Contents
1Introduction
2European Union and the ECB: A brief overview
2.1 The European Union
2.1.1 History
2.1.2 The growing Union
2.2 The ECB
2.2.1 Monetary Union and the way to the ECB
2.2.2 The structure of the ESCB
2.2.3 ECB - tasks, objectives and strategy
2.2.4 The structure of the ECB
3Challenges of the enlargement for the ECB
3.1 Voting procedures before the eastern enlargement
3.2 The need for an adjustment of the voting procedures
3.3 How to do the adjustment ?
3.4 The ECB´s solution
4Conclusions
1 Introduction
Almost every day there can be found headlines in the newspapers or comments in the media concerning the EU and its enlargement to the east. Very often the effects on labour markets, migration or political issues like public safety are the centre of the debate. In this paper we will take a closer look at the effects of the enlargement on the ECB or, to be more precise, its institutional design.
Therefore it is necessary to understand the recent developments as well as the history of the European Union. Hardly any conclusions about how the institutional design of the ECB should or should not be affected by the enlargement process are possible without a good knowledge of the ESCB and the ECB. Chapter 2 will first address the history and the enlargement of the European Union in sections 2.1.1 and 2.1.2. The ECB will be the center of section 2.2. In chapter 3 the different aspects of enlargement on the institutional design will be considered in detail and different approaches of how it can be dealt with the relevant challenges of the enlargement will be discussed. Finally, in Chapter 4 the reader will be given a summary of the paper and some conclusions will be drawn.
2 European Union and the ECB: A brief overview
2.1 The European Union
The European Union (EU) is a unique organisation. Clearly, it is more than a confederation but its intention is not to replace the prevailing member states. In a Europe of different nationalities, languages and traditions the EU wants to assure a close cooperation of the individual countries in order to achieve common political goals like peace, security and democracy. The greater political and economic weight of the EU compared to its relatively small member countries makes it possible to reach goals which were out of reach for each country individually. But for the success of the Union also an economic cooperation is essential. Therefore the single european market was built and the Euro serves as the common currency in the Euro area.
2.1.1 History
Today more than 450 million people are part of the European Union and live together peacefully. But in the history of Europe there were several wars in which millions of people lost their lives. Germany and France, Europe´s biggest countries, were enemies in the three wars of the period 1870 to 1945. Having in mind the military conflicts of the past, European politicians were searching for ways to assure a lasting peace in Europe for the future. An economic and political integration of their countries seemed to be suitable to achieve this objective. That was the reason why in 1950 Robert Schuman, the French
Foreign Minister, made the proposal to integrate the coal and steel industries of Western Europe. The fact that Schuman picked coal and steel is not by chance. Military relevant resources should become instruments of reconciliation. So, in April 1951 the European Coal and Steel Community (ECSC) was established in Paris which had the power to decide about the coal and steel industry of the participating countries. The members of the ECSC were Germany, Belgium, Luxembourg, France, Italy and the Netherlands ("The six"). In addition to this first attempt to unite the countries economically the foundation of a European Defense Community should help the political integration along. But France did not ratify the relevant treaty in 1954 and so the foundation of such an organization failed. However, the success of the ECSC led to considerations of "The six" to integrate additional sectors of their economies. As a result, these countries signed the Treaties of Rome in 1957 thereby setting up the European Atomic Energy Community (EURATOM) as well as the European Economic Community (EEC). The EEC aimed at reducing trade barriers between the member countries and creating a common market. Another objective was a common agricultural policy because agricultural subsidies were a substantial part (almost 90%) of the EEC´s budget. Nevertheless, it is important to see that at that time no other subsidies were in the EEC´s field of activity. After all, the institutions of these European communities were united in 1967. For the first time there was a single Council of Ministers, a single Commission and the European Parliament. Since 1979 the members of the European Parliament can be directly elected by the people of the member states every five years. In 1986 there was the first reform of the comprehensive contract. The so called Single European Act aimed at the completion of the European single market within december 1992, i.e. at that time the "four freedoms" should have been accomplished: The free movement of goods, persons and capital and the freedom to provide services. Finally, in 1992 the Treaty of Maastricht led to an extended co-operation of the member states. The Common Foreign and Security Policy (CFSP) and the co-operation in Justice and Home Affairs together with the European communities represent the three pillars of the EU. The Maastricht Treaty added these forms of co-operation to the already existing community system and thus created the European Union.
2.1.2 The growing Union
Looking at the past, the number of member states of the European Union was not constant. Starting with only six member states ("the Six") the first enlargement happened in 1973. Ireland, Denmark and the United Kingdom joined the EC. This was called the northern enlargement. In the so-called southern enlargement Greece, Portugal and Spain became members of the EC in 1981. The german unification in 1990 was a special case. The GDR was re-unified with Western Germany and thereby became part of the EC. In 1995 Austria, Sweden and Finland accessed the European Union. The accession of Eastern Germany and Austria must be seen as the beginning of the EU eastern enlargement. In the nineties more and more eastern countries applied for EU membership (see Table 1). So in 2000 the European Council of Nice focussed on eastern enlargement and decided about changes of voting weights in the Council of the European Union and the allocation of seats in the European Parliament. Finally, in 2004 ten additional eastern countries joined the Union as the European Council in Copenhagen had decided in 2002. But the European Council of course determined criteria which the entrants have to fulfill, such as stable political institutions, respecting human rights and certain economic criteria (these will be discussed later). Figure [1] provides a good overview of the past developments.
For other Eastern European countries like Romania and Bulgaria the planned date of accession is 2007. Croatia applied for a membership but accession negotiations will first be started in 2005. Accession negotiations with Turkey will begin in October 2005. As easily can be seen from Table [2], the European Union in the future could have more than 27 member states.
2.2 The ECB
2.2.1 Monetary Union and the way to the ECB
The previous chapter focussed on the European Union. The aim of this chapter is to describe briefly but clearly the way up to the point the ECB was founded, its tasks, objectives and its organizational structure.
The origin of the creation of the ESCB is the so-called Werner report in 1970. The Heads of Governments of the EC decided a phased plan with the objective to set up an Economic and Monetary Union (EMU). The three steps of the plan were to achieve a better economic policy coordination and a reduction in exchange rate fluctuations in the first phase, the control of exchange rate changes by the governments and the introduction of a European unit of account in the second phase and the creation of a European System of Central Banks as well as the introduction of a common currency in the third phase. All this should have been achieved in 1990 - retrospective one must say this was illusory.
Shortly after the fixed exchange rate system of Bretton Woods had collapsed, the EC Council of Ministers decided thesnake in the tunnel, to prepare for the monetary union. The fluctuation margins between the currencies of the member countries in relation to fluctuations against the Dollar should be reduced (to +/- 2,25%). After some countries dropping out of the system making the D-Mark too dominant, this mechanism failed finally. Thesnake in the tunnelwas replaced by the European Monetary System in 1979 which should reduce exchange rate fluctuations, too. In addition, the EMS should support the economically weaker countries and contribute to the convergence of the participating countries. The European Currency Unit (ECU) as an artificial basket currency served as an internal accounting unit of the EU member states within the EMS. Like thesnake in the tunnelthe EMS defined bandwidths for the fluctuation of the member countries bilateral exchange rates. For each combination of the paticipating currencies a certain parity had to be defined. The so-calledparity gridshowed all this combinations. Until August 1993 the fluctuation margins were 2,25% to each side1. After the currency crisis the bands were increased to 15% on each side. Every time the exchange rates reached the upper or the lower bound the central banks had to intervene through open market operations to support the relevant currencies. That´s why the upper and the lower bound are also called intervention points of the ERM. After the Single European Act 2 demanded for convergence of economic and monetary policy the Delors- Commission should develop a strategy how the Economic and Monetary Union (EMU) could be achieved. Like the Werner report the Delors-report consisted of three phases and later on served as a basis of the relevant decisions in the Maastricht Treaty in 1991. The Treaty is based on two principles[3]: the gradual transition towards monetary union (in contrast to the German monetary unification) on the one hand and the so-called convergence criteria which have to be fulfilled before an entry in the union on the other hand. The objective of the first phase of the Treaty which already started 1990 was to orientate economic and monetary policy to price stability and the reduction of budget deficits as well as the completion of the European single market. This should assure a stable non-inflationary growth with low unemployment. The second stage started in 1994. Monetary policy remained a field of action for the national central banks and the member countries should prepare to fulfill the covergence criteria for the third stage. But the most important change of this second stage was the creation of the European Monetary Institute (EMI). The rather limited tasks of this precursor of the ECB were for example to support the co-operation of the member states in monetary affairs, to develop the monetary instruments necessary for the third stage and to develop the monetary policy strategy of the ESCB. In January 1999 finally the third stage of the EMU started. The exchange rates between the national currencies were irrevocably fixed but the currencies were in circulation besides the euro until the end of 2001. In 2002 the euro replaced the national currencies and became the single currency. The core of the monetary union is the creation of the ECB. Although the national central banks are not allowed to decide about monetary or exchange rate policies anymore they will be part of the ESCB. Only those countries were allowed to take part which carried out the convergence criteria. The inflation rate of a country that wants to accede the union is not allowed to be more than 1,5% higher than the average inflation rate of the three lowest inflation rate countries of the EMS and the long-term interest rate is not allowed to be more than 2% higher than the average of those countries. In addition, the country´s currency must not have had a devaluation within two years before the entrance. Another important precondition is the requirement that the budget deficit is below 3% of the GDP and the debts should not be higher than 60% of the GDP. To make sure that the member states take care of their budget deficits the European Council signed the stability and growth pact in 1997.
2.2.2 The structure of the ESCB
The ESCB consists of the ECB and the national central banks (NCB´s) of all EU member states (Article 107.1 of the Treaty). The question wether these states have adopted the euro or not does not play a role. Of course, the ECB is considered to be the institutional top of the ESCB, so the organizational structure of the ESCB is a vertical one with the NCB´s at the basis. This federal structure is meant to reflect the diversity within the Community. The intention is to implement the monetary policy decisions which are made centrally in a decentralized manner.
2.2.3 ECB - tasks, objectives and strategy
It is the ECB´s main target to maintain price stability. But in the Maastricht Treaty price stability is not defined explicitly. Price stability for the ECB means an increase of the HICP within the euro area of below but close to 2% p.a. This also shows that deflation is also fought against because of its strongly negative effects. In addition the ECB should without endangering price stability support the economic policies in the Community so that the goals of the Community can be better achieved. The objectives of the EU are a high level of employment, a steady and stable economic growth and price stability. The ECB has the important task to define and implement the monetary policy for the euro area. But it also has to make foreign exchange and it is responsible for the management of the official foreign reserves. Another field of action is to make sure that the payments systems operate smoothly.
To achieve the goal of price stability the ECB adopts a monetary policy strategy which it callsstability-orientated monetary policy. This approach rests on two pillars - one for a broadly based assessment of price developments and the other one defines a reference value for M3. For the assessment of economic developments and the resulting risks to price stability the ECB watches several indicators like wages, exchange rates and price indices. The monetary pillar can be seen as a weak monetary target because money growth is not an intermediate target but is used as an indicator for medium-term risks to price stability. This two pillar strategy is meant to assure that no relevant information about risks to price stability are overlooked.
2.2.4 The structure of the ECB
For the next chapter it is also crucial to have a good understanding of how the ECB is organized. Figure 2 shows the three decision-making bodies of the ECB but only two of them are responsibe to prepare and implement the single monetary policy. Those are the Governing Council and the Executive Board of the ECB. These two bodies run the ESCB. The third body only exists when there are member countries which have not (yet) adopted the euro.
The highest decision-making body of the ECB is the Governing Council. It consists of the six members of the Executive Board and the Governors of the NCB´s of the euro area.
In both bodies, the Governing Council and the Executive Board, the President of the ECB is the chairman. According to the ESCB statutes the Governing Council has to meet at least ten times a year but the meetings take place every two weeks in Frankfurt actually. The Governing Council has several tasks. It is responsible to formulate the monetary policy of the euro area, i.e. it has to make the monetary policy decisions. This includes the strategy , setting the interest rates and the minimum reserves. Additionally, it has to decide about the use of other instruments regarding monetary or exchange rate policy and it represents the ESCB internationally[4].
The Governing Council is not an executive body, i.e. it decides about the monetary policy but it is not responsible for conducting it. This is a task for the decentralized NCB´s and the Executive Board which can be seen as the management of the ECB.
The Executive Board is an executive body, i.e. it is responsible for the current business of the ECB. The Executive Board prepares the meetings of the Governing Council but its main task is to conduct and implement the monetary policy decisions and guidelines made by the Governing Council. This is the reason why the Executive Board is authorized to give the NCB´s the necessary instructions. In contrast, the relationship between the Executive Board and the Governing Council should not be seen as a hierarchical one. The ESCB is run by both the Executive Board and the Governing Council.
The Executive Board consists of 6 members altogether: The President, the vice- president and four other members. These are appointed by the Heads of State and only if they were first recommended by the European Council of Ministers. But only an expert can be considered for this task according to the Treaty. That means only acknowledged persons with lots of working experience in the monetary or the banking sector are suitable for this job. As a consequence, the nationality of a person should not be taken into account but their qualification for the position. This can be doubted in reality. Putting their candidate into office is often not only a question of prestige to the different countries but also a question of national interest ( the human resource problem). So the Spanish Executive Board member was followed again by Spanish fellow countryman. The Italian and German support was due to the fact that they want to replace their members in 2005 and 2006 with persons of their nationality, too.
Within the Executive Board, every member has one vote and decision are made with simple majority voting. In the case it cannot be reached, the President has to decide. The President is also responsible for representing the ECB in the public.
After having discussed two important bodies of the ECB there is only one left: the General Council. Two persons out of the Executive Board are also members of the General Council. In addition to the President and Vice-President the governors of all EU member states are in the General Council. That means that the number of members in this Council is dependent on the enlargement process of the EU (see again Table 2 ). When the voting is concerned there is the principle"one person - one vote". Every member, regardless if the relevant country has adopted the euro or not (i.e. is in the third stage) , has one vote. The other four members of the Executive Board can also take part in the meetings but they are not allowed to vote. The General Council is responsible for the tasks of the former EMI.
[...]
[1] The Escudo, Peseta and Italian Lira had wider margins.
[2] See 2.1.1
[3] See De Grauwe (1997): The Economics of monetary integration
Frequently asked questions
What is the purpose of this document?
This document provides a comprehensive language preview of a publication concerning the European Union, the European Central Bank (ECB), and the challenges of EU enlargement, particularly its impact on the ECB's institutional design.
What topics are covered in this document?
The document covers the history and development of the European Union, the structure and function of the ECB, the challenges posed by the eastern enlargement of the EU to the ECB, and potential solutions to address those challenges.
What is the structure of the European Union as described in this document?
The European Union is presented as a unique organization that seeks close cooperation among member states to achieve common political goals such as peace, security, and democracy. It emphasizes the importance of economic cooperation, including the single European market and the Euro.
What is the history of the European Union's enlargement?
The document outlines the EU's expansion from its original six members to include various countries through several enlargements: the northern enlargement (Ireland, Denmark, United Kingdom), the southern enlargement (Greece, Portugal, Spain), the German unification, and the accessions of Austria, Sweden, and Finland. It also discusses the eastern enlargement and the ongoing accession processes of other countries like Romania, Bulgaria, Croatia, and Turkey.
What is the purpose of the ECB?
The ECB's main target is to maintain price stability, defined as an increase of the Harmonized Index of Consumer Prices (HICP) within the euro area of below but close to 2% per annum. It also supports economic policies in the Community to achieve a high level of employment, steady economic growth, and price stability.
What are the tasks of the ECB?
The ECB's tasks include defining and implementing monetary policy for the euro area, conducting foreign exchange operations, managing official foreign reserves, and ensuring the smooth operation of payment systems.
How is the ECB structured?
The ECB is part of the European System of Central Banks (ESCB), which includes the national central banks (NCBs) of all EU member states. The ECB's decision-making bodies are the Governing Council, the Executive Board, and the General Council. The Governing Council formulates monetary policy, while the Executive Board implements it. The General Council handles tasks related to countries that have not yet adopted the Euro.
What is the role of the Governing Council of the ECB?
The Governing Council is the highest decision-making body of the ECB and consists of the six members of the Executive Board and the Governors of the NCBs of the Euro area. It formulates the monetary policy of the euro area, sets interest rates, and decides on the use of monetary and exchange rate policy instruments.
What is the role of the Executive Board of the ECB?
The Executive Board is responsible for the current business of the ECB and implements the monetary policy decisions and guidelines made by the Governing Council. It consists of the President, the Vice-President, and four other members appointed by the Heads of State.
What is the General Council of the ECB?
The General Council includes the President and Vice-President of the ECB, as well as the governors of all EU member states' central banks. It is responsible for tasks of the former European Monetary Institute (EMI) and consists of one person from each relevant country who has one vote.
What is the Stability and Growth Pact?
The Stability and Growth Pact was signed by the European Council in 1997 to ensure that member states take care of their budget deficits.
- Quote paper
- Simon Peglow (Author), 2005, ECB institutional design after enlargement- Is a reform necessary?, Munich, GRIN Verlag, https://www.grin.com/document/109555
