THE EUROPEAN CENTRAL BANK HISTORY, ROLE AND FUNCTIONS THE EUROPEAN CENTRAL BANK - HISTORY, ROLE AND FUNCTIONS BY EUROPEAN CENTRAL BANK EUROPEAN HANSPETER K. SCHELLER THE EUROPEAN CENTRAL BANK HISTORY, ROLE AND FUNCTIONS BY HANSPETER K. SCHELLER Published by: © European Central Bank, 2004 Address Kaiserstrasse 29 60311 Frankfurt am Main Germany Postal address Postfach 16 03 19 60066 Frankfurt am Main Germany Telephone +49 69 1344 0 Internet http://www.ecb.int Fax +49 69 1344 6000 Telex 411 144 ecb d All rights reserved. Reproduction for educational and non-commercial purposes is permitted provided that the source is acknowledged. The cut-off date for the data included in this book was 1 July 2004. ISBN 92-9181-505-5 (print) ISBN 92-9181-506-3 (online) CONTENTS ABBREVIATIONS AND ACRONYMS 7 FOREWORD 9 ACKNOWLEDGEMENTS 11 INTRODUCTION 12 CHAPTER 1 EMU, the ECB and the euro 15 1.1 The road to EMU and the euro 15 1.1.1 First steps towards European monetary integration 15 1.1.2 The European Monetary System and the Single European Act 19 1.1.3 The Treaty on European Union 20 1.1.4 The realisation of EMU and the changeover to the euro 22 1.2 Legal basis and characteristics of EMU 28 1.2.1 Legal basis 28 1.2.2 Characteristics 30 CHAPTER 2 Central banking in EMU: legal, institutional and organisational aspects 41 2.1 The ECB, the ESCB and the Eurosystem 41 2.1.1 ESCB and Eurosystem as the organic link between the ECB and the NCBs 42 2.1.2 The ECB as a specialised organisation of Community law 43 2.1.3 The euro area NCBs as an integral part of the Eurosystem 44 2.1.4 The NCBs of the non-participating EU Member States 44 2.2 Objectives 45 2.2.1 The primary objective of price stability 45 2.2.2 The support of general economic policies 47 2.2.3 The principle of an open market economy 47 2.3 Assignment of tasks by the Treaty 48 2.3.1 Basic tasks of the Eurosystem 48 2.3.2 Other tasks 49 2.4 Centralised decision-making and operational decentralisation 49 2.5 The ECB’s role in the Eurosystem 51 2.5.1 Decision-making centre of the ESCB and the Eurosystem 51 2.5.2 Consistent implementation of policy decisions 62 2.5.3 The ECB’s regulatory powers 68 2.5.4 The ECB’s advisory activities 69 2.5.5 Monitoring compliance with the prohibition of monetary financing and privileged access 73 2.5.6 Performance of tasks taken over from the EMI 73 3 CHAPTER 3 ECB policies and Eurosystem activities 77 3.1 The conduct of monetary policy 77 3.1.1 Theoretical foundations 77 3.1.2 The ECB’s monetary policy strategy 80 3.1.3 Monetary policy operations 86 3.2 External operations 90 3.2.1 Foreign exchange operations 91 3.2.2 Management of foreign exchange reserves 94 3.3 Payment and clearing systems 98 3.3.1 Provision of payment and securities settlement facilities 99 3.3.2 Oversight of payment and securities settlement systems 102 3.4 Euro banknotes and coins 103 3.5 Collection and compilation of statistics 108 3.6 Economic research 110 3.7 The ECB’s contribution to prudential supervision and financial stability 111 3.8 Intra-Eurosystem financial relationships 114 3.8.1 Financial resources of the ECB 115 3.8.2 Monetary income sharing 118 CHAPTER 4 The ECB and the European Community 121 4.1 Independence 121 4.1.1 Institutional independence 122 4.1.2 Legal independence 122 4.1.3 Personal independence 123 4.1.4 Functional and operational independence 123 4.1.5 Financial and organisational independence 124 4.2 Democratic accountability 125 4.2.1 Accountability as a core element of legitimacy 125 4.2.2 Nature and scope of the ECB’s accountability 126 4.2.3 Discharge of the accountability obligation 127 4.3 Dialogue and cooperation with Community institutions and bodies 130 4.3.1 European Parliament 130 4.3.2 EU Council and Eurogroup 132 4.3.3 European Commission 134 4.3.4 Economic and Financial Committee 135 4.3.5 Economic Policy Committee 136 4.3.6 Macroeconomic Dialogue 136 4.4 The ECB’s linguistic regime 136 4.5 Judicial review by the European Court of Justice 137 4.6 Scrutiny of financial management and integrity 138 4 CHAPTER 5 The ECB’s involvement in international cooperation 141 5.1 Background 141 5.2 Policy content of the ECB’s international relations 143 5.3 ECB relations with international organisations 144 5.3.1 International Monetary Fund 144 5.3.2 Organisation for Economic Co-operation and Development 146 5.4 ECB participation in informal fora for finance ministers and central bank governors 147 5.4.1 G7 finance ministers and central bank governors 147 5.4.2 G10 finance ministers and central bank governors 148 5.4.3 G20 finance ministers and central bank governors 148 5.4.4 Financial Stability Forum 149 5.4.5 Bank for International Settlements and central bank fora 149 CHAPTER 6 The ECB as a corporate entity 153 6.1 Mission statement 153 6.2 Corporate governance 153 6.2.1 The role of the Governing Council and the Executive Board in corporate governance 154 6.2.2 External and internal control layers 154 6.2.3 Access to the ECB’s archives 156 6.3 Organisational structure 157 6.4 Staff and staff relations 158 6.4.1 Staff 158 6.4.2 ECB staff representation 159 6.4.3 Social Dialogue with regard to the ESCB 159 6.5 Seat and premises 160 ANNEX I 163 Excerpts from the Treaty establishing the European Community ANNEX 2 181 Protocol on the Statute of the European System of Central Banks and of the European Central Bank GLOSSARY 203 BIBLIOGRAPHY 217 INDEX 225 5 BOXES Box 1 The road to the euro 16 Box 2 Overview of the preparatory work carried out by the EMI 23 Box 3 Irrevocably fixed euro conversion rates 26 Box 4 Chronology of European integration 27 Box 5 The Community framework for fiscal policies 33 Box 6 Conditions necessary for the adoption of the euro 35 Box 7 The benefits of price stability 46 Box 8 Members of the Governing Council (1 June 1998 to 1 July 2004) 58 Box 9 The transmission mechanism of monetary policy 78 Box 10 Why maintain a low positive rate of inflation? 82 Box 11 The two pillars of the ECB’s monetary policy strategy 84 Box 12 Open market operations and standing facilities 87 Box 13 Minimum reserve requirements 90 Box 14 Joint Statement on Gold (8 March 2004) 97 Box 15 From design to circulation: preparing the euro banknotes and coins 104 Box 16 Key for subscription to the ECB’s capital 114 TABLES Table 1 The two-group rotation system (first stage) – voting frequencies of governors in each group 55 Table 2 The three-group rotation system (second stage) – voting frequencies of governors in each group 56 Table 3 Eurosystem monetary policy operations 86 Table 4 Capital key of the ECB (%) 115 CHARTS Chart 1 The ESCB and the Eurosystem 41 Chart 2 The stability-oriented monetary policy strategy of the ECB 83 Chart 3 The organisational structure of the ECB 157 DIAGRAMS Diagram 1 The three-group rotation system for the ECB Governing Council (scenario for a euro area of 27 Member States) 56 ILLUSTRATIONS 1 The Treaty on European Union (Maastricht Treaty) with the Statute of the ESCB and of the ECB, signed on 7 February 1992 14 2 Governing Council meeting at the ECB on 22 July 2004 40 3 Illuminated euro symbol in front of the Eurotower 76 4 Jean-Claude Trichet, President of the ECB, during a hearing at the European Parliament in 2004 120 5 Press conference with the ECB President, Jean-Claude Trichet, at the Bank for International Settlements in Basel on 26 June 2004 140 6 The Eurotower, the ECB’s headquarters in Frankfurt am Main 152 6 ABBREVIATIONS AND ACRONYMS BEPG Broad Economic Policy Guideline BIS Bank for International Settlements BSC Banking Supervision Committee CESR Committee of European Securities Regulators CMFB Committee on Monetary, Financial and Balance of Payments Statistics EBA Euro Banking Association EBC European Banking Committee EC European Community ECB European Central Bank ECJ European Court of Justice ECOFIN Economics and Finance (Ministers) ECU European Currency Unit EEC European Economic Community EFC Economic and Financial Committee EMCF European Monetary Cooperation Fund EMI European Monetary Institute EMS European Monetary System EMU Economic and Monetary Union EPC Economic Policy Committee ERM exchange rate mechanism ESCB European System of Central Banks EU European Union GDP gross domestic product HICP Harmonised Index of Consumer Prices IMF International Monetary Fund MFI monetary financial institution NCB national central bank OECD Organisation for Economic Co-operation and Development OJ Official Journal of the European Union OLAF European Anti-Fraud Office RTGS Real-time gross settlement SGP Stability and Growth Pact SSS Securities settlement system TARGET Trans-European Automated Real-time Gross settlement Express Transfer system 7 FOREWORD The ECB is fully committed to the principles of openness and transparency, and it honours this commitment in particular with a large volume of publications that explain its aims and activities. In addition to the frequent and extensive publications on current developments within its field of competence, the ECB publishes Working Papers and Occasional Papers on specific topics.