The European systems of central banks: quo vadis?

• Author: Deller, Patrick

1. INTRODUCTION

   After years of unsuccessful attempts to achieve monetary integration within the area of the European Union (Elf),(1) the Economic and Monetary Union (EMU), as set forth under the newly designed Treaty Establishing the European Community (EC Treaty),(2) entered the third and final stage of monetary integration on January 1, 1999.(3) There were two possible ways for the EU to enter the third stage of monetary integration. The first possible entrance procedure required that "a majority of the Member States fulfil the necessary conditions for the; adoption of a single currency."(4) Unlike the first procedure, the second alternative does not call for a certain number of EU countries to comply with the crucial criteria, such as legal and economic requirements.(5) Under either procedure the national legislation of the member states, including the statutes of the national central banks (NCBs), must be in compliance with Articles 107 and 108 of the EC Treaty and the European System of Central Banks (ESCB) Statute.(6) The ESCB Statute is a protocol to the EC Treaty.(7) With respect to he economic requirements, the member states must provide a high degree of sustainable convergence, which applies to the following:(8) (1) stable prices and low inflation;(9) (2) public finances (comprised of public deficit and public debt);(10) (3) exchange rates;(11) (4) long-term interest rates;(12) and (5) other factors, (13) The uniqueness of this "road on which there is no turning back"(14) is demonstrated by the fact that never in history have democratic states transferred theft monetary policy sovereignty and abandoned theft currencies in favor of a centralized, "supranational institution"(15) such as the ESCB.(16) The ESCB consists of a two-tier scheme as a commitment to its federal structure.(17) The ESCB will be comprised of the NCBs of the participating countries with the European Central Bank (ECB) as its "decision-making center."(18) These tiers are integrated to handle the new currency called the "euro."(19) Like its forerunner the European Monetary Institute (EMI), the ECB(20) is located in the financial center of Germany, Frankfurt, where the German Central Bank (Deutsche Bundesbank) is also centered.(21)

   Rumors concerning the possible first wave of EMU participants never seemed to end,(22) since according to the EMI's Convergence Report 1996(23) the majority of the member states did not meet the necessary conditions for the adoption of the single currency.(24) The rumors were primarily due to the poor fiscal situation and the budgetary deficits of the member states.(25) The mystery about the "ins" and "outs" was ultimately revealed on March 25, 1998 when the EU Commission and the EMI simultaneously published their respective convergence reports as required under Article 109j(1) of the EC Treaty.(26) The Commission recommended the countries that were eligible for EU admission to the European Council.(27) For 11 member states the dream of the expected paradise has come true--Germany, France, Italy, Spain, Netherlands, Belgium, Austria, Finland, Portugal, Ireland, and Luxembourg.(28) By contrast, Sweden failed to fulfill two(29) and Greece failed four(30) of the above-mentioned criteria. In accordance with their particular status,(31) Denmark(32) and the United Kingdom(33) have already notified the Council that they will voluntarily not participate in the third stage of the EMU. However, even with all the enthusiasm and the major improvements that have been made throughout the EU within the last two years, it can not be overlooked that the debt-to-GDP ratio is still among the Community's biggest worries.(34) It is by no means surprising that the EMI, regarding the top stars in this area, Belgium (122.2%)(35) and Italy (121.6%),(36) has unambiguously expressed its doubts "whether the ratio of government debt to GDP will be `sufficiently diminishing and approaching the reference value at a satisfactory pace.'"(37) The language used by Professor Hans Tietmeyer, President of the Deutsche Bundesbank,(38) was more direct when presenting the Statement of the Central Bank Council on the state of convergence in the EU before the German Federal Cabinet.(39) Tietmeyer noted that the continuously expressed commitment to construe and apply the convergence criteria strictly and narrowly(40) is deemed all the more important since economic and fiscal policy will remain a national responsibility. He also raised "substantial doubts" and "serious concern" about the sustainability of the governmental fiscal situation in Belgium and Italy.(41) Tietmeyer calculated that Belgium and Italy would have to achieve a surplus of at least 2.3% and 2.2% respectively to fulfill the reference value of 60% debt ratio within ten years.(42) This ratio is very unlikely to be achieved in the near future since further deficits are expected in these states.(43) Thus, the Deutsche Bundesbank consented with reservations to the Commission's evaluation,(44) while the Federal Government expressed its concern more modestly by only insisting on the achievement and maintenance of the criteria.(45)

   In contrast to the general consent about who should be in, there seems to be a never-ending fight about how the ESCB should be organized and structured with regard to its independence and political accountability.(46) Recently these issues were highlighted during the nomination of the ECB President. Despite consensus among most member states that EMI President and former Governor of the Nederlandsche Bank, Willem (Wim) Frederick Duisenberg, should receive the nomination, France nominated Jean-Claude Trichet as a candidate for the position,(47) Trichet, as head of the Banque de France,(48) is known for his desire to make the ECB and its policies more politically accountable.(49) The battle for the ECB presidency is surprising since the ECB's stated policy is to be solely committed to the task of achieving price stability throughout the entire Community, regardless of the nationality and the interests of the member country whose citizen heads the ECB.(50) Hence, the cut and thrust that mainly took place between Bonn and The Hague on the one hand and Paris on the other did not only provide for tensions in the political relationships among the respective countries, but also endangered the credibility of the ECB and the prospective venture of the single currency.(51) France, faced with the deadlock over the ECB presidency, also blocked the appointment of a successor to the London-based European Bank for Reconstruction and Development (EBRD), which was headed by the Frenchman Jacques Larosiere until January 31 1998.(52) The publicity of this messy squabble, within the EU and the United States as well, caused many to question the supposedly harmonized union.(53) Observers were probably asking themselves how one of the biggest challenges of the 21st century could be achieved when there was trouble right from the start. Interestingly, a suggestion not provided for in the Maastricht Treaty or the EMI Protocol was made to settle the case simply by sharing the regular eight year term between the two competitors.(54) Naturally, as with every compromise there was resistance and support.(55) Everyone was curiously looking forward to the final round of the ongoing fight to take place in Brussels on May 2, 1998 when the Council of the European Union, composed of the heads of state and government, would make the ultimate decision on the countries that would participate in the last stage of EMU. The negotiations among the fifteen heads finally culminated in a political understanding and a unanimous nomination of Wim Duisenberg as the future president of the ECB.(56) Unfortunately, this was not the end of the dispute, but the beginning of new debates, rumors, and misrepresentations that filled newspapers throughout the world.(57) In particular, German Chancellor Kohl was heavily criticized,(58) a fact that the opposing Social Democratic Party warmly welcomed in view of the forthcoming elections on September 27, 1998.(59) The stumbling block was that there had been "horse-trading"; France was allegedly given the right to take over the ECB presidency after four years.(60) At least the wording of Duisenberg's response to his nomination did not give rise to such concern. He clarified the situation in public and during his hearing before the European Parliament's Committee on Economic and Monetary Affairs on May 7, 1998.(61) In his statement, he announced that he does not want to serve the full term in view of his age.(62) He also made clear his intention to stay through the transitional arrangements for the introduction of the euro notes and coins in January 2002.(63) For the French, this wording was enough to celebrate their victory.(64) Presumably, they did not want to hear the final remarks of Duisenberg at the EU Summit that read as follows:

   I wish to emphasize that this is my decision, and my decision alone, and it is entirely of my own free will, and mine alone, and not under pressure from anyone that I have decided not to serve the full term.... Also in the future the decision to resign will be my decision alone. This must be clearly understood.(65) We will see if he keeps his promise.

   In any event, this story shows that dynamite still exists in the supposedly regulated issues of independence and accountability, and the question simply remains: why? This article therefore intends to provide insight into the sensitive areas of these issues and will also explain the structure and functioning of the ESCB. Due to the developing nature of the EMU and the ESCB, the author will naturally refer to recent developments related to these matters. Moreover, because the ECB is supposedly modeled after the Deutsche Bundesbank, the functioning of the two are closely linked.

2. THE EUROPEAN SYSTEM OF CENTRAL BANKS (ESCB)

   1. Historical Background: From Hanover to Maastricht

      The key...