 and 25, 1990.] The suggestions of the legal experts were nonetheless taken aboard. In retrospect this has been a very important decision for the ECB, as it enormously increased the standing of the ECB within the system. [Remark made by one of the drafters of the texts, who later worked at the ECB. The issue of centralization or decentralization of operational tasks will be dealt with in Cluster II under Art. 12.1, third paragraph.]

Article 1-ESCB of the final version of the draft Statute would read:
Article 1 – The System
Pursuant to Article …. of the EEC Treaty, a system, consisting of a central institution to be known as “The European Central Bank” (hereinafter “the ECB”) and of the participating national central banks of the Member States of the Community (hereinafter “national central banks”), is hereby established and shall be known as the “European System of Central Banks” (hereinafter the “System”).
– draft 27 November 1990

Below we quote part of the Commentary on Article 1 accompanying the draft Statute, which refers to the status of the ESCB within the Community framework: [Until mid-October the draft had contained internal working comments per article, mostly pointing out unresolved issues. However, later drafts would contain for each article a specific explanatory Commentary, which Commentary would be sent to the IGC together with a more general Introductory Report.]

The accompanying Commentary with Article 1 read:
“Article 1 – The System
Neither the System nor the ECB are to be classified as a Community institution under Article 4, paragraph 1 of the EEC Treaty. Instead, it is suggested to refer to the establishment of the System in a new paragraph of this Article. In order to avoid any legal uncertainty arising from the possible application to the System of general provisions relating to Community institutions, Chapter VII includes the necessary provisions governing the general
aspects of the System [aspects governing staff, budgetary issues, auditing, judicial control, professional secrecy, non-contractual liability, signatories, seat, priviliges and immunities].
[… ].”
– Commentary 27 November 1990

For completeness’ sake, we also cite Article 9.1 to 9.3 on the legal personality, capacity and immunity of the ECB:
“Article 9 – The European Central Bank
9.1 The ECB is hereby established 45 and shall have legal personality.
9.2 In each of the Member States the ECB shall enjoy the most extensive legal capacity accorded to legal persons under their laws; it may, in particular, acquire or dispose of movable and immovable property and may be a party to legal proceedings.
9.3 The property of the ECB shall be exempt from all forms of requisition or expropriation. [….]”
9.4 …..
– draft 27 November 1990

As it was still foreseen that the ESCB could be established before it was even clear which countries would qualify for stage three of EMU, the governors had accepted that the central banks of the Member States not yet qualifying could still be participating in the ESCB, be it that the chapter on Transitional Provisions (which still had to be written) would indicate their rights and obligations. However, views were split on how to deal with central banks of Member States not willing to join EMU (read: the UK). This issue had to be resolved by the IGC.

II.3 History: IGC
The IGC would discuss the monetary side of EMU along two venues: first, along the monetary articles to be included in the Treaty (based on the draft Treaty proposals by the Commission, France and Germany and the text proposals made during the IGC by other delegations); second, through a number of separate sessions of the IGC deputies on the draft Statute prepared by the Governors. [The IGC would leave the Statute relatively untouched. At two occasions the Committee of Governors would react to changes resulting from IGC: it would react to the Luxembourg’s non-paper of 6 June 1990 (letter to the IGC dated 5 September 1991, CONF-UEM 1617/91) and to the Dutch presidency’s consolidated draft Treaty text of 28 October (letter to the IGC dated 13 November 1991, UEM/101/91).]
The IGC would not challenge the federal structure, as proposed by the Committee of Governors (and already by the Delors Committee), neither would the IGC challenge the view that the ESCB should be mentioned in a new paragraph of Article 4, making it distinct from the existing Community institutions. The IGC would contribute to Article 1 by finding a solution for the definition of ‘participating’ central banks. [Solution based on a Dutch presidency’s proposal to create (1) in stage two a new institution not being the ECB (but the European Monetary Institute, in which every central bank would participate) and (2) a third decision-making body of the ESCB, with only advisory functions.]

Below we will follow the draft texts discussed during the Luxembourg presidency relating to Art. 1-ESCB and Art. 4-EC. As a starting point we look at the draft Treaty texts proposed by the Commission, France and Germany. The proposals from the UK and Spain hardly played a role in the negotiations, because their proposals basically aimed at stage two of EMU, during which the ‘hard ecu’ should increasingly substitute for the national currencies. This road had been rejected by the Delors Committee and the governors.
The Commission’s draft treaty [Draft Treaty amending the Treaty establishing the European Economic Community with a view to achieving
Economic and Monetary Union, 10 December 1990.] adopted the position of the Governors not to mention the ESCB in Article 4.1-EC (containing the Community institutions), but indeed in a new paragraph 4.2:
4.2-EC Monetary policy shall be defined and pursued by a European System of Central Banks (herinafter referred to as “Eurofed”) acting within the limits of the powers conferred upon it by this Treaty and the Statute annexed hereto.
– Commission’s draft December 1990

Article 106 of the Commission’s draft provided that “Eurofed shall be made up of the European Central Bank and the central banks of the Member States.” [While the draft ESCB Statute had spoken of the ‘participating’ central banks (at the insistence of the UK), the Commission draft used the term ‘central banks’. According to Article 109D(1) of the Commission’s draft the Eurofed would be established at the start of stage two. This explains why the Commission wanted all central banks to participate in the Eurofed.] [The Commission had chosen to fit the articles on EMU in the existing chapter on economic policy, replacing Articles 102-109. This explains why the articles in the Commission’s draft ran from 102 to 109H.] The European Central Bank should have legal personality. In describing the objectives and tasks of the Eurofed the Commission stayed close to the draft Statute of the Governors, though there were also important differences. [Some differences were: a different name; a more political procedure for appointing the ECB Board members; exchange rate policy is determined by Ecofin; ownership of foreign reserve assets is transferred to the Community (and not to the ESCB); no role in the area of supervision.] The Commission accepted the idea that the Statute should get the status of a Protocol annexed to the Treaty and the idea that the ESCB should not get the status of a Community institution. The French draft [Projet de Traité sur l’Union Economique et Monétaire, 25 janvier 1991. Printed in HWWA (1993).] paid a lot of attention to the institutional provisions and to stage two of EMU. The articles on monetary policy were clearly based on the draft Statute of the Governors, with a number of important exceptions. [The ESCB was made independent of political instructions in the exercise of its functions, though at the same time the French draft stated that ‘le Conseil Européen définit, sur rapport du Conseil [des Ministres], de la
Commission et du S.E.B.C., les grandes orientations de l’Union Economique et Monétaire.’ (During a meeting of the deputies IGC in February 1991 the French personal representative (Trichet, then from the Trésor) defended this by saying the ECB would not be under instruction of the European Council, these ‘orientations’ merely constituted guidelines, like the ECB would be allowed to express its opinions on wage policy.) Furthermore, the French draft limited the role of the ESCB in matters relating to exchange rate policy to executing the orientations set by the Council of Ministers. And the capital of the ECB was to be held by the Member States. This last proposal was to come back in November 1991 (suggestion by the French Minister Bérégovoy, but again rejected). See discussion on Article 28-ESCB.] The German draft [Composite proposal; UEM/2991 and CONF-UEM 1612/91, dated February 26 1991. Printed in HWWA (1993)] placed the ESCB in a new Article 4a (“An independent European System of Central Banks (ESCB) is hereby set up which, as provided in this Treaty and the Statute annexed thereto shall conduct the Community’s currency and monetary policy with the overriding objective of maintaining price stability.”) The ECB would have legal personality. The German draft was quite elaborate on Economic Union, but as short as possible on Monetary Union. The German authorities wanted to duplicate the Statute as little as possible in the Treaty, thus giving added status to the Statute as such. Both the French and the German draft proposed that the ESCB should consist of an ECB and the NCBs of the Member States and that the ECB should have legal personality.

In the first half of 1991 the Luxembourg presidency would regularly issue so-called non-papers which aimed ‘to reflect the prevailing drift rather than the positions of each Member State taken in the IGC meetings’ In a first non-paper covering articles 2 to 6 of the EEC Treaty 55 Article 4A read:
Article 4a
A European System of Central Banks (ESCB) is hereby set up; it shall act within the limits and powers conferred upon it by this Treaty and the Statutes annexed thereto.
– non-paper, 29 June 1991

Article 4A would remain unchanged throughout the Luxembourg presidency, apart from changing ‘hereby’ into ‘according to the procedures laid down in the Treaty’. Article 1 of the draft ESCB Statute was brought in line with Article 4A, the main difference with the version of the Governors being the deletion of the word ‘participating’. [The issue was complicated because according to some the ECB should be established quite early in Stage Two, at which time it would not yet be clear which Member States would participate in Stage Three from the beginning.] The deletion of the word ‘participating’ left open the precise modalities of the participation of the central banks of the countries which would not join Monetary Union from the start. Possible solutions which came to mind in these days were: central banks of countries not joining would not have the right to vote in the ECB Council, they would not be allowed to subscribe to the ECB’s capital. [Taken from an internal note of the Dutch central bank of June 20 1991]
In the final Non-Paper of the Luxembourg presidency, before handing the presidency over to the Dutch, Article 1 read as follows:
Article 1 – The System
The “European System of Central Banks” (hereinafter the “System”), set up pursuant to Article 4A of the Treaty, consists of a central institution to be known as the “European Central Bank” (hereinafter “the ECB”) and of the central banks of the Member States of the Community (hereinafter “national central banks”).
– non-paper, 6 June 1991

According to some legal experts Article 4A should also have mentioned the establishment of the ECB (or at least mention that the ESCB consists of the ECB and the NCBs) to bring it on equal footing with the European Investment Bank which is explicitly named in Article 4B (“A European Investment Bank is hereby established etcetera”). During the Dutch presidency the ECB would indeed be added to Article 4A.

The first draft of the Dutch presidency containing Article 4A and the ESCB Statute was presented on 28 October 1991. [UEM/82/91, annexed to UEM/90/91. The first months of the presidency the discussion in the IGC had focused on finding political solutions for the most pressing issues, like the transition to stage three, the transition to and the content of stage two, external monetary policy in stage three and economic policy in stage three. See
UEM/49/91, report on the working procedure under the Dutch presidency.] The words ‘participating’ had not reappeared, the reason being that consensus had emerged to establish a third decision-making body for the ESCB, the General Council (at that time called the Chamber of Governors) – see the Dutch draft of Chapter IX of the ESCB Statute, UEM/82/91. [To be exact, the General Council is the third decision-making body of the ECB, because it was considered desirable to allocate the decision-making bodies to an institution with legal personality.] The General Council would consist of all central banker governors, also those of the derogation countries. This new body would not be a decision-making body, but merely contribute to the collection of statistical information and to the advisory function of the ECB.
Nonetheless, the construction allowed all central banks to say they were part of the European System of Central Banks. But the derogation central banks would of course not sit in the Governing Council of the ECB. At the very last moment (i.e. during Maastricht) the UK would create a special position for itself, by producing a protocol which gave it the right not to participate, even if it were to qualify. This protocol gave the UK the same rights as the
derogation countries. [Protocol nr 11 attached to the Treaty of Maastricht.]
During November 1991 it was decided that Article 4A and therefore also Article 1-ESCB should mention the establishment of the ESCB and of the ECB. Article 1-ESCB was split in two parts: a first section referring to the establishment of the ESCB and the ECB (and the limits on their powers) and a second one referring to the composition of the ESCB (ECB + NCBs) [See UEM/112/91 of November 22, 1991]. During the nettoyage juridique some further slight editing of Article 1.1 took place, [“(in the Statute called “ESCB”)” was replaced by “(ESCB)”; “perform their functions” was replaced by “perform their tasks”.] after which the final form cited at the start of section I above, was reached. [The sentence referring to Luxembourg in Art. 1.2 had been added to make clear that Luxembourg would participate in the ESCB, even though its monetary institution was not called a national central bank. Luxembourg had long been in a monetary association with its big neighbour Belgium (with for instance the Belgian franc being legal tender in Luxembourg too) – with the Belgium central bank performing the basic monetary central bank functions for both countries.]

Article 2: [Preferably, Article 7 should be read first, as Article 1 and 7 cover an important part of the historic and institutional background of the process leading to the ESCB statute.] 

Article 2-ESCB: Objectives
“In accordance with Article 105(1) of this Treaty, the primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, it shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2 of this Treaty. The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 3a of this Treaty.”
(to be read in conjunction with: Article 2-EC (Community principles), Article 3a-EC (Community activities); Article 7-ESCB (independence); Article 12.1-ESCB, first and second paragraph (division of labour between ECB Governing Council and Executive Board); Article 34-ESCB (legal acts))

Nota bene: This section also deals with the genesis of Article 105(1) of the EC Treaty.
Article 105(1) reads exactly the same as Article 2-ESCB except for a few changes reflecting the fact that the articles of the Statute refer to the corresponding article in the Treaty (the Treaty article does not refer to the corresponding article in the Statute):
“Article 105-EC
1. The primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2. The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 3a.”

I. Introduction
I.1 Price stability
I.2 Independence and a narrow mandate
I.3 Secondary objective
I.4 Market conformity
I.5 Relevant features of the Federal Reserve System

I.1 Price stability
The ESCB is entrusted with one overriding objective: to maintain price stability in the euro area.[Price stability is not only the objective of the single monetary policy, but also of the Community’s exchange rate policy. See Article 3a(2)-EC which describes the activities of the Member States and the Community: “Concurrently with the foregoing, and as provided in this Treaty and in accordance with the timetable and the procedures set out therein, these activities shall include the irrevocable fixing of exchange rates leading to the introduction of a single currency, the ecu, and the definition and conduct of a single monetary policy and exchange-rate policy the primary objective of both of which shall be to maintain price stability [emphasis by the author] and, without prejudice to this objective, to support the general economic policies in the Community, in accordance with the principle of an open market economy with free competition.”]
This was, together with the independence of the new ESCB, a precondition of the German authorities (government and central bank) for even considering to give up their own national currency. Price stability together with Erhard’s Soziale Marktwirtschaft (social market economy) had formed the foundation for the economic success of post-war Germany.
For Erhard the social market economy was always and foremost a market economic system. The dynamics of the market were for Erhard the source of affluence. Erhard “believed that monetary stability deserved to be counted among the ‘basic human rights’. The free play of market forces requires, above all else, stable money. Monetary stability is also of great importance for social peace. For monetary instability always acts to the disadvantage of the
weaker members of a society.” [See Tietmeyer (1999), p. 9. See ibidem pp. 5-13 for an exposé of Erhard’s concept of the Social Market Economy.] [Indeed, price stability was considered important, because it contributes to the social fabric. It does not only have economic, but also social benefits, for instance because inflation hits persons with fixed savings, like parents who save to pay for the university study of a child, or who saved for a fixed pension. Phrased in terms more familiar to economists: inflation leads to wealth redistribution with negative effects for the less sophisticated (usually poorer) economic agents. This last observation is supported by recent research, see W. Easterly and S. Fischer (2001).]
Because of its long record of low inflation the German currency had become the strongest of the European currencies. Only some of the smaller currencies managed to maintain their parity with the Dmark, other currencies had to devalue frequently. Devaluations were usually felt as an embarrassment by the government of the devaluing country.

Part of the orthodoxy in mainstream economic thinking in the late eighties and early nineties was that price stability creates the best climate for durable economic growth. This was a reaction to the dismal experiences of stagflation in the seventies, which could not be solely attributed to the adverse impact of the first oil shock of 1973, but also to accommodating policies, especially in the monetary field. In other words, belief in a downward-sloping Phillips curve waned, implying no durable trade-off between inflation and unemployment.
Monetary policy may at best only temporarily increase output, but at the cost of a sustained higher rate of price increases.[See Houben (2000), p. 38.] Part of the orthodoxy was also that price stability was best achieved by an independent central bank. An independent bank, that is a central bank not susceptible to political pressure, solves the time-inconsistency problem in monetary policy, assuming the central banker is more ‘conservative’ than the government and assuming an independent central banker is less inclined to please the electorate with short-term monetary relaxation. This problem arises from the policy-makers’ natural bias to stimulate output above the natural level and to finance government deficits as cheeply as possible, resulting in an inflationary bias. In other words, the problem arises when the authorities cannot credibly commit to price stability. This will lead not only to a once-off higher inflation, but permanent higher inflation and increased risk premia in real long-term interest rates. In these circumstances appointing a central banker who puts more weight on price stability than on output or employment stabilization improves the outcome also for the government relative to government setting policy itself. [This problem was first defined and treated in these terms by Rogoff (1985), who put the problem in terms of a ‘conservative’ versus a less conservative central banker. See also previous chapter, under the heading Independence.] Increasing the independence of a central bank will make that central bank’s commitment to price stability more credible. It will also reduce election-induced uncertainties. However, the independence comes at a cost of less flexibility for the government, which leads some authors to suggest the option for the government to overrule the central bank in ‘extreme circumstances’. (However, this belies both the independence – and therefore the credibility factor – of the central bank, thus not solving the time inconsistency problem, and the fact that in ‘extreme circumstances’ central bankers are flexible themselves. See for instance McCallum (1995) versus Lohmann (1992).)

An exact definition of price stability was not discussed at the time of Maastricht. The issue of defining price stability was just never raised. [Neither was it raised in the context of the definition of the so-called convergence criteria, which Member States had to conform to before being allowed to adopt the euro, because the price convergence criterium was defined in relative terms (inflation should not ‘exceed by more than 1-1.5 percentage points that of, at most, the three best performing Member States’ – see Protocol nr 6 (on the Convergence Criteria) attached to the Treaty of Maastricht).] This might surprise now, but it should be understood against the following background. First, ‘maintaining price stability’ was already more specific than the mandate of many central banks, including that of the Bundesbank.
Most mandates spoke of ‘maintaining the value of the currency’ or similar variants.[See table 2.1 in section II.1 below] Many central bank statutes had been written in a period in which the value of money was not a policy target, either because according to economic theory prices were assumed rigid, or because of the pre-war world of the gold standard, in which price level changes (vis-à-vis other countries) were supposed to be mean-reverting through the contractory or expansionary effects of gold exports or imports which financed current account imbalances resulting from diverging price levels. Second, the so-called strategy of direct inflation targeting (a strategy with an explicit target for the inflation rate – usually a range) was not yet practiced, at least not in Europe. The first country to experiment with direct inflation targeting was New Zealand as of 1989, followed by Canada in 1991 and in 1992 by the UK. [See Houben (2000), pp. 104-105 and 244-246.] The Treaty left the issue of defining price stability – or in a broader sense detailing the monetary strategy – to the ESCB.
In 1998 the Eurosystem would define price stability as follows (text taken from ECB Press release entitled “A stability-oriented monetary policy strategy for the ESCB”, 13 October 1998: “(…) the Governing Council of the ECB has adopted the following definition: ‘Price stability shall be defined as a year-on-year increase in the Harmonized Index of Consumer Prices (HICP) for the euro area of below 2%’. Price stability is to be maintained over the medium term. (…) 
(…) the statement that ‘price stability is to be maintained over the medium term’ reflects the need for monetary policy to have a forward-looking, medium-term orientation. It also acknowledges the existence of short-term volatility in prices which cannot be controlled by monetary policy.”

Such a definition should not be equated with direct inflation targeting. As is explained by Issing c.s (2001, p.65) the monetary policy strategy is the way in which a central bank plans to achieve its mandatory objective. The ECB argued that the public announcement of a quantitative definition for the price stability objective would represent an important form of commitment. The announcement can be seen as an integral part of its strategy, which is
furthermore based on a reference value for money growth and a broad based assessment of indicators of prospective price pressures. In other words, the ECB’s strategy emphasizes a prominent role for money, but at the same time allows for the input of many other nominal and real variables which influence future price developments.
Within this zone of price stability a preference grew to be in the range of 1-2 % – see remark made by president Duisenberg before the Committee on Economic and Financial Affairs of the European Parliament.[17 February 2003. Answer in response to question by chairwoman Randzio-Plath. “.. in practice, we are more inclined to act when inflation falls below 1% and we are also inclined to act when inflation threatens to exceed 2% in the medium-term. Short-term movements in the actual inflation rates have no impact on our policy considerations and decisions.”] Recent studies on the relation between inflation and growth indicate that inflation starts to have net negative effects on growth, when it rises over 1-3%, depending on the study. [See e.g. Dotsey and Ireland (1996), M.S. Khan and Sendhadji (2000) and M.S. Khan (2002), who see a threshold value for industrialised countries of 2%, 1-3% and 1% respectively. The optimality of the inflation rate is not researched in this study. For our purposes is relevant that among economists there is no agreement on the optimal level of inflation – see also section I.3 infra.] More recently, i.e. in May 2003, the Governing Council clarified that, while sticking to its earlier definition, it aims at an inflation rate close to but below 2% over the medium-term. This clarification underlines the ECB’s commitment to provide a sufficient safety margin to guard against the risks of deflation and also takes into account the possible presence of a measurement bias in the HICP and the implications of inflation differentials within the euro area (ECB Press Release, 8 May 2003).

I.2 Independence and narrow mandate
There is a broad consensus among practitioners and academics that an independent central bank is more likely to achieve price stability than a central bank which is under instruction of the government.[Maastricht coincided, if not triggered, an increasing volume of empirical and comparative research supporting this orthodoxy. The first extensive empirical research seems to have been done by Cukierman as a follow-up to earlier, more theoretical studies into the relationship between central bank behavior and credibility (see Cukierman (1992) and by Eijffinger and Schaling (1992). But also see Alesina and Summers (1993) who find that a lower degree of independence leads to a higher level and variability of inflation. For a review of recent literature see Berger, de Haan and Eijffinger (2001). Berger c.s. conclude that the negative relationship between central bank independence and inflation is quite robust despite measurability and possible causality problems. For some other early writings on central bank independence see Rogoff (1985), De Haan and Sturm (1992), S. Fischer (1995) and Eijffinger-de Haan (1996), chapter 6.] The importance of central bank independence also gained ground in practice, as evidenced by the move towards more central bank independence in many countries (mostly anglosaxon countries) that changed their monetary policy regime towards direct inflation targeting in the early nineties – though the independence has remained limited to the daily policy decisions, as it did not include the specification of price stability, which remained in the hands of the government. This is sometimes referred to as instrument vs. goal independence. A central bank has instrument independence when it has full discretion to deploy monetary policy the way it sees most fit to attain its (in some cases externally given) goal. According to Fischer (1994) a central bank has goal independence when its goals are imprecisely defined. [See e.g. S. Fischer (1994), p. 292. An alternative definition could be that the lack of a precise definition of a central bank’s objective implies goal independence. This shows goal independence can be seen as a sort of continuum.] However, in a democracy independence for an institution established by law is only acceptable if the mandate and powers of that institution are well circumscribed.
If the ESCB would have received a broader mandate (e.g. stabilizing prices and maximizing employment), the call for political control would have – justifiedly – been stronger. The broader the mandate, the stronger the call for, and need for, political control. At the same time the powers attributed to the institution have to be commensurate with the objective it has to realize, in other words they should enable the institution to realize its mandate, but should not go beyond. [In the case of the ESCB its only real instrument is the interest rate (and volume) on its refinancing operations and the interest rates applying to its standing facilities (see also section I.4 below).]

I.3 The ESCB’s “secondary” objective
According to Article 2 the ESCB ‘shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2 of the Treaty [Article 2-EC reads: ‘The Community shall have as its task, by establishing a common market and an economic and monetary union and by implementing the common policies or activities referred to in Article 3 and 3a, to promote throughout the Community a harmonious and balanced development of economic activities, sustainable and non-inflationary growth respecting the environment, a high degree of convergence of economic performance, a high level of employment and of social protection, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among Member States.’] ,’ but ‘without prejudice to the primary objective of price stability’. Price stability takes precedence. This idea of a broader secondary objective was borrowed from the Bundesbank law (see section II.1 below).

Three remarks on this. First, it is clear there is only one overriding objective: price stability. There is no goal-sharing. Indeed, it would complicate the life of the ESCB, if it would have to hit two balls (inflation rate, economic policies) at the same time with one stick (the only stick it can wield is the interest rate, or to be more exact: the price of central bank money). From the viewpoint of effectiveness and accountability it is clearly preferable for the ESCB to have one goal. Second, the words ‘policies in the Community’ (and not: policy of the Community) are used, because economic policy is not centralized at Community level. Third, Smits (1997) points out that the word ‘general’ is used in ‘general economic policies’. This implies according to Smits (1997) that the ESCB’s actions can never be judged in terms of support of a specific course of action, but only in terms of support of underlying trends in economic policy. [Smits (1997), p. 188.]

It is very difficult to make this secondary objective operational. Maintaining price stability is a never-ending, continuous task, which leaves little room for actively pursuing the secondary objective. The secondary objective could, however, be taken to express the general wish that interest rates should not be higher than necessary, based on the idea that – provided inflationary expectations are not negatively affected, depending in turn on the size of the output gap and the prevalence of structural rigidities – lower interest rates support economic growth. [See Duisenberg’s answer to a question during the ECB press conference of 8 November 2001 whether the ECB by lowering interest rates had not gone beyond its first priority: ‘[….] maintenance of price stability remains our first priority. You can almost literally quote the Treaty in this respect, since today’s move [to lower interest rates – cvdb] could be taken ‘without prejudice to price stability’, and it thereby supported the other goals of Economic and Monetary Union, such as economic growth.’]

To a large part this wish has been ‘accommodated’ in the way the ESCB has formulated its monetary policy strategy.
First, the eurosystem aims at a positive inflation rate. This is implicit in the use of the word ‘increase’ in its definition of price stability as ‘a year-on-year increase of the harmonized consumer price index’. The word ‘increase’ captures the fact that most price indicators (including the HICP) tend to overstate the rate of inflation, due to a measurement bias. For instance, some price increases may be due to improvement in quality or functionality, but are still measured as a general price increase for an unchanged product. Therefore a state of zero inflation, or even a positive, but still small rate of measured inflation, could actually mean a de facto situation of a decreasing price level. [The Boskin report (Final Report to the US Senate Finance Committee of the Advisory Commission To Study The Consumer Price Index, 1996, ‘Toward a more accurate measure of the cost of living’) concluded in 1996 that inflation in the US was 1.1 percentage points lower than was measured. 0.6 of this reflected improved quality of goods and services (quality bias/new product bias) and 0.4 was due to the failure to detect changed spending by consumers as relative prices changed (until then the US Bureau of Labour Statistics updated its
basket of goods and services only once every 10 years). The outcome of the report went not undisputed, inter alia because it threatened to lower the cost of living adjustment for social security benefits. The measurement bias in Europe is probably somewhat smaller. A Bundesbank study carried out by Hoffmann (1998) indicated the overall bias in Germany might be smaller, in the order of 0.75 percentage point per year, partly on account of more regular re-weighing of the basket. According to the ECB the positive measurement bias in the European HICP is minimal (Issing, lecture City University Buiness School London, 12 May 2004).] [On the problems for monetary policy in dealing with a situation of negative real growth and negative inflation
(in other words deflation), see Cees Ullersma (2002).]
And second, the eurosystem has chosen to maintain price stability over the medium-term (see section I.1). According to many researchers and practitioners the time-lag between a monetary policy move and its full impact on the inflation rate is 18 to 24 months.[This period was also mentioned by Otmar Issing, Executive Board Member responsible for the ECB’s Monetary Directorate, during an ECB central banking conference ‘Why price stability?’ on 2-3 November 2000.] Trying to reach a similar impact in a shorter period would require much stronger measures, leading to strong output shocks. In case of price shocks the concern of the ESCB lies more with the risk of a feed-through of the first round price effects into a wage-price spiral. If that is likely, the ESCB should act in a timely fashion to head off such risks.

I.4 Market conformity
The ESCB has to operate according to the principles of the market economy.[The axiom therefore is the existence of deregulated markets. Regulating markets (and thereby interfering in the competitive relations between commercial banks) usually requires approval by, or a framework set by, the
Ministry of Finance, which creates a dependency (see Art. 7, section I.1).] It is not allowed to impose quantitative restrictions on bank credit and price controls. The one instrument which could be considered an infringement on the market economy is the requirement for credit institutions to hold minimum reserves with the central banks (Article 19-ESCB). The basis for the minimum reserves and the maximum reserve ratio are therefore regulated by the political authorities. [Council Decision (EC) No 2531/98 of 23 November 1988 concerning the application of minimum reserves by the European Central Bank. Within the limits set by this Council Decision the ECB can determine the actual reserve ratio. It is also up to the ECB (Governing Council) to decide on the remuneration, which could be set at zero. Any remuneration below the prevailing market rates can be seen as a form of ‘taxation’. Under complete capital liberalisation this will drive off certain parts of the banking business to other, possibly off-shore, centres. In fact, the ECB has decided to remunerate the minimum reserves at a level corresponding to the rate of the ECB’s main refinancing operations (Governing Council Decision of 7 July 1998). But even then the minimum reserve requirement could be seen as an instrument forcing banks to hold part of their assets in a form possibly not of their own choice.]

Minimum reserves may be necessary to ensure that banks have to borrow from the central bank – otherwise the central bank would find it difficult to make its refinancing rate effective and it could lose its grip on the price of money. In order to enforce compliance with its regulations and its decisions directed at third parties (credit institutions), the ECB is entitled to impose fines. The Council of Ministers defines the limits within which (and conditions under which) the ECB is allowed to impose fines – see Article 34.3.
The ESCB has the right to authorize (and thus veto) the issuance of banknotes and could in theory control (limit) the volume of banknotes. In practice however, the ECB accommodates the demand for banknotes, the only instrument it uses is setting the price banks pay for borrowing central bank money, whether for the purpose of buying of banknotes or adding liquidity to their accounts at the central bank.

I.5 Relevant features of the Federal Reserve System
The mandate of the Federal Reserve System of the United States is considerably broader in scope than that of the ESCB. Section 2A of the Federal Reserve Act (introduced as part of the Federal Reserve Reform Act of 16 November 1977) defines the objective in the following way:
“The Board of Governors of the Federal Reserve System and of the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote the goals of maximum employment, stable prices, and moderate long-term interest rates.”

Worth mentioning here is that the Administration does not have the right to give directives to the Fed nor can it raise a veto on Fed decisions. The Fed is only accountable to Congress. (See also the discussion on Article 7-ESCB.) The broad mandate does not mean price stability plays second fiddle in the United States. Like the ECB, the Fed sees price stability as conducive to supporting maximum sustainable economic growth over time. At a conference
in Mexico City on 14th November 2000 Alan Greenspan, Chairman of the US Federal Reserve, said: “Monetary policy makers must keep hold of the anchor of price stability so as to support maximum sustainable economic growth over time.” (Source: Morning Press, IMF External Relations Department, November 15 2000.) Nonetheless, the FED is seen as trying (successfully) to manage growth and price stability, whereas the ECB is seen as focussing purely on price stability, which sometimes leads to comments from financial specialists that it is ‘behind the curve’ (i.e. reacting too late to developments in the real economy).
The Fed has not quantified its definition of price stability. In a statement before the Subcommittee on Economic Growth and Credit Formation of the Committee on Banking, Finance and Urban Affairs of the House of Representatives on February 22, 1994 Greenspan used a by now famous, qualitative definition of price stability: “It follows that price stability, with inflation expectations essentially negligible, should be a long-run goal of
macroeconomic policy. We will be at price stability when households and businesses need not factor expectations of changes in the average level of prices into their decisions.” [Published in Federal Reserve Bulletin of April 1994, p. 302.]

An interesting account of why the Federal Reserve Act (FRA) of 1913 did not contain a reference to price stability is given by Alfred Broaddus Jr, president of the FRB of Richmond (1993).[Broaddus (1993)] The direct cause for wanting to establish a central bank was not so much concern over price stability, but the recurrence of banking crises, the most recent one of which had taken place in 1907.[Major banking panics occurred in 1873, 1884, 1890, 1893 and 1907] Bank runs, apart from the damage done directly to the deposit holders, also led to short-term interest rate spikes, sometimes of over 10 percentage points. Also, there was a pronounced seasonal pattern in short-term interest rates. The withdrawal of interbank balances in peak agricultural and holiday periods, in combination with the practice of pyramiding reserves within the banking system, [Interbank balances were mostly concentrated in big-city banks, especially in New York. This so-called ‘pyramiding’ was stimulated by the reserve requirement provision of the National Banking Act, according to which correspondent balances counted as legal reserves. See also under Real Bills doctrine.] tended to exacerbate seasonal pressures on the banking system. Short-term interest rates varied seasonally by as much as 6 percentage points over the course of the year.

Under the FRA 12 FRBs were to be established around the country as depositories for the required reserves that previously had been held at correspondent banks in New York City and elsewhere. By requiring that private banks hold reserves directly in a FRB, the act eliminated reserve pyramiding and eased the seasonal strain on the banking system. The most important power given to the central bank, however, was the authority to issue currency and to create
bank reserves at least partly independently of the nation’s monetary gold reserves. Until then the national money supply was closely linked to the nation’s stock of monetary gold (it was the time of the gold standard). As Broaddus describes, the gold standard ‘had good features and not-so-good features. On the good side, the gold standard did keep the aggregate price level under control over the very long run.’ It was a credible anchor and the public understood the mechanism.[The aggregate level of prices in 1914, for example, was not very different from the level 30 years before in the early 1880s.] However at the same time, ‘the strict discipline of the gold standard did not allow the money supply to increase rapidly in response to domestic disturbances such as a bank panic or a stock market crash.’

This background is reflected in the FRA of 1913. In the preamble the purpose of the FRA was stated as ‘to provide for the establishment of Federal reserve banks, to fournish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes’. Section 2 of the FRA stipulates the designation of ‘not less than eight nor more than twelve cities to be known as Federal reserve cities’, in which FRBs would be established.[See also under Article 10.1 and 10.2-ESCB] In conclusion, the prevailing presumption was that ‘[t]he gold standard would guarantee price stability, as long as the Federal Reserve respected its obligatory minimum gold reserve ratio, and the new central bank could focus on stabilizing the banking system and interest rates. No separate mandate to resist inflation or deflation was needed.’

Meltzer (2003) in his recent History of the Federal Reserve mentions legislative proposals in the mid-1920’s by Congressmen, most of them from powerful cotton states, to add the promotion of a stable price level to the FRA. However, the Federal Reserve, which was much more in favour of applying the principles of the gold standard, united in their opposition to any “mechanical formula” for setting policy. Moreover, neither existed much agreement on
how such policy could be conducted. [For instance, Fed Chairman Miller testified there existed no link from changes in the volume of credit and currency to the level of prices. He also stated the Fed could not influence the total volume of money in circulation, as this was determined by the community. For him the way to provide economic and price stability was to prevent speculations based on credit. (Meltzer (2003), p.183-192.)]

Only in 1977 the words ‘stable prices’ entered into the FRA. The 1977 amendment of the FRA introduced a new Section 2A containing inter alia the wording quoted at the beginning of this section (‘[….], so as to promote the goals of maximum employment, stable prices and moderate long-time interest rates’). However, the purpose of the 1977 amendment was not so much to specify the goals of monetary policy, but to require the Fed to report to Congress on its monetary targets for the upcoming twelve months.[The 1977 amendment was later modified (though not the sentence just quoted) through the Full Employment and Balanced Growth (‘Humphrey-Hawkins’) Act of 27 October 1978, which contained amendments on both the Employment Act of 1946 and the FRA. See also W. Eizenga (1983), p.3-4. In December 2000 Congress created a new Section 2B, titled ‘Appearances Before and Reports to Congress’, substituting for a part of Section 2A.]  The essential point of the 1977 amendment were the reporting requirements and not the first sentence of Section 2A, though it has become common practice, especially by the Fed, to quote this sentence when it wants to describe the objectives of the Federal Reserve System.

Comparing the Fed and the ESCB
The drafters of the FRA wanted to design a system that could prevent the recurring liquidity squeezes in the country which occasionally led to bank runs and periods of deflation. The drafters of the ESCB Statute had in mind a central bank which would not be obliged to finance government and would be focussed on preventing the erosion of the internal value of their money. Especially the German mind-set was influenced by the occurrence of hyperinflation in the twenties, which with some exaggeration could be said to have led the basis for the rising of the national socialist party in Germany.
Nonetheless, practices of the Fed and the ESB have converged in that sense that for the Fed price stability is the prime objective for their policy. Price stability is recognized to be the best condition for sustainable growth. The experience in the seventies with stagflation had shown there was no durable trade-off between inflation and unemployment, meaning that loose monetary policy in the end only led to higher inflation and not more output. (Differences in policy reactions between the Fed and the ESCB, as are sometimes perceived in the press, are mostly due to the differences in shocks and differences in the monetary transmission, inter alia due to the fact that American consumers hold relatively more financial assets than in Europe and that in Europe bank lending is a relatively more important financing channel than financing through the financial markets compared to the US.)

The German experience had also pointed to the need for a central bank with a high degree of independence. A high degree of independence would not have been compatible with a broad mandate. (As will be pointed out under Art. 7, section I.2, the issue of independence did not play an important role when the FRS was designed, because there was no history of a central bank being an appendix of the government. [The First and Second Bank of the United States could extend only limited loans to the government. See Sleijpen (1999), p. 115]

II.1 History: Delors Report
Even before the Delors Committee was established, the Bundesbank had prepared an internal position paper on the issue of Economic and Monetary Union, because developments in this area were clearly accelerating. [Developments were clearly in a swing: the ‘Comité pour l’Union Monétaire de l’Europe’, established (in December 1996) and chaired by Schmidt and Giscard d’Estaing, had finalised on March 31, 1988 a blueprint for European monetary integration (in their words: un “programme pour l’action” couvrant l’ensemble des aspects de la construction monétaire européenne), in which they proposed the establishment of a European Central Bank which would have as its ‘mission essentiel d’assurer le respect de l’objectif de stabilité monétaire et la libre convertibilité des monnaies de l’union monétaire europeénne a taux fixe entre elles’, while it would also be responsible for issuing ecu’s, which would circulate as a parallel currency (Comité pour l’Union Monétaire de l’Europe, Un Programme pour l’Action (Proposition no.1, section II), 31 Mars 1988). In December 1987 Balladur had proposed to create in the future (in French: ‘à terme’) a European central bank and a European currency, the so-called Balladur memorandum (in: HWWA 1993, p.337). In his six page memorandum only one page deals with this idea, the other pages deal with the asymmetries of the EMS and ways to reinforce monetary cohesion within the context of the EMS. Genscher had taken up the idea of an European Central Bank in his Memorandum of 26 February 1988, in which he also called for the creation of a Sachverständigengremium (‘5 – 7 Weisen’) by the Hanover Council in June 1988, which should among other things come up with a statute of a European central bank and a concept for how to get there (in: HWWA 1993, p.31.).]

Even so, Pöhl was not among the believers.[In his press conference following the Zentralbankrat-meeting of 5 May 1988, at which they had discussed the secret position paper, Pöhl mentioned the ZBR had discussed questions relating to monetary cooperation in Europe, but at the same time he pointed to many examples of free trade zones without a common currency. Talking then about possible future developments he stated that a European central bank system should have a federal character (like that of the Bundesbank or the American Federal Reserve System) and that it should have a clear objective: ‘Sie sollte mit dem Ziel des Bundesbanksgesetzes übereinstimmen “die Währung zu sichern”. Darunter wird allgemein verstanden, die Preise stabil zu halten.’ Pöhl did not mention the existence of the internal position paper.]
The first concept of their internal paper dates back to April 1988. In September 1988 this paper would be submitted by Pöhl to the Delors Committee (it is reprinted in the annex to the Delors report, together with the contributions of other member of the Delors Committee).

In paragraph IIB.1 the paper mentions:
“1. The mandate of the central bank must be to maintain stability of the value of money as the prime objective of European monetary policy. While fulfilling this task, the central bank has to support general economic policy as laid down at Community level.”
– Bundesbank paper April/September 1988

[It is interesting to continue this quotation: “Domestic stability of the value of money must take precedence over exchange rate stability. This does not exclude the possibility that depreciation vis-à-vis third currencies and the associated import of inflation be counteracted by appropriate monetary policy measures. In the event of the establishment of an international monetary system with limited exchange rate flexibility vis-à-vis third currencies, the central bank would need to be given at least the right to participate in discussions on parity changes.” We will come back to this when dealing with Article 109-EC.]

This formulation leaned heavily on Article 3 and 12 of the Bundesbankgesetz [Bundesbankgesetz 1957]:
Par. 3: Aufgabe
“Die Deutsche Bundesbank regelt mit Hilfe der währungspolitischen Befugnisse, die ihr nach diesem Gesetz zustehen, den Geldumlauf und die Kreditversorgung der Wirtschaft mit dem Ziel, die Währung zu sichern, und sorgt für die bankmässige Abwicklung des Zahlungsverkehrs im Inland und mit dem Ausland.”
Par. 12: Verhältnis der Bank zur Bundesregierung
“Die Bundesbank ist verpflichtet, unter Wahrung ihrer Aufgabe die allgemeine Wirtschaftspolitk der Bundesregierung zu unterstützen. ….”

Seen from today, Pöhl’s first formulation for the mandate of the ECB and the mandate of the Bundesbank seem surprisingly vague. The formulations do not directly relate to the consumer price index and the formulation can be seen as relating both to internal and external value of money (the exchange rate). However, the formulation of the mandate of most other European central banks was even vaguer (see table 2.1 below).

Table 2.1 Economic/monetary objectives of a number of central banks [The countries are listed in alphabetical order using their names as spelled in their national language. Reference is made only to the countries which were then EU member: Belgium, Denmark, Germany, Greece, Spain, France, Ireland, Italy, Netherlands, Portugal and the UK; Luxembourg is left out, because it did not have its own central bank. Austria is added for reference sake because of its tradition of having a relatively independent central bank. Information based on national central bank laws, European Commission (1990a); Hans Aufricht (1967), Central Bank Legislation, Vol. II: Europe, IMF Monograph Series no. 4; and G. Toniolo (ed.) (1988), Central Banks’ Independence in Historical Perspective. ‘Not specified’ means usually the Bank Act only enumerates responsibilities of the central bank, like issuing the currency, acting as the Government Cashier (e.g. art. 17, Belgian Bank Law 1939), managing clearing houses (art. 44, Banca d’Italia Statute 1936). In a way the Banque de France objective is also ‘not specified’, in the sense that it does not contain an economic objective or orientation. Cf. Committee of Governors (1992), Annex II. – (situation in 1989)

Austria: “(3) It (die Oesterreichische Nationalbank) shall ensure with all the means at its disposal that the value of the Austrian currency is maintained with regard both to its domestic purchasing power and to its relationship with stable foreign currencies.
(4) It shall be obliged to ensure within the framework of its credit policy that the credits it places at the disposal of the economy are distributed with due
regard to the requirements of the economy.” (Art. 2.3 and 2.4 Nationalbankgesetz 1955)

Belgium: not specified
Denmark: “to maintain a safe and secure currency system and to facilitate and regulate the traffic in money and the extension of credit” (Art. 1 of Bank Act)
Germany: “The deutsche Bundesbank shall regulate the amount of money in circulation and of credit supplied to the economy using the monetary powers conferred on it by this Act, with the aim of safeguarding the currency, and shall arrange for the handling by banks of domestic and external payments” (Art. 3 BBankG 1957)
“The deutsche Bundesbank shall be obliged insofar as is consistent with its functions, to support the general economic policy of the Federal Government.” (Art. 12 B BankG 1957) [For the origins of this formulation see appendix 3 at the end of cluster III]
Greece: not specified
Spain: “The Bank of Spain … conducts monetary policy in accordance with the general objectives determined by the government, while using the means it considers most adequate for achieving these objectives, in particular the safeguarding of the value of the currency.” (Loi du 21.6.80, art. 3)
France: ‘The Banque de France is the institution which, in the framework of the economic and financial policy of the nation, receives from the State the mission of watching over the currency and credit. As such the Banque de France makes sure the banking system is functioning properly.’ (Art. I, Statutes BdF 1973)
Ireland: “The Bank shall have the general function and duty of taking … such steps that the Board may from time to time deem appropriate and advisable towards safeguarding the integrity of the currency and ensuring that, in what pertains to the control of credit, the constant and predominant aim shall be the welfare of the people as a whole.” (Section 6 (1) of Bank Act 1942)
Italy: not specified
Netherlands: “It shall be the duty of the Bank to regulate the value of the Netherlands’ monetary unit in such a manner as will be most conducive to the nation’s prosperity and welfare, and in so doing seek to keep the value as stable as possible.” (Section 9 (1), Bank Act 1948) [For a description of the origin of the formulation, see André Szász (2001), par. 15.3, and A.M. de Jong (1960), p. 409-15]
Portugal: not specified
UK: no explicit rule

The table shows two things. First, the mandate was nowhere specified as just maintaining internal price stability. The objective is usually broader: sometimes the external value is part of the objective (sometimes only implicitly) and in other cases the central bank has to support the general economic policies (or it has to operate within a framework set by the government). The emphasis on internal price stability constituted a new development. Second, the table shows how often the objectives of the central banks were formulated in such a broad general way, making it indeed difficult to imagine them operating as completely independent institutions. Indeed, complete independence in formulating monetary policy goals and
implementing monetary policy was a scarce good. (See for an overview of the relations with the government Article 7-ESCB.)

The first draft of Chapter II (The final stage of economic and monetary union) of the Delors Report, dated 2 December 1988, contained the following formulation, closely reflecting the wording of Pöhl’s paper [CSEMU/5/1988, page 15]:
“- the mandate of the system must be to maintain the stability of money as the prime objective of the Community’s monetary policy. While fulfilling this task, the system has to support the general economic policy of the Community. Stability of the currency in terms of prices must take precedence over exchange rate stability;
– the system must be independent of instructions from national governments and Community authorities ….”

– CSEMU/5/88, December 1988

During the meetings of the Delors Committee a number of alternative formulations would be tabled. During the meeting of 13 December 1988 Pöhl handed in the following text: [Paper of 2 December 1988, called ‘Outline of a Report to the European Council on Economic and Monetary Union’]
“- a commitment to regulate the amount of money in circulation and of credit supplied by banks and other financial institutions under criteria designed to assure non-inflationary economic growth as well as to preserve a properly functioning payment system;”
– Pöhl, December 1988

This mandate was even vaguer than the one already on the table. For instance, in Pöhl’s new version it was not clear whether domestic price stability should take precedence over external stability.[Pöhl’s formulation was closer to the mandate of the Bundesbank, but – like the Bundesbank formulation – lacked a hierarchy: it took away the notion of domestic price stability taking precedence over external stability. Pöhl’s formulation would be stubborn: it would more or less reappear in the draft Treaty proposal of the German IGC delegation. This would be the only instance in which the German draft texts would deviate from the governors’ draft ESCB Statute. (It is not clear why the Germans were so stubborn on this: maybe they hoped their formulation (which emphasized the importance of managing money and credit supply) would help them securing their favourite monetary strategy, i.e. monetary targeting (as opposed to interest rate targeting, like had been applied by the Fed in the past – or direct inflation targeting, though that strategy still had to be invented).Sources from the Bundesbank have said Pöhl quickly came to regret his proposal, ‘which he had meant as a compromise’ – though it is unclear whom Pöhl had sought to please.] Seeing this text Duisenberg immediately reacted by saying he preferred to see a clear distinction between the task of the ECB and the instruments; the task should preferably be formulated in terms of stabilizing the value of money, making at the same time a distinction between internal stability (price stability) and external stability (exchange rate stability).

During the meeting of 10 January 1989, Duisenberg handed out his preferred formulation, borrowing heavily from the text of CSEMU/5/1988:
“- The mandate of the system must be to maintain the stability of money as the prime objective of the Community’s monetary policy. While fulfilling this task, the system has to support the general economic policy of the Community. Stability of the currency in terms of prices must take precedence over exchange rate stability. [The latter sentence borrowed from CSEMU/5/88]
– The system will be responsible for the formulation of monetary policy at Community level and for the preservation of a properly functioning payments system. The instruments at its disposal will be enumerated in the statute of the system with a procedure for amending this enumeration.
– The system will be responsible for the formulation of banking supervision policy at Community level and coordination of banking supervision policies of the national supervisory authorities.”
 [Implicit in this formulation is that visiting banks should remain a task of the national supervisor. This was the
view held within the Dutch central bank]
– Duisenberg, January 1989

The next draft of the rapporteurs [CSEMU/10/89, dated 31 January 1989 (section 18)] would mention Pöhl’s and Duisenberg’s texts as alternatives. At that moment it was unclear how the final formulation would read.
On 14 March 1989 the discussion in the Delors Committee almost derailed. Pöhl had thirty pages of proposed amendments (he especially disliked the ideas centering on the promotion of the Ecu) and preferred a substantial reduction of the report. The Danish governor Hoffmeyer (chairman of the Committee of Governors) said he would also not be in a position to sign the report in its present form. De Larosière said a signal was needed that Europe would embark in
the direction of economic and monetary union; therefore he had proposed the creation of a special fund, the European Reserve Fund, in stage two of EMU (which Pöhl and others had already indicated they did not like). [The fund’s functions would include intervening in the foreign exchange market and progressively setting up a body to exercise surveillance over monetary and exchange rate trends. (See De Larosière’s paper in the Annex to the Delors report.)]

Pöhl reacted strongly to de Larosière and Delors by saying that large parts of the report were unacceptable to him. He distinguished four steps.
First, all countries should become members of the EMS. Second, a complete adoption of full liberalization of capital movements had to be fulfilled by all Member States. Third, the political priority for central banks must be price stability. Fourth, budget discipline.
Delors tried to conclude the discussion by suggesting the following changes to the draft report: first, the report should make clear that a significant amount of sovereignty had to be transferred. Second, the objective of an economic and monetary union should in particular be price stability [emphasis by the author]. Third, a treaty change was necessary, sooner or later, [The Germans and Dutch were not willing to accept a step-by-step approach based on Community legislation. That could lead to a half-way house and meant that the independence would be based not on a Treaty, but on legislation of a lesser status (and more easily amendable)]. and he supported the proposal put forward by Duisenberg to ask the European Council to invite the competent Community bodies to make concrete proposals on the basis of the report of this committee. [Subsequently when the Committee discussed the text paragraph by paragraph, many of Pöhl’s reservations came to be reflected in the text, much to the regret of de Larosière. He said he had yielded as regards the question of the ECU as a parallel currency and it would be a pity for him if one would kill the little bird that was left. Pöhl yielded somewhat, and the final outcome was that the following text:
“48. Thirdly, the Committee examined the possibility of using the official ECU as an instrument in the conduct of a common monetary policy. The main features of possible schemes are described in the Collection of papers submitted to the Committee, which represent personal contributions. [last emphasis by the author.]
49. Fourthly, the Committee agreed that there should be no discrimination against the private use of the ECU and that existing administrative obstacles should be removed.”] (Duisenberg’s proposal was important, because it secured the involvement of the Committee of Governors and the Monetary Committee in later stages.)

The rapporteurs and Delors prepared a new draft [CSEMU/14/89 (31 March 1989)] which was to be discussed on 11 and 12 April 1989. They inserted for the first time the term ‘price stability’ [Seen from today’s perspective, this is an improvement over the term ‘stability of money’, as used in their draft of December 1988 and in the proposal submitted by Duisenberg, because the term ‘stability of money’ had had in the past the double meaning of external and internal stability] as the objective for the ESCB. The mandate was formulated as follows:

“ Mandate and functions
– the System would be responsible for the formulation of monetary policy at the Community level and its implementation at the national level, for the full convertibility of European currencies, and for the maintenance of a properly functioning payment system; [the System would have to regulate the amount of money in circulation and the volume of credit supplied by banks and other financial institutions with a view to safeguarding overall price stability;] or [“the System would be committed to promoting price stability as well as economic growth”]
 [Second alternative proposed by UK Governor Leigh-Pemberton]
the System would participate in the co-ordination of banking supervision policies of the national supervisory authorities.”
– CSEMU/14/89, March 1989, par. 33

Probably unintentionally, the so-called secondary objective had dropped out of the text.
Before the meeting Pöhl handed out an alternative of his own, including his earlier secondary objective:
“ Mandate and functions
– the System would be responsible for the formulation of monetary policy at the Community level and its implementation at the national level, for the full convertibility of European currencies and exchange rate management as well as the maintenance of a properly functioning payment system;
– the System would be committed to price stability;
– within the limits of this objective the System would support the general economic policy of the Community.”

Pöhl April 1989

This was rearranged during the meeting into the following final outcome:
“ Mandate and functions
– The System would be committed to price stability;
– subject to the foregoing, the System should support the general economic policy set at the Community level by the competent bodies;
 [At that stage it was still unclear how the general economic policy should be managed, but this had eventually to be decided by the ECOFIN-council. (Source: Summary by Hoffmeyer of the meeting of 11-12 April 1989.)]
the System would be responsible for the formulation and implementation of monetary policy, exchange rate and reserve management, and the maintenance of a properly functioning payment system;
– the System would participate in the coordination of banking supervision policies of the supervisory authorities.”

Delors Report, par. 32

II.2 History: Committee of Governors
The governors would stay quite close to what they had agreed upon in the Delors Committee.
Article 2 of the Committee of Governors’ final draft of the ESCB Statute, dated 27 November 1990, would read:
“Article 2 – Objectives
2.1 The primary objective of the System shall be to maintain price stability.
2.2 Without prejudice to the objective of price stability, the System shall support the general economic policy of the Community.
2.3 The System shall act consistently with free and competitive markets.”

The accompanying Commentary with Article 2 read:
“Article 2 – Objectives
Article 2.1 expresses the unequivocal commitment to maintain price stability as the primary objective of the System. However, since monetary policy is not considered in isolation of other economic policy objectives, Article 2.2 explicitly states that without prejudice to the objective of price stability, the System shall support the general economic policy of the Community. Article 2.3 confirms the adherence of the System to the fundamental
principle of a market-based economy.”

To be more specific, the first draft of the ESCB Statute dates back from 11 June 1990.[The Committee of Governors had used the latter half of 1989 especially for adapting the mandate of the Committee to the new demands of stage one of EMU, which started the first of July 1990. This required a
amendment in the Council Decision (64/300/EEC) of 8th May 1964 establishing the Committee of Governors, for which amendment the Committee was asked to make a recommendation. The amended version was adopted by the Council on 12th March 1990 (90/142/EC).] The governors had given their Committee of Alternates a mandate to draw up draft Statutes for the ESCB. Article 2 of the draft of 11 June was called ‘Objectives and basic tasks’. Within that article, Article 2.1 read:
“2.1 The primary objective of the ESCB shall be to maintain price stability within the Community; without prejudice to that objective, it shall support the general economic policy adopted by the competent Community bodies.”
– draft 11 June 1990
(Article 2.2 listed the tasks of the ESCB. In the subsequent drafts Article 2.2 would become an article of its own, i.e. Article 3.)

During their discussion on 18 June the Alternates would add a third paragraph, i.e. the obligation to promote free and competitive markets.
“Article 2 – Objectives
2.1 The primary objective of the ESCB shall be to maintain price stability within the Community.
[2.2 Without prejudice to the objective of price stability, the ESCB shall support the general economic policy of the Community.]
[Between square brackets because one Alternate preferred to insert this provision in Article 12.2, the main reason being that this provision would detract from the primary objective. The governors would decide to retain the text and drop the brackets]
2.3 When exercising its competence, the ESCB shall promote free and competitive markets”

– draft 22 June 1990

During their meeting on 29 June 1990 the British Alternate, Crockett, proposed to add ‘A further objective of the ESCB will be to preserve the integrity of the financial system.’
However, Tietmeyer had this placed between square brackets: he considered this to be a task, and not an objective. (This would indeed be delegated back to Article 3. This issue is dealt with under Article 3.3.) The wording of Article 2.3 was changed into ‘In exercising its functions, the ESCB shall act consistently with free and competitive markets’.[This is more a condition than an objective]

During their meeting of 10 July Governors had to choose between ‘price stability within the Community’ and ‘price stability within the Union’. The outcome was just to refer to ‘price stability’ (the mandate could of course only apply to the Monetary Union area).
When presenting a progress report to the ministers of finance during the informal Ecofin meeting on 7 to 9 September 1990, Pöhl (in his capacity of chairman of the Committee of Governors) [Pöhl had been elected chairman as of 1 January 1990. The governors had increased the term of the chairman
from one to three year (Rules of procedure of the Committee of Governors of the Central Banks of the European Economic Community, as amended by the Committee of Governors on 11 June 1990) to strengthen the position of their chairmen. The amended 1964-Council Decision (The Committee of Governors had used the latter half of 1989 especially for adapting the mandate of the Committee to the new demands of stage one of EMU, which started the first of July 1990. This required a amendment in the Council Decision (64/300/EEC) of 8th May 1964 establishing the Committee of Governors, for which amendment the Committee was asked to make a recommendation. The amended version was adopted by the Council on 12th March 1990 (90/142/EC))) had conferred new tasks to the Committee of Governors relating to the start of stage one as of 1 July 1990. When changing the Rules of Procedure, the governors had also decided to extend the support of the Committee by installing – apart from the existing Secretariat – an Economic Unit of initially five persons. The task of the Economic Unit was inter alia to prepare research and analytical papers, to identify issues for discussion by the Committee and to draft the Committee’s Annual Report] strongly underlined the importance of the System’s primary objective of price stability: “(….) we want to underline the unequivocal statement in the Delors Report that the primary objective of the System must be to preserve price stability. But, of course, giving primacy to this objective should not be misinterpreted as an invitation to act in a single-minded manner and without due regard to other economic policy objectives. There is full recognition that monetary policy is not conducted in a vacuum and the new System shall, without prejudice to the objective of price stability, support the general economic policy of the Community. (….) However, there should be no misunderstanding: in the event of a conflict between price stability and other economic objectives, the governing bodies of the System will have no choice but to give priority to its primary objective. (….) The System will have to act consistently with free and competitive markets and in doing so will regulate money and credit predominantly through indirect money market interventions, as has become the widespread practice in countries with deregulated financial markets.” [Statement by President Pöhl on the Statute of the System at the ECOFIN meeting on 7 to 9 September 1990.]

On 13 November 1990 there would be one last discussion on Article 2.3. Duisenberg put forward the question of whether the setting of key official interest rates could not be seen as an exogenous act not being in conformity with local market conditions. De Larosière agreed and felt the governors should be careful not to limit the scope of the System. Chairman Pöhl, however, supported inclusion of Article 2.3 because it prevented the use of direct monetary
instruments such as credit controls. He felt the System should not be able to set quantitative limits for controlling credit or suspend the use of market-oriented instruments. The Irish, Italian and UK governors also wished to retain Article 2.3, as it would happen, implying that the following text was sent to the IGC:
“Article 2 – Objectives
2.1 The primary objective of the System shall be to maintain price stability.
2.2 Without prejudice to the objective of price stability, the System shall support the general economic policy of the Community.
2.3 The System shall act consistently with free and competitive markets.”

– draft ESCB Statute, 27 November 1990

II.3 History: IGC
During the IGC there would be no efforts to give the ESCB another or multiple objectives, which could have been a way to bring the ESCB under more political control. However, the issue of whether (and under which circumstances) exchange rate stability could have precedence over price stability was not solved, but for the last minute and even then left certain questions unsolved (see Article 109-EC.) Another risk emanated from the French Treaty proposal to allow the European Council to establish ‘grandes orientations de l’Union Economique et Monétaire’. Their proposal found minimal support (see Article 7-ESCB) and was not taken aboard by the Luxembourg presidency.

“Article 4-1-EC
1 – Le Conseil Européen définit, sur rapport du Conseil, de la Commission et du SEBC, les grandes orientations de l’Union Economique et Monétaire. Il est garant de son bon fonctionnement.”
[The Commission draft had provided for multi-annual guidelines submitted by the Commission to the European Council, but these did not pertain to EMU, but were restricted to budgetary developments, cost control, the level of saving and investment and social cohesion/structural policies. This idea of ‘grandes orientations de la politique économique de la Communauté et de ses Etats membres’ would survive in Article 103-EC]
– French draft January 1991

The German draft proposal is also worth citing, because it introduced the concept that both exchange rate and monetary policy should have as their overriding objective to maintain price stability. The German draft dates from 26 February 1991. [CONF-UEM 1612/91, published by Europe/Documents No. 1700 of 20 March 1991. See also section II.3.2 of Art. 109-EC below]

“Article 3a-EC (Activities of the Community in economic and monetary union) [In Article 3a of the German draft economic and monetary union are dealt with separately, we cite here only the part relating to monetary union]
1. (…… securing convergent economic policies, in particular securing budgetary policies geared to stability, on the basis of close co-ordination.)
2. In addition, as provided in this Treaty and in accordance with the timetable set out therein, the activities of the Community shall include: the irrevocable fixing of exchange rates between the currencies of the Member States and the introduction of a single currency, the definition and conduct of a uniform currency [= exchange rate – cvdb] and monetary policy the overriding objective of which shall be to maintain price stability.”

“Article 4a-EC (European System of Central Banks)
An independent European System of Central Banks (ESCB) is hereby set up which, as provided in this Treaty and the Statute annexed thereto shall conduct the Community’s currency and monetary policy with the overriding objective of maintaining price stability.”

“Article 109a-EC (European System of Central Banks)
1. (…)
2. In accordance with the Statute, the ESCB shall regulate the circulation of money and the provision of credit in the Community with the overriding objective of ensuring price stability.
3. Insofar as is possible without jeopardizing the objective of price stability, the ESCB shall support the general economic policy objectives of the Member States and the Community.”

– German draft February 1991 [The German representative in the deputies IGC, Horst Köhler, was very adamant on the importance of price stability. He reacted quite strongly to the suggestion by the Dutch representative, Cees Maas, to extend the multilateral surveillance exercise with a discussion on the policy mix. Trichet supported this, but Köhler came out strongly, saying that monetary stability was the basis for sustained growth, adding that “monetary stability is a basic right, especially for the small man.” (Report of Deputies IGC meeting of January 29, 1991.)]

The Luxembourg presidency more or less copied the text of the German Article 3a in their non-paper of 29 January 1991 [UEM/15/91]. though they added the name of the single currency: the ecu [It is well-known the Germans disliked the name ‘ecu’, which they associated with a basket whose value had been depreciating continuously against the Dmark (and had been called an esperanto currency). During the nettoyage after the signing of the Treaty of Maastricht Grosche (then German Finance Ministry and later secretary of the Monetary Committee) insisted ecu would be written as ECU – to indicate it is an acronym (European Currency Unit) and not necessarily a name – obviously to keep the option open to give the ECU another name . The French and Italian delegations objected. The compromise found was to translate ‘ecu’ in the national languages in the same way as had been done in the translation of the Single Act (Article 102A). Depending on the language ecu was written as ‘écu’, ‘Ecu’ or (as in German) ‘ECU’. (Report of nettoyage meeting on 14 January 1992.) In 1995 Waigel, supported by Kohl, would insist the name of the single currency should be ‘euro’, which had the additional advantage that it was a name everybody could pronounce in more or less the same way (see Conclusions of European Council meeting in Madrid, December 1995)]. . The Luxembourg presidency did not include a separate article on the objective of the ESCB, limiting themselves to referring in the chapter on EMU to the existence of the statute. [The Italian and Dutch delegations had proposed texts for the objective of the ESCB (numbered Article 106B respectively 106A) which were exact copies of article 2 of the draft ESCB Statute].

As mentioned before, the Dutch presidency, which took over in the second half of 1991, first focussed on a few very contentious, unsolved issues, like the content of stage two, the criteria for transition to the stage three and the responsibilities for exchange rate policy. As regards the articles on the ESCB and monetary policy the Dutch presidency decided to stick as much as possible to the wording of the draft Statute. [To avoid interpretation problems that could arise if different phrasing were used in the Treaty and the Statute. Furthermore the Dutch presidency preferred to lay down in the Treaty the obligations of the ESCB vis-à-vis the Community institutions and vice versa, and to incorporate in the Statute the rules and obligations within the ESCB. Source: internal note from Ministry of Finance, dated 29 August 1991.] To this end, the wording of the objectives and tasks [An exception being the formulation on the exchange rate policy and supervision, see Article 109-EC and Article 3.3-ESCB respectively] from the draft Statute were copied into the draft Treaty. [At some stage the Dutch presidency wanted to partially ‘empty’ the statute, by taking out all articles which were mentioned in the Treaty and instead use in the Statute cross-references to the relevant Treaty articles. This was the case in an internal draft version by the Ministry of Finance of August 1991. The Dutch central bank pressed the presidency to keep the Statute self-reading.] As regards Article 2, it was added that the ESCB’s conditional support for the general economic policies in the Community was meant to contribute ‘to the realisation of the objectives of the Community (as laid down in Article 2 of the European Communities), in accordance with the principles set out in Article 3A of this Treaty.’ [See Annex 4]

On 28 October 1991 Minister Wim Kok presented a complete Dutch Presidency proposal on all Treaty provisions concerning EMU, including several protocols, among which the Statute of the ESCB.
“Article 2-ESCB – Objectives
As is stated in Article 105 paragraph 1 of this Treaty, the primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, it shall support the general economic policies in the Community with a view to contributing to the realisation of the objectives of the Community as laid down in Article 2 of this Treaty, in accordance with the principles set out in Article 3A of this Treaty. It shall act consistently with the principle of open markets with free competition.”
[The Dutch draft of 28 October had substituted the words ‘general economic policy of the Community’ (which was used in the draft ESCB Statute) by ‘general economic policies in the Community’, because unlike an individual country the Community did not (and does) not have a single economic policy. Both the Member States and Brussels conduct economic policies. The same reasoning was applied to Article 3A-EC, though there the ‘policy’ was not changed into ‘policies’ (plural)]
– Dutch presidency proposal 28 October 1991

For completeness’ sake we also present the final version of Article 3A-EC.

Article 3A-EC
1. (….) [Article 3A(1)-EC dealt with the economic policy]
2. Concurrently with the foregoing, and as provided for in this Treaty and in accordance with the timetable and the procedures set out therein, these activities shall include the irrevocable fixing of exchange rates between the currencies of the Member States leading to the introduction of a single currency, the ECU, the definition and conduct of a single monetary and exchange rate policy the primary objective of which shall be to maintain price stability and, without prejudice to this objective, to support the general economic policy in the Community, in a manner compatible with free and competitive market principles.”
– Dutch presidency proposal 28 October 1991

During the remainder of the IGC Article 2 underwent only some editorial changes.

Article 3.1 and 3.2:

Art. 3.1 and 3.2: Tasks [Art. 3.3 on prudential supervision and financial stability will be dealt with under Cluster II, the bone of content being basically ‘who should do what?’ (national or supranational authorities). Had the outcome been a clear responsibility for the System, we would have dealt with that article in the present cluster.]
“3.1 In accordance with Article 105(2) of this Treaty, the basic tasks to be carried out through the ESCB shall be:
– to define and implement the monetary policy of the Community;
– to conduct foreign-exchange operations consistent with the provisions of Article 109 of this Treaty;
– to hold and manage the official foreign reserves of the Member States;
– to promote the smooth operation of payment systems.
3.2 In accordance with Article 105(3) of this Treaty, the third indent of Article 3.1 shall be without prejudice to the holding and management by the governments of the Member States of foreign-exchange working balances.”
(to be read in conjunction with Art. 30-ESCB (pooled reserves); Art. 31-ESCB (non-pooled reserves); Art. 41-ESCB (discussion on general enabling clause); Art. 43-ESCB (list of articles which do not apply to derogation countries); Art. 105(2)-EC (mirrors Art. 3.1-ESCB in the Treaty); Art. 109-EC (exchange rate policy))

I. Introduction
I.1 General introduction

Article 3.1 shows the basic tasks of the System. These tasks are disentangled from the System’s objective, which is mentioned in Art. 2. The basic tasks are the normal basic tasks of a central bank. The expression ‘basic task’ is not used in the remainder of the Statute, nor in the Treaty. [In other words, the Statute does not use a generic distinction between basic or non-basic tasks.] The ‘basic tasks’ are the tasks with the highest profile and the highest policy-making content, though of course, for instance, the collection of reliable statistics is a sine qua non for good decision-making. Other (non-basic) tasks which are mentioned in Chapter II of the ESCB (‘Objectives and Tasks of the ESCB’) are covered by in Art. 3.3 (a contributory function in the area of supervision and financial stability), Art. 4 (advisory functions), Art. 5 (collection of statistical information) and Art. 6 (international cooperation). The Statute also contains a detailed description of operations and activities of the System. [Examples are the issuance of banknotes (Art. 16) and the function of fiscal agent (Art. 21)] This can especially be found in Chapter IV of the Statute.

The precise formulation of the basic tasks will be dealt with below. The first indent on defining and implementing monetary policy (the natural task for a central bank) was indeed hardly contentious. Seen from the perspective of the ESCB it is important that it is not only responsible for implementing monetary policy, but also for its definition. The second indent (on foreign currency operations) touched upon a difficult and sensitive issue, i.e. who will
decide on foreign currency operations. This was not solved in the context of this article, but carried over to the IGC (see Art. 109-EC). The third indent shows a number of ‘catches’: it does not determine who ‘owns’ the reserves;[The ‘holder’ does not need to be the ‘owner’] the indent is clear though in that it pertains to all the reserves of the Member States, and not only those in the hands of the NCBs. [At the start of the participation of a Member State in the euro area its reserves have to be handed over to the NCBs, which will ‘hold’ them (an exception is allowed for limited working balances – see below)] 
Therefore, even where reserves are owned by the State, such ownership is without any right as to the investment or buying or selling of these reserves, the ratio being twofold. First, transactions and interventions by the State could interfere with the ECB’s monetary policy (because of the effects on market liquidity and their possible signalling function). This was especially relevant because some central banks feared an activist exchange rate policy by the
political authorities (e.g. vis-à-vis the dollar), which would impede on the monetary independence of the ECB. Second, a communautarian exchange rate policy would be impossible if twelve or more States could intervene independently.

I.2 Relevant features of the Federal Reserve System
The introduction to the Federal Reserve Act (a short kind of recital) comes closest to the formulation of the basic tasks of the Federal Reserve System: ‘To provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States, and for other purposes.’ The Act does not contain an article with an overview
of a precise list of permitted tasks. The FRA first of all deals with the institutional set-up of the system. It starts with an extensive description of the FRS’s districts, its branches within the districts and the organization of the Federal Reserve Banks. Art 2A of the FRA (inserted only in 1977) comes closest to the formulation of an objective for the FRS: ‘to maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.’ Most of the System’s tasks are mentioned in Sections 11, 13-16, 19(c) and 21 of the FRA.
The Fed did not and does not have a formal responsibility in exchange rate matters. This is the preserve of Congress, which has delegated this to the Treasury (see under Art. 109, section I.2).

II.1 History: Delors Report
The Delors Committee paid attention to the objective of the System, but not so much to the tasks of the System. This is understandable, because these tasks looked quite straightforward – an exception being the exchange rate management, because that task was considered to involve both the System and the political authorities (see Article 109-EC).

The final version of the Delors Report (April 1988) contained the following descriptions of the System’s tasks:
“Mandate and functions
– [objective]
– the System would be responsible for the formulation and implementation of monetary policy, exchange rate and reserve management, and the maintenance of a properly functioning payment system;
– the System would participate in the coordination of banking supervision policies of the supervisory authorities.”

– Delors Report, par. 32

Some of these tasks would also be mentioned in slightly different wording in paragraph 60 of the Delors Report. Paragraph 60 repeats which tasks would befall on the ESCB once it would roll into stage three of EMU:
“ In particular:
– [….] the responsibility for the formulation and implementation of monetary policy in the Community [….];
– decisions on exchange market interventions in third currencies would be made on the sole responsibility of the ESCB Council in accordance with Community exchange rate policy; the execution of interventions would be entrusted either to national central banks or to the ESCB;
– official reserves would be pooled and managed by the ESCB;” [The Delors Report (par. 57) envisaged that already during stage two ‘a certain amount of exchange reserves would be pooled and would be used to conduct exchange market interventions in accordance with guidelines established by the ESCB Council.’ Pöhl would later distance himself from this aspect of the Delors Report – see for the reasons of his hesitation section II.2 of Art. 1 and section II.1 of Art. 12.1c.]
– Delors Report, par. 60

Earlier drafts had been less specific on the list of tasks of the ESCB. For instance the draft of 31 January 1989 [CSEMU/10/89] had contained two alternative versions for the ‘Mandate and functions’ of the System, one by Duisenberg and one by Pöhl (reflecting closely the wording of the Bundesbank Law).[See Article 2-ESCB, section II.1] Duisenberg’s text was based on elements of an earlier draft of the Delors Report by the rapporteurs of the Committee and elements of Pöhl’s proposal, e.g. the reference to the properly functioning payment system.[A reference to a function in the area of payment systems was not unique among the European NCBs. For instance, Art. 3 of the Bundesbank Law (1957) mentioned that the Bundesbank ‘shall ensure appropriate payments through banks within the country as well as to and from foreign countries.’ The Dutch Bank Act (Art. 9.2) of 1948 mentioned that the Dutch central bank shall ‘facilitate domestic and external money transfers.’ Art. 44 of the Statute of the Italian central bank mentioned that ‘the Bank of Italy shall manage the existing clearing houses and those which, with its approval, are established in the future.’]

The formulation (using the words ‘official reserves’ and not ‘the official reserves’) left open whether all reserves would be pooled and managed by the System. In the end, it would be decided that all reserves would fall under the management of the System, though not all of them would be pooled (see Article 31-ESCB). [The management of the reserves is under full responsibility of the central banks. Efforts by the government to influence the bank’s reserve management would contradict the Treaty-imposed independence of the central bank. Cf. Welteke in the Frankfurter Allgemeine of 18 October 2001: ‘Eine Uebertragung auf andere öffentliche Institutionen sowie jeder Versuch staatlicher Stellen, die Bank bei der Verwaltung der Währungsreserven zu beeinflussen, würden einen Bruch des Vertrages bedeuten und die Unabhängigkeit der Bundesbank verletzen.’]

II.2 History: Committee of Governors
The very first draft for the ESCB Statute listed the following tasks, clearly inspired by the Delors Report:
Art. 2.2 The basic tasks of the ESCB shall be:
– to formulate and implement the monetary policy of the monetary union;
– to implement the Community’s exchange rate policy and manage the foreign exchange reserves;
– to contribute to the smooth operation of the payment systems and the financial markets;
– to participate in the co-ordination of the banking supervision policies of the supervisory authorities;

– draft 11 June 1990

The Alternates of the Committee of Governors discussed this text on 18 June 1989. The Dutch and German alternates (Szász and Rieke) proposed to change the second indent regarding the conduct of exchange rate policy. They wanted to prevent that the ESCB would be merely implementing the exchange rate policy of others. They feared an activist exchange rate policy by the political authorities, which could conflict with the ESCB’s monetary policy
independence. They preferred the use of the word ‘operation’. (This would be inserted after the meeting of the Governors of 10 July – see below.)

In light of the discussion among the Alternates the second indent was split (into indent three and four). The next version would thus read:
“Art. 3 – Basic Tasks [The Alternates had decided to separate the System’s objectives (Art. 2) and the System’s tasks (Art. 3)]
3.1 The basic tasks of the ESCB shall be:
– to issue notes [and coins] which shall circulate as means of payment within the Community;
[Note issuance would be transferred to Chapter IV (Monetary Functions and Operations of the System) at the suggestion of Doyle, the Irish governor (see Article 16-ESCB): Banknotes). The Luxembourg presidency, when drafting the amendments for the EC Treaty, would mention bank note issuance in Art. 105(2), with Art. 105(1) enumerating the basic tasks of the System and Art. 105(3) the supervisory related tasks. During the summer months of 1991 the Dutch presidency would replace all articles of the Statute which figured in the Treaty (like the establishment of the ESCB, its objective, its tasks) by simple cross-references to the relevant Treaty articles.
This internal exercise was criticized, i.a. by the Dutch central bank, which wanted the Statute to remain self-contained and self-reading. The presidency then dropped the idea of substituting texts by cross-references – but in this process Article 15 (by then renumbered into Art. 16) had become the last article of Chapter III (Organization of the ESCB) instead of the first article of Chapter IV]
– to formulate and implement the monetary policy of the Community;
– to conduct foreign exchange policy of the Community in accordance with the exchange rate regime adopted by the Community;
– to manage the foreign exchange reserves of the ESCB;
– to promote the smooth operation of the payment systems;

– to promote the stability of the financial markets;[This indent will be dealt with further under Art. 3.3-ESCB]
[-to participate as necessary in the formulation and execution of policies relating to banking
supervision]. [The last indent was put between brackets to indicate that the appropriateness of the formulation would be reviewed in the light of a report by the Banking Supervisory Sub-Committee. This indent will be further dealt with under Art. 3.3-ESCB]
3.2 Other tasks may be conferred by a decision of the Council of the European Communities in order to promote the primary objective of EMU whilst preserving the objectives contained in Article 2 of the present statutes.” [Article 3.2 contains a very general so-called ‘enabling clause’. For the further development of the idea of an enabling clause’ we refer to Article 3.3-ESCB, sections II.2 and II.3. Suffice here to say that the governors postponed – and later dropped – the idea of a general enabling clause. Instead they introduced a so-called ‘simplified (=light) amendment procedure was introduced for a number of technical articles (in the extended draft version of the Statute of April 1991, Art. 41). A specific ‘enabling clause’ would be retained in the supervisory area – see Article 25 which is dealt with in the context of Art. 3.3-ESCB]
– draft 22 June 1990

During the meeting on 29 June 1990, the French and British alternates (Lagayette and Crockett) aimed for more clarity for the situation in which an international exchange rate agreement would be lacking. To this end they proposed to reformulate the third indent into:
‘- to formulate in consultation with the relevant Community bodies the exchange rate policy of the Community in accordance with the established regime.’

Szász counter argued that their formulation allowed the Council of Ministers, even in the absence of international exchange rate obligations, to declare – unilaterally – an exchange rate policy, e.g. aiming at a certain exchange rate vis-à-vis the dollar or an effective (weighted) exchange rate. The Council of Ministers could subsequently delegate the job to the ESCB, which could find itself before a job impossible to execute (at least impossible without distorting its domestic monetary strategy, as the only instruments available for the ESCB are the interest rate and interventions). Therefore, the ESCB would not be free to pursue the monetary policy it considered best.[This concern was shared by Tietmeyer, who was worried that the European Council would use its political authority (which extended into the area of exchange rate issues) to counter the stability policy of the ESCB. (Dyson/Featherstone (1999), p. 388.)]  Szász proposed to bring the matter before the governors.

As regards the fourth indent, Szász proposed to reformulate this indent into ‘to hold and manage the foreign exchange reserves‘. This was accepted. Tietmeyer and Szász emphasized that this indent should apply to all reserves of a Member State, and not only to the reserves held by the central banks. On this point Crockett disagreed (the British reserves were kept by the Exchange Equalization Fund and he could not imagine these reserves being handed over
to the ESCB). The French and Portugese alternates (Lagayette and Borges) sided with Crockett. Szász proposed to put this important issue before the governors. Szász was concerned that disunity among the governments with respect to the exchange rate, possibly enlarged by conflicting Member States’ foreign exchange transactions, would spill-over in disagreement on the right monetary policy and thus in pressure on the ESCB.

By 3 July Art. 3.1 would read: [Square brackets were used to indicate disagreement among the Alternates. The last two (bracketed) indents
would later be moved to a separate article 3.3]
“3.1 The basic tasks of the ESCB shall be:
– to formulate and implement the monetary policy of the Community;
– to determine the supply of money and credit and to issue notes [and coins] which shall circulate as means of payment within the Community;
[- to formulate in consultation with the other relevant bodies
[The word ‘other’ had been inserted, probably to indicate the ESCB was also itself a ‘relevant’ body] of the Community the exchange rate policy of the Community in accordance with the established exchange rate regime];
– to conduct foreign exchange operations;
– to hold and manage [the] official foreign reserves [of the Community];
– to ensure the smooth operation of the payment system;
[- to preserve the integrity of the financial system];
[- to participate as necessary in the formulation and execution of policies relating to banking supervision].”

– draft 3 July 1990

The governors met on 10 July 1990. De Larosière said he would not be able to sell at home any solution according to which governments would only be involved in decisions on the exchange rate regime. Changing parities within an existing regime had always been the prerogative of the government. He saw no need to change this. Pöhl was hesitant: implementation of, for instance, a G7 agreement to stabilize volatile exchange rate was only possible insofar it would not jeopardize the System’s first priority of price stability. A compromise was found by substituting ‘prevailing’ for ‘established (regime)’ and by including a reference to Art. 4.3 which defined the notion of exchange rate regime:
‘- to conduct foreign exchange operations in accordance with the prevailing exchange rate regime as referred to in Article 4.3.’
– draft 13 July 1990

Art. 4.3 (version of 3 July) had read:[For the development of Art. 4.3, eventually into Art. 109, see Art. 109-EC]
‘4.3 The ESCB shall be consulted with a view to reaching consensus prior to any decision relating to the exchange rate regime of the Community, including, in particular, the adoption, abandonment or change in central rates or exchange rate objectives vis-à-vis third currencies. [Opinions in accordance with Article 4.3 shall be published unless it is contrary to the best interests of the Community.]’
– draft 3 July 1990

However, Pöhl said he could not accept the use of the words ‘exchange rate objectives’, after which the Committee agreed to use the words ‘exchange rate policies’. (The final wording of 27 November 1990 of Art. 3 is shown in the box below.)

As regards ownership and management of the reserves, views did not converge. For the sake of clarity, we will first present the discussion among the governors on the foreign reserve issue until the end and then come back to the other tasks.[At stake was not the issue of pooling of reserves: the governors agreed that the ECB would have to be endowed with at least some reserves. The centre would be responsible for deciding on interventions. To be
credible in the markets it would have to be able to intervene with reserves of its own, though possibly it could use the NCBs as agents to carry out the actual operations. (For a discussion on the degree of centralization of the operations, see Cluster II)]
During the governors’ meeting of 11 September 1990 Leigh-Pemberton mentioned the idea that individual governments would probably wish to continue to undertake transactions which would require a certain level of reserves. In his view it would be axiomatic that governments would want to retain a certain proportion of their reserves. (This idea would resurface during the IGC and would result in a new Article 3.2, allowing governments to retain (minimum) working balances in foreign reserve assets.) [The alternates would continue to discuss Article 4.3. In the end the part relating to ‘or exchange rate policies’
would be put between square brackets, while it was also made clear that the consultations aimed at reaching consensus should be guided by the overriding principle of price stability. See for more details Article 109-EC]
During the governors’ meeting of 13 November it became clear that removing the square brackets around the word [the] still posed a problem to the UK. Leigh-Pemberton said his Majesty’s Treasury was not prepared to cede all or part of the reserves to a central institution. Pressure by the other governors increased. De Larosière said he had ‘conceptual difficulties’ with the British position, while Duisenberg felt it was unacceptable to leave outside the System reserves which might be used for transactions which could run counter to the policies of the ECB. However, Leigh-Pemberton did not budge and the brackets were retained in the text sent to the IGC. [To be complete, the words ‘ of the Community’ were changed into ‘of the participating countries’ and the square brackets around these words were deleted. The text of 27 November 1990 which was sent to the IGC contained only a few brackets. They related to the exchange rate issue (Art. 3.1 and Art. 4.3) and to the issue of division of labor between the centre and the NCBs (Art. 12.1 and Art. 14.4 of the draft Statute). Art. 18.1 also contained brackets, related to the question whether the ESCB would only be allowed to extend credits against collateral.]

As regards the other indents, the following can be said:
The indent relating to banknote issuance was deleted, because banknote issuance was dealt with separately in Article 16 of the Statute. The indent of the formulation and implementation of monetary policy in the Community was not amended.[The reference to ‘the Community’ should be read in conjunction with Art. 43-ESCB, which makes clear that Art. 3 does not confer any rights or obligations on Member States with a derogation. Same applies to the UK] The indent relating to the smooth operation of payment systems had been strengthened somewhat by replacing ‘promoting’ by ‘ensuring’. The indents on supervision and the stability of financial markets would be relegated to a separate Article 3.3 during the IGC (see Article 3.3-ESCB).

The final version of Article 3 of the governors’ draft would read:
“Article 3 – Tasks
The basic tasks to be carried out through the System shall be:
– to formulate and implement the monetary policy of the Community;
– to conduct foreign exchange operations in accordance with the prevailing exchange rate regime of the Community as referred to in Article 4.3;
– to hold and manage [the] official foreign reserves of the participating countries;
– to ensure the smooth operation of payment systems;
– to participate as necessary in the formulation, co-ordination and execution of policies relating to prudential supervision and the stability of the financial system.”

– draft 27 November 1990

We also show the most relevant part of the accompanying Commentary:
“All except one of the Community central banks agreed on the need to bring all official foreign reserve assets (including gold) of the participating countries into the System (i.e. into the NCBs) not later than at the beginning of Stage Three. This would require a Treaty provision according to which all foreign reserve assets held by official non-central bank bodies should be transferred to the NCBs of the countries concerned before the start of Stage Three (see also comments on Article 31). The reason for bringing all such assets into the System is to ensure that exchange rate and monetary policy operations are not affected by transactions in official foreign reserve assets undertaken by official bodies outside the System. The Bank of England, which does not hold the official foreign reserves of the United Kingdom, [The other exception was the Banca d’Italia: the Italian reserves were held and managed not by the Banca d’Italia, but by the Ufficio dei Cambi, though the Ufficio was chaired by the president of the Banca d’Italia. (In France reserves were located at the Banque de France, ownership however was claimed by the Trésor. This was disputed by the Banque de France, which claimed it also owned the reserves.)] sees no need for bringing such reserves into the System.”
– Commentary with Article 3-ESCB, November 1990

II.3 History: IGC
During the IGC it became clear that the UK position was untenable. To make a compromise possible the Dutch presidency introduced the idea (suggested by the UK) of making an exception for (limited) working balances. At the same time the Dutch presidency reformulated the relationship between the conduct of foreign-exchange operations by the ESCB and Art. 109, which stipulates the relative competences of the Council of Ministers and the ESCB in the area of exchange rate matters. [Likewise compromises on Article 109 itself came under reach only under the Dutch presidency. According to
Grosche (member of the German delegation) a stalemate in the area of exchange rate policy was only warded off thanks to the due diligence of the Dutch presidency. (Conversation with Grosche November 2001.)]

The tasks of the System are typically elements to be repeated in the Treaty itself. Below we first cite the working document of the Commission and the draft Treaty texts of the French and German delegation.

Article 106b
1. For the purpose of the preceding Article, [Containing the objective and the independence of the ECB] Eurofed’s tasks shall be:
– to determine and conduct monetary policy; [Differs from the governors’ text (which used the words ‘formulate and implement’), but this is probably due
to translation from the French. Many Commission documents were drafted in French.]
– to issue notes and coins denominated in ecus as the only legal tender throughout the Community, subject to the provisions of Article 109h(2); [Refers to an article providing for the possibility of technical arrangements under which Member States’ national currencies may provisionally remain legal tender as well]
– to conduct foreign-exchange operations in accordance with the guidelines laid down by the Council;
– to hold and manage foreign reserves;
– to participate in international monetary cooperation;
– to monitor the smooth operation of the payments system; [‘Monitoring’ is less far-reaching than ‘ensuring’. The Commission might have wished a stronger role for itself in this field]
– to participate as necessary in the formulation, coordination and execution of policies relating to banking supervision and the stability of the financial system.
2. In order to carry out the tasks assigned to it, Eurofed shall:
– conduct credit operations and operate in the money and financial markets;
– hold the foreign reserves of the Member States, ownership of which will have been transferred to the Community;
– have its own decision-making powers, and in particular the power to require institutions to lodge reserves with it.” [Instruments are dealt with under chapter IV-ESCB (artt. 17-24)]
– Commission draft December 1990

Article 2-4
1. Les missions fondamentales du SEBC sont:
– la définition et la mise en oeuvre de la politique monétaire de la Communauté;
– l’exécution des opérations de change, et la gestion de réserves officielles de change, conformément aux dispositions du chapitre 3 ci-après;
2. Pour mener à bien les missions qui lui sont assignées le SEBC:
[What follows mostly constitutes a list of instruments]
– règle l’émission des signes monétaires en écu ayant seuls force libératoire dans l’ensemble de la Communauté;
– oeuvre des comptes au bénéfice des institutions de crédit, organismes monétaires et financiers;
– peut mettre en oeuvre d’autres méthodes de controle monétaire dans les conditions fixées au paragraphe 3 ci-dessous;
– peut établir des rélations avec des banques ou institutions financières de pays tiers ou internationales, et effectuer des transactions de change;
– participe à la BRI [BIS] et, sous réserve de l’approbation du Conseil, à d’autres institutions internationales;
– exerce toute autre compétence qui pourrait lui être dévolué par le Conseil, statuant à l’unanimité.”
[This resembles a general enabling clause; for this topic see Article 41 (dealt with under Art. 3.3-ESCB)]
– French Treaty draft January 1991

As mentioned before, the German text on the monetary part of EMU was very concise, emphasizing that the German delegation strongly supported the governors’ draft ESCB Statute.[During the deputies IGC of 12 March 1991, Horst Köhler remarked that, ‘although the German government did not agree with all details of the draft Statute, it did accept the draft Statute as the outcome of sensitive negotiations.’] The German draft did not mention the tasks, or basic tasks, of the system, except in the following paragraph:
Art. 109a (ESCB), paragraph 2:
“In accordance with the Statute, the ESCB shall regulate the circulation of money and the provision of credit in the Community with the overriding objective of ensuring price stability.”

– German Treaty draft February 1991

During a first discussion among the IGC deputies (on 26 February 1991) Horst Köhler stressed his preference to include in the Treaty only the essential elements, like the objective, but not the tasks of the ESCB. Wicks (HM Treasury) put on the table the wish of the British government to continue to have its own foreign exchange reserves. The Dutch (Cees Maas) replied it would be unacceptable that, for instance, all Dutch reserve assets would be
controlled by the ESCB, but not all reserves of the UK.

The Luxembourg presidency would not include the instruments in its non-papers (these papers reflected not so much the consensus, but the ‘flow of the discussions’). Article 105 of its non-papers listed the tasks of the ESCB:
“ Article 105
1. The ESCB shall define and implement the monetary policy of the Community with a view to contributing to the realization of the objectives of economic and monetary union, as laid down in Article 2A, in accordance with the principles set out in Article 3A.
The ESCB shall conduct the exchange transactions and shall hold and manage official exchange reserves in accordance with the provisions of Article 109.
[At that stage Article 109 read as follows: ‘The Council [….] and after consultation of the Bank in an endeavour to reach consensus [consistent] with the objective of price stability, shall determine [guidelines for the Community’s exchange rate policy,] the exchange rate system of the Community, including, in particular, the adoption, adjustment and abandoning of central rates vis-à-vis third currencies.’][The text contained a footnote saying: ‘Still under discussion at this stage is the question of whether the ESCB holds and manages “the” (i.e. all) exchange reserves or simply “exchange reserves” (i.e. some of them) and the way in which these reserves are to be held and managed.’]
It shall ensure the smooth operation of the system of payments.
It shall take part, as required, in the definition, co-ordination and execution of policies relating to the prudential control and stability of the financial system.”

– Luxembourg presidency 10 May 1991

The Luxembourg presidency’s paper had combined the conduct of exchange transactions and the management of the reserves into one article; both would have to be ‘in accordance with the provisions of Art. 109’. [The Dutch presidency would split the article: the management of reserves has nothing to do with Art. 109. The Dutch presidency would adapt the terminology ‘in accordance with the provisions of Art. 109’ into ‘consistent with the provisions of Art. 109’ – which created more room for the ESCB (consistency being easier achieved than being in accordance with, but at the same time was more general than the formulation of the governors (which had referred to being in accordance with the ‘prevailing exchange rate regime’)]

The Luxembourg presidency’s paper did not contain a separate article nor an explicit reference to the overriding objective of monetary policy.[The same is true for the Commission’s document of December 1990] This probably explains why they needed the reference to Article 2A and 3A in their first indent of Article 105(1). In the meantime, the deputies IGC also had discussed the individual articles of the draft Statute.
Like most articles Article 3 remained intact, be it that the last indent relating to supervision was again put between brackets, awaiting further discussion in the Monetary Committee. [See for a further discussion Art. 3.3-ESCB]
The brackets in ‘[the] official foreign reserves’ remained in place, also awaiting the outcome of the discussion in the Monetary Committee.

The Monetary Committee discussed the issue on 17 May 1991. A clear majority was of the opinion that the reserves, also those of the governments, had to be to brought into the System, being the only way to ensure that those reserves cannot be used in such a way, or at such moments, which would conflict with the Community’s exchange rate policy. Wicks and the French Trésor called on the principle of subsidiarity and claimed that ownership of the non-
pooled reserves could remain as it was in each Member State. Conthe (Spain) sided with them. Chairman Maas concluded (1) that everybody agreed that all reserves should at least be managed by rules of the System and (2) that opinions diverged with regard to ownership of the reserves.

The Dutch presidency issued a first consolidated new draft proposal on 28 October 1991. As regards the external competences of the ESCB the draft followed the outcome of the Monetary Committee, while at the same time splitting the second indent in two indents (one on foreign exchange operations and one on holding reserves). To overcome British reluctance, the Dutch presidency inserted the notion of working balances for governments in a separate
article 3.3. [In retrospect, one could say this is a neat solution, as in a society of open and competitive markets and free capital flows all economic agents (including the public sector) should be free to acquire, hold and use foreign assets. The solution ensured there would be only one official operator in terms of exchange rate policy, i.e. the ESCB, while limits could be set above which governments would need approval for carrying out foreign exchange transactions.] The Dutch also inserted a new paragraph mentioning the primary objective of the ESCB, allowing them to return to the text of the governors, restoring the unequivocal primacy of the objective of price stability for the ECB, which had not been clear from the Luxemburg version of Art. 105.1. Only ‘without prejudice to price stability’ should the ECB’s policy contribute to the support of the Community’s objectives as mentioned in Art. 2 of the Treaty (into which Art. 2A had been merged).

“ Article 105
1. The primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the realization of the objectives of the Community as laid down in Article 2, in accordance with the principles set out in Article 3A. The ESCB shall act in accordance with the principles of an open market economy with free competition. 
2. The basic tasks to be carried out through the ESCB shall be: [The Dutch presidency used the wording ‘carried out through the ESCB’ to allow for the fact that the ESCB has no legal personality and could therefore not carry out a task itself. In this respect the Dutch presidency returned to the wording used in the governors’ draft.]
– to define and implement the monetary policy of the Community;
– to conduct foreign exchange operations consistent with the provisions of Article 109;
– to hold and manage the official foreign reserves of the Member States;
– to promote the smooth operation of payment systems; [Change at the instigation of, inter alia, the UK. The expression ‘to promote’ is weaker than the expression ‘to ensure’. Apparently this preference was not shared by everybody: during the EMU Working Group session of 6 November at least the Danish and Italian delegation suggested to replace ‘promote’ again by ‘ensure’. The UK feared too much interference with private sector operated payment systems.]
– to contribute to a smooth conduct of policies relating to prudential supervision of credit institutions and the stability of financial markets.
3. From the holding and management of the official foreign reserves as mentioned in paragraph 2 may be excluded official working balances for non-monetary transactions. [Among these are small purchases, but probably also covert diplomatic and other financial transactions. The transactions with non-pooled reserves have to respect the limit referred to in Art. 31.2-ESCB (version of 28 October 1991): “All other operations [i.e. other than those necessary to fulfil obligations towards international organizations] in foreign reserve assets remaining with the NCB’s after the transfers referred to in Article 30 [pooling of reserves], and Member State transactions with foreign assets of the working balances shall, above a certain limit to be established [by the Governing Council], be subject to approval by the ECB in order to ensure consistency with the exchange rate and monetary policy of the Community.” These limits have been set at euro 200 million for outright transactions against the euro and at euro 500 million for cross-currency transactions (gross) for central governments; for regional governments higher limits have been set, while the limit for the Commission (though on a net basis) is lower – see Governing Council decision of 3 November 1998)]
4. [relates to the issuance of banknotes]”
– presidency’s text of 28 October 1991

The Dutch presidency reformulated Article 3.1 of the draft Statute according to the same line. [“Article 3 – Tasks
3.1 As set out in Article 105 paragraph 2 of this Treaty, the basic tasks to be carried out through the ESCB shall
– to define and implement the monetary policy of the Community;
– to conduct [etcetera]
3.2 In accordance with Article 105 paragraph 3 of this Treaty, official working balances for non-monetary transactions may be excluded from the holding and management of the official foreign reserves as mentioned in paragraph 1.”] The presidency’s text left open the issue of ownership. Whatever the ownership of nationally held reserves, reserves pooled to the ECB can be considered as virtually being owned by the ECB, based on the wording used in Art. 30.1: “[….] the ECB shall be provided by the NCBs with foreign reserve assets [….] up to an amount equivalent of ECU 50.0000 million. [….] the ECB shall have the full right to hold and manage the foreign reserves that are transferred to it.” [In a late stage the last sentence would be extended with the following addition: “and to use them for the purposes set out in this Statute.” (UK suggestion during the EMU Working Group meeting on 6 November
The ownership issue was discussed by the EMU Working Group, chaired by Bernard ter Haar of the Dutch Ministry of Finance, on 6 November 1991. The UK and France preferred to drop ‘to hold’ and just mention ‘to manage’. Others (Italy, Denmark, Greece, Spain and Ireland) considered this to be too weak, because it would seem to exclude the possibility of unwanted ‘guidance’ by the ‘owner’. The UK also levied a protest against the expression ‘working
balances for non-monetary transactions’. ‘Working’ implies a small amount, while the UK envisaged four categories of expenditures which should be covered by exemption: future government outlays, increases in the reserve position in the IMF, debt service on sovereign debt and ‘a stock of assets in a range of currencies for international emergencies’. There was no support for the UK. Paragraph 3 was already a gesture in their direction. The Italian
delegation (Papadia) threatened to withdraw its support for the entire paragraph, if the UK would continue to insist. In the end the text was rephrased into: ‘The third indent of paragraph 2 shall be without prejudice to the holding and management by the governments of Member States of foreign-exchange working balances.’ – to make very clear that the use of these funds below the threshold is not subject to approval by the ECB.


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