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Special Issue THE DISSOLVING ASSET conditions change and historical comparisons are only relevant to a limited extent, experience and BACKING OF THE EURO insight may still be derived from history. Some schol- ars, who have dealt extensively with the history of cur- rencies, recognized with frightening clarity from the NGO AUER I S * beginning the construction flaws of the ESCB or the Eurosystem that are becoming visible now (Heinsohn and Steiger 2002). Since apparently economics is not In the course of the debate on the Target credits of the (sufficiently) willing to delve into history, it is Eurosystem it has become evident in recent months dammed to relive it anew. that an increasingly large share of the credit-created money supply (as much as two-thirds by the end of Heinsohn and Steiger (2002) noted already a decade 2010) was actually issued in the GIPS countries ago that the ECB is only the torso of a central bank (Greece, Ireland, Portugal and Spain). In this regard, and that its lacking competencies are not widely the fear held by numerous Germans when the euro understood. Most (German) economists saw the ECB was introduced – that at some point they would be as a copy of the former Bundesbank or its predeces- carrying southern European bank notes in their wal- sor, the Bank Deutscher Länder,3 and were apparent- lets – has largely become reality. But does it matter ly not aware of the high degree of decentralization in where the money supply was issued and what the pur- the Eurosystem. However: “[t]he ECB and the euro chase of government bonds by the central banks of area NCBs [national central banks] jointly contribute the Eurosystem implies about the stability of the cur- strategically and operationally, to attending the com- rency? This paper will try to answer these questions. mon goals of the Eurosystem, with due respect to the principle of decentralization in accordance with the We shall focus on the relationship (or disparity) Statute of the ESCB” (European Central Bank 2011, between the central bank money supply (M0) and the 191, emphasis added). securities of the central banks activated at issue. When we refer to money supply or money we always Criticism must especially be levied at the lack of con- mean central bank money (M0). It consists of the cur- trol on the part of the ECB over the national central rency and deposits of the commercial banks at the banks’ issuance of currency. central bank.1 A wish: a true central bank The institutional framework: the ECB2 – only the torso of a central bank Based on the experience gained from the Latin and Scandinavian monetary unions Erik Lindahl has Of course, the countries participating in the euro have propagated a central bank which truly stands above not created the first currency union in history. Even if the national central banks for monetary unions of various nation states. While national central banks * Johann Wolfgang Goethe University, Frankfurt am Main. would still issue the notes for domestic purposes, for 1 “Nowadays the cash base (monetary base) mostly consists of the liabilities of the central bank, primary notes, but also bankers’ bal- ances at the central bank which the bankers can, if they wish, with- 2 In accordance with Article 282(1) of the Treaty on European draw in note form to add to their own cash holdings” (Goodhart Union, the European Central Bank (ECB) and the national central 1987). Setting deposits equal to notes is questionable in the banks constitute the European System of Central Banks (ESBC). Eurosystem, however. In contrast to the old Bundesbank and the The ECB and the national central banks of the Member States Fed, in the Eurosystem there is no longer a uniform character of cen- whose currency is the euro constitute the Eurosystem. tral bank money (notes equal deposits at the central bank), as one of 3 The Bank Deutscher Länder (BdL), 1948 to 1958, was more decen- the main characteristics of genuine money, lack of income, is no tralized in its decision-making than the Bundesbank. The Council of longer given for deposits. The deposits of commercial banks at their Governors consisted of the eleven presidents of the state central national central banks are interest bearing and treated just like banks (Landeszentralbanken) and the six Executive Directors of the demand deposits at a commercial bank. Correspondingly, the BdL, but the BdL Directors had decision-making powers without deposits at the national central banks in the Eurosystem should be waiting for the Council´s consent. In addition, the BdL had the defined as claims to central bank money and no longer as central monopoly of issuing notes. The ECB is therefore not at all compa- bank money per se (see Heinsohn and Steiger 2008, 140). rable to the old BdL. 63 CESifo Forum 2012 Special Issue cross-border transactions they would have to obtain financial sector nor central bank money. Thus, the ‘international currency’ from this central bank of cen- ECB is clearly not a bank of issue, i.e. it is excluded tral banks (the ‘Main Central Bank’ – see also Steiger from the main refinancing operations of the 2002, 3) – in the same manner that commercial banks Eurosystem. To have an independent balance sheet, refinance with their central bank (Lindahl 1930, 170). which the ECB indeed has, is not sufficient to meet the requirements of a bank of issue” (Heinsohn and A similar – and still more far-reaching – proposal for Steiger 2002, 8). a central bank of the national central banks, which carries the submitted good securities of national cen- The aforementioned statement refers to the balance tral banks and thereby strictly controls the issue of sheet of the ECB of December 31, 2001, i.e. before the notes, has in fact been made for the euro. Here the balance sheet of January, 1 2002 for the first time car- national central banks could not issue euros indepen- ried the position ‘lending to financial sector’ (asset dently, but would have to obtain them against their side) or ‘banknotes in circulation’ (liability side). To good securities. Carlo Ciampi, the then Italian central be sure, this applies only to the negligible 8 percent of bank president, campaigned for such an institution in the entire position ‘banknotes in circulation’ in the 1988: “to bring the creation of ECUs [euros] under consolidated balance sheet of the Eurosystem. strict control, the central monetary institution should Furthermore, these notes (the aforementioned 8 per- be given the power to grant member central banks dis- cent) also continue to be issued by the national central cretional credit in ECUs, in the same way as a central banks and are only booked in the balance sheet of the bank refinances commercial banks through open ECB as ECB notes. The ECB can also issue money market or rediscount operations” (Heinson and itself by means of permitted operations, for example Steiger 2002, 6). intervening in the foreign currency market. However, the most important monetary policy operations, If such a structure is not given, other measures must repurchase agreements and longer-term refinancing be taken to prevent an excessive issue of poorly operations, are not transacted by the ECB but by the secured notes by individual central banks (Target national central banks (European Central Bank 2000, problem). A regular settlement of claims and liabili- 15; Steiger 2002, 22). ties like that in the Federal Reserve System (see Sinn and Wollmershäuser 2011, 48–50) or an agency that The facts (2): the lack of power of the Executive Board keeps an eye on the respective sums would have been an advantage. The problem that claims and liabilities The members of the Executive Board have only six of between note-issuing banks are created – and then the 23 votes in the Governing Council and the Executive excessive, poorly secured issuance of individual note- Board is therefore in no way comparable to the pow- issuing banks puts other note-issuing banks at risk – erful directorate of the former Bundesbank. is not really new. The private note-issuing banks of England in the 18th century created the institution of In Article 12 Section 1 of the Statute of the European a clearing house in 1773 to oversee these amounts. System of Central Banks and the European Central This case is only partly comparable, however, as at the Bank the most important component of the division time excessive issuing could result in discounts on the of tasks between the Governing Council and the issued notes, whereas today the central banks belong- Executive Board is laid down: “the Governing ing to the Eurosystem must accept the Greek Council shall formulate the monetary policy of the ‘Y euros’4 (meant are the Target claims) without any Union including, as appropriate, decisions relating to discount. intermediate monetary objectives, key interest rates and the supply of reserves in the ESCB, and shall The facts (1): the ECB – a central bank without notes establish the necessary guidelines for their implemen- tation. The Executive Board shall implement mone- “A first glance at its [the ECB’s] balance sheet imme- tary policy in accordance with the guidelines and deci- diately reveals […] that this bank is in no way whatso- sions laid down by the Governing Council”. ever a ‘bank of issue’. […] The ECB balance sheet as at 31 December 2000 does neither have lending to It is evident that the decision powers of the Executive 4 The various euro notes can be identified by a letter in front of the Board are essentially limited to its share of votes serial number as to which central bank of the Eurosystem issued it.

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