Task Force on Economic and Monetary Union

Briefing 25

The effects of EMU on the Institut monétaire luxembourgeois

Briefing drawn up by the Directorate-General for Committees and Delegations

The opinions expressed hereinafter are the author's own and do not necessarily reflect the position of the European Parliament

A reform of the law is under way to bring the Luxembourg Monetary Institute into line with the Treaty provisions requiring the independence of central banks

Luxembourg, 17 January 1997 PE 166.608 BEL-LUX

CONTENTS

Page

I. The current situation of the IML within the context of EMU...... 3

II. The Grand Duchy of Luxembourg and its currency: the historical background ...... 4

III. Third phase of EMU: the measures called for by the Treaty ...... 5

Bibliography ...... 7

Author: Heinz-Hermann Elting

Editor: Ben Patterson

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1. THE CURRENT SITUATION OF THE INSTITUT MONETAIRE LUXEMBOURGEOIS IN THE CONTEXT OF EMU

1. The transition to the final phase of Economic and Monetary Union will involve ending the currency association with Belgium since all the functions of the association and the rules laid down thereby will have been absorbed by the European Monetary Union.

2. By virtue of the Treaty on European Union and, particularly, the Treaty establishing the European Community, Title VI: 'Economic and Monetary Policy', the Member States are obliged to adapt their national legislation to the requirements for achieving EMU. Luxembourg law in this area comprises the law of 15 March 1979 on currency arrangements and the law of 20 May 1983 setting up the Institut monétaire luxembourgeois (IML) which has the powers of a central bank and constitutes a flexible structure for taking whatever pragmatic action needs to be taken in response to needs as they arise in a changing monetary environment. Under the present arrangements the IML is an institution which possesses the characteristics of a central bank.

3. In 1993, the Luxembourg Government tabled bills giving the IML the specific attributes of a national central bank required for the third phase. These bills, and the announcement that further legislation would be adopted within the requisite timescale for the transition to the final phase of the EMU, indicate that the Luxembourg Government is committed to enabling the IML to take on the functions it needs for the ESCB,

4. The Governor of the National Bank of Belgium had stressed to the Monetary Sub-Committee meeting on 17 December 1996 that he would do everything to enable the Luxembourg Central Bank to operate autonomously; in other words, the National Bank of Belgium would hand its branch office in Luxembourg over to the IML.

5. From 1994 on, IML staff began to be seconded to the Luxembourg branch office of the National Bank of Belgium (BNB). These secondments form part of the implementation of Agreements concluded between the two institutions and approved by the Belgian and Luxembourg Governments with a view to reinforcing cooperation between the BNB and the IML so as to get the latter ready to assume all its obligations in the third phase of EMU. However, the monetary association between Belgium and Luxembourg will remain unchanged for the duration of the second phase of EMU.

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II. THE GRAND DUCHY OF LUXEMBOURG AND ITS CURRENCY: THE HISTORICAL BACKGROUND

It is worth recalling the various stages of Luxembourg's monetary history. The French Revolution brought about a modern standardized currency with the 'franc germinal' of the year XI. Luxembourg then became part of the Dutch monetary system for a time: the Belgian monetary system and the 'Zollverein' currency agreements. After 1922, these agreements were replaced by the monetary provisions made within the framework of the Belgo-Luxembourg Economic Union.

Following the Second World War, international treaties were initially enough to establish the Grand Duchy's international monetary links. Following the collapse of the 'BRETTON WOODS' currency system, the Luxembourg Government introduced legislation to redefine the parity of the franc. Following the amendment of the International Monetary Fund Structures in 1978, the Luxembourg law of 15 March 1979 for the first time provided a complete and consistent definition of the monetary status of the Grand Duchy, whereby the Government determined the exchange provisions applicable to the franc. The Grand Ducal Regulation of 31 March 1979 provided for the participation of the Luxembourg franc in the European Monetary System and established a one-to-one exchange rate between the Luxembourg and Belgian francs.

Maximum limits for the amount of banknotes and coins issued under the authority of the Luxembourg State are laid down by an implementing protocol to the Protocol of 9 March 1981 between the Grand Duchy and the Kingdom of Belgium concerning the monetary association. It also provides for the state to share in the advantages and profits of the Belgian State as sovereign state of the Belgian National Bank. On this basis, the surplus arising from the arbitrage of assets in gold carried out in 1996, amounting to 222 billion Belgian francs, was shared following the payment by the BNB to the Belgian and Luxembourg States of the amount due them on the basis of their relative population sizes.

A point of interest: the Luxembourg Prime Minister, Pierre Werner, was entrusted by the Heads of State and Government of 2 December 1969 at The Hague Summit with chairing the 'Working Party on Establishing and Economic and Monetary Union of the European Community'. In 1983, as President of the Government and Minister of the Treasury, Pierre Werner was also to bring about the establishment of what would become Luxembourg's central bank, the Institut monétaire luxembourgeois.

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III. THIRD PHASE OF EMU: THE MEASURES CALLED FOR BY THE TREATY

Addressing the Monetary Sub-Committee on 17 December 1996, Mr VERPLAETSE, the Governor of the Belgian National Bank, acknowledged that 'the Institut monétaire luxembourgeois is not a central bank but will become one . . .; the branch office in the Grand Duchy of Luxembourg will follow the Euro timetable. The branch office will be handed over to our Luxembourg friends when the time comes; the Belgian flag will be replaced by the flag of Luxembourg.

For the IML, a transition to the third phase of EMU means a progressive transformation from being a virtual monetary authority exercising its powers within the limits imposed by the currency association with Belgium, to becoming a national central bank enjoying the legal status and fulfilling the same role as the central banks of the Member States within the framework of the European System of Central Banks (ESCB), under the aegis of the European Central Bank (ECB). Most of the changes which need to be made to bring Luxembourg law into line with the Treaty's requirements involve the law governing the IML. The latter is a member of the European Monetary Institute and will form an integral part of the ESCB. On 7 December 1993, the government tabled a bill amending the laws the IML concerning and the monetary status of the Grand Duchy.

In the explanatory statement to its bill, the government stressed that further, complementary legislation might be required in order fully to achieve the third phase once the latter had become operational. The draft legislation was submitted to the EMI for its opinion, pursuant to Article 109f (6) of the Treaty and Article 5(3) of the EMI statutes; the EMI adopted its opinion on 12 April 1994 as follows:

'The EMI took note of the fact that the draft intends to bring existing laws into accordance with the Treaty on European Union, not only for Stage Two of EMU, but also in anticipation of stage Three. It does not give rise to any major issues to which the attention of legislative authorities should be drawn. The legislation is considered to fulfil all requirements stated in the Treaty and the Statute of the ESCB with respect to the institutional independence of the IML, the independence of the members of its decision-making bodies as well as its functional and operational independence. The objectives and tasks of the IML are defined consistently with Articles 2 and 3 of the Statute of the ESCB.

It can thus be concluded that the legislation complies fully with the Member States' obligation arising from Article 108 of the Treaty for Stage Two and already to a large extent with a view to stage Three. In addition, Article 2(4) of the law establishing the IML explicitly states that the Institute will perform its duties in the framework, and with due regard to, the international agreements concluded by Luxembourg in the monetary field. It is understood that this includes the parts of the Treaty on European Union which deal with EMU'.

The EMI's opinion should be taken in conjunction with the observations contained in Annex 1 of its report on progress towards convergence; on page 152, the EMI recalls that Luxembourg is linked to Belgium by an economic union comprising an association at monetary level, and that the IML, set up in 1983, does not currently possess all the powers of a fully-operating central bank, since the Belgian National Bank carries out a certain number of functions for both Members of the association.

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In the current division of labour the IML, with a staff of about 100, basically deals with supervisory activities, while the BNB branch office, with a staff of about 30, deals with managing current accounts of banks in Luxembourg and with circulating Belgian banknotes.

In its paragraph 5 concerning the Luxembourg Monetary Institute, the EMI notes that 'the statutes of the IML include a certain number of provisions contrary to the obligations imposed by the Treaty and the statutes of the ESCB with regard to the independence of the Central Bank'. With regard to institutional independence, it is the Government rather than the IML which is responsible for monetary policy! The EMI observes that 'this state of affairs is incompatible with the Treaty and the statutes'. The changes to be made to the existing text should recognize that in the Third Phase, powers with regard to monetary policy are invested exclusively in the Council of Governors of the Central European Bank, and that the IML will form an integral part of the ESCB. The EMI also voices reservations on the subject of the status of the directors and Council of the IML.

'Should the Council of the IML become the body responsible for activities concerning the European Central Banking System, the personal independence of its members should be provided for in accordance with the obligations laid down in the Treaty and the statutes. In particular, they should be guaranteed the same provisions protecting their function as those which appear in Article 14(2) of the ESCB statutes, namely a mandate of at least five years' duration and reasons for dismissal similar to those referred to in that article'.

The EMI also voices reservations with regard to the Luxembourg Government's right to dismiss the entire IML management in case of fundamental disagreement. This does not accord with the reasons for dismissal to be found in Article 14(2) of the ESCB statutes. With regard to functional independence, the current IML statutes apparently do not clearly express the absolutely fundamental nature of the need to maintain price stability.

The complementary legislation announced by the Luxembourg Government should take account of the observations of the EMI.

Once this legislation has been completed, the IML will have the status already assigned to it by the Community texts. Article 1.2 of Chapter I ('Constitution of the ESCB') states that the Luxembourg Monetary Institute will be the Central Bank of Luxembourg'. In the EMI statutes, the wording is a little more prudent but nonetheless expresses confidence: Article 1.2 states that the Luxembourg Monetary Institute is considered to be the central bank of Luxembourg.

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Bibliography

1. Draft law amending the laws concerning the Luxembourg Monetary Institute and the Monetary status of the Grand Duchy of Luxembourg, No 3862, Chambre des Députés, ordinary session 1993-1994 (tabled 7 December 1993).

2. Opinion of the Luxembourg Conseil d'Etat of 15 December 1995.

3. Opinion of the Luxembourg Chamber of Commerce of 30 January 1995.

4. European Monetary Institute Progress towards convergence in 1996 (Frankfurt, November 1996)

5. Innovation - Intégration:

Mélanges pour Pierre WERNER Editions St. Paul, 1993:

- Jean GUILL, Director of IML, L'Institut Monétaire Luxembourgeois: une banque centrale en devenir, p. 77.

- Jean GODEAUX, Honorary Governor of the Belgian National Bank, L'Union Economique belgo-Luxembourgeoise et son avenir dans l'UEM, p. 167.

- Alfons VERPLAETSE, Governor of the Belgian National Bank, La politique monétaire du BENELUX, p. 173.

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