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Diapositiva 1 a.a. 2018-2019 Course in European Institutions and Policies – Prof. Andrea Prontera 03 May 2019 SARA ROCCHI Part one: the history of monetary integration – milestones Part two: the European Central Bank and its monetary policy – main institutional and policy features 1962 Majorin Memorandum The European Commission proposes the creation of a permanently fixed exchange rate among the currencies of the six member states. 1964 Committee of Governors of Central Banks of Member States of the European Economic Community. It will manage all the exchange rate systems. 1970 Werner Plan Three-stage process for the creation Economic and Monetary Union (EMU). 1972 Snake-in-the-tunnel Aim: to limit fluctuations between European currencies each currency was allowed fluctuation band of 2.25% around the parity with the US Dollar. Members: Germany, France, Italy, Benelux, United Kingdom, Denmark, Ireland 1979 European Monetary System Adjustable peg system against European Currency Unit (ECU) Floating margin: 2.25% on either side of the agreed bilateral rate D-Mark as de facto anchor 1988 Delors Committee Aim: drawing the blueprint for the Economic and Monetary Union. Members: Jacques Delors, governors of the national central banks, three experts 1989 Delors Report Monetary policy aimed at price stability Monetary policy run by a completely independent central bank Three-step integration process 1992 Treaty on the European Union (Maastricht Treaty) 1990-1994 liberalisation of capital markets 1994-1998 creation of European Monetary Institute to prepare the transition to Euro. The Committee of Governors became the Council (the governing body). Member states were asked to meet the convergence criteria. 1999 – onwards single currency managed by the European Central Bank and the European System of Central Banks (2002 cash changeover). What is Sound public Sustainable Durability of Exchange rate Price stability measured: finances public finances convergence stability Government How it is Consumer price Government debt Long-term Deviation from deficit as % of measured: inflation rate as % of GDP interest rate a central rate GDP Not more than 2 percentage points Not more than 1.5 Participation in above the rate of percentage points ERM II for at Convergence Reference value: Reference value: the three best above the rate of the least 2 years not more than 3% not more than 60% performing criteria: three best performing without severe Member States in Member States tensions terms of price stability The Maastricht convergence criteria Source: European Commission Euro Area 19 countries, 340 millions of citizens 1999: Germany, France, Italy, Spain, Netherlands, Belgium, Luxemburg, Ireland, Finland, Austria, Portugal 2001: Greece 2007: Slovenia 2008: Cyprus, Malta 2009: Slovakia 2011: Estonia 2014: Latvia 2015: Lithuania Source: EU The organisation, powers and functions of the European Central Bank were outlined in: Treaty on European Union - Articles 105 to 115 (Chapter 2 of the Treaty on the Functioning of the European Union – Lisbon Treaty 2007) Protocol number 18 on the ‘Statute of the European System of Central Banks and of the European Central Bank’ (Protocol number 4 of TFEU). The Eurosystem is responsible for: Defining and implementing the monetary policy Conducting foreign exchange operations and managing the euro area’s foreign currency reserves Promoting the smooth operation of payment systems Authorising the production of euro banknotes by Eurozone national central banks Ensuring safety and soundness of financial institutions and stability of the banking system Main features: Decentralised implementation Independence Price stability as primary objective 1.Decentralised implementation Source: Central Bank of Denmark GENERAL COUNCIL Composition: president, vice-president of ECB, all the governors of National Central Banks of the Euroarea. Tasks: Coordination of monetary policy of states whose currency is not the euro; preparations for the adoption of euro by member states. Transitional status: it will dissolve once all EU members have adopted the euro. GOVERNING COUNCIL Composition: Euro Area NCBs governors, ECB president and vice president, 4 members of the Executive Board. Tasks: formulation of monetary policy and implementation guidelines. Voting rule: simple majority of member with voting rights (unless stated differently); Informal rule: Consensus. Vote allocation: One permanent voting right for each member of the Executive Board. Monthly rotation of voting rights among the NCB governors. National Central Banks Governors are divided in two groups on the basis of: 1. Size of national economy 2. Size of national financial sector First group: Germany, France, Italy, Spain and Netherlands share 4 votes. Second group: remaining 14 central banks share 11 votes. Rotation of voting rights in the Governing Council 2019 Source: ECB EXECUTIVE BOARD Composition: ECB president, vice-president and 4 members. Nomination: appointed by the European Council by qualified majority vote after recommendation of the Ecofin Council and after consultation with EP and ECB Governing Council. Tasks: preparation of meeting of the Governing Council; implementation of monetary policy decisions according to GC guidelines. Voting rule: simple majority, one head, one vote. In case of tie, the President has the casting vote Source: ECB PERSONAL INDEPENDENCE No member of the decision-making bodies shall seek or take instructions (art.7) Term of office shall not be less than 5 yrs for Governors of the NCBs; 8 yrs for the Executive Board members. National governors or Executive Board members can be retired only by the ECJ for serious misconduct. INSTITUTIONAL INDEPENDENCE Prohibition of monetary financing: Art 21.1 prohibits any direct purchase of public debt instruments and any type of credit facility in support of any public institution. Clear hierarchy of policy objectives: Art.2 “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 Union”. OPERATIONAL INDEPENDENCE Decision over the operational definition of the policy objective. In 1998 the Governing Council defined price stability as a “year-on-year increase in the Harmonised Index of Consumer Prices for the Euro Area below, but close to, 2%, over the medium term” Decision over the monetary policy strategy to achieve the policy objective i.e. how to assess price developements and what instruments to use. OBJECTIVE: Price stability defined by the Governing Council as: “year-on-year increase in the Harmonised Index of Consumer Prices for the Euro Area below, but close to, 2%, over the medium term”. STRATEGY: To steer the level of short term interest rates and specifically the EONIA by: - signalling the monetary policy stance through decisions about the official interest rate - managing liquidity in money markets. Transmission mechanism of monetary policy - ECB Source: ECB .
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