The development of the European Central Bank, Transparency and Accountability

Table of contents

1. Introduction

2. A historical background of the developments towards the establishment of the ECB
2.1 The road to EMU
2.2 The establishment of the ECB

3. Monetary Strategy and democratic Accountability of the ECB
3.1 Monetary strategy of the ECB
3.2 Transparency and Accountability of the ECB

4. Conclusion

5. Literature

1. Introduction

The following paper is a seminar paper for the seminar “European Institutions, Decisions and Structures” to the curse of studies “European Studies”. Topic of the paper is “The development of the European Central Bank, Transparency and Accountability”.

For the purpose of the curse this paper will give a brief overview about the historical development of the European Central Bank and the predecessor institutions of the European Monetary Union. Therefore the author will select certain points in the path to the monetary Union in order to give a slight insight in the developments behind this powerful European institution. A short outline of the chapter will also be provided in the beginning of it.

After the author has examined the chosen parts of the historical background with the conclusion that the integration process of the European Monetary Union is somehow exemplary for the integration movement in Europe itself, he will go over to the examination of the monetary strategy carried trough by the central bank. Again this investigation will have an introductionary character which also spears out the claim to be complete in the editing of the subject of matter. This section about the strategy of the central bank will shortly comprehensively explain the two pillar strategy and its advantages for the agents concerned.

Followed from a section about transparency and accountability which will be introduced with some opening remarks as well, the paper will conclude with a revision of the applied arguments of the text and drawn upon this a short closing comment to the read paper.

The paper will provide the reader with a basic knowledge about the development of the European Central Bank and additionally with some arguments which could be helpful in the discussion of the just mentioned subject.

2. A historical background of the developments towards the establishment of the ECB

2.1 The road to EMU

The European integration process as such is a process of designating national political sovereignty to supranational institutions as to, in the beginning, the European Coal and Steal Community (ECSC), later on to the European Economic Community (EEC) and European Community (EC) and finally to the institutions of the European Union (EU), for the purpose of reaching the goal of peaceful economical and political prosperity and sustainable development and growth in Europe. Along with the further deepening of political integration during the last five decades, the economical integration is one of the most communalized parts of this historical endeavour.

Remarkable steps of the economical integration process in Europe have been made with the establishment of the Common Market and later on with the introduction of the European Monetary Union (EMU) in three steps. Some important cornerstones of this economical integration process which mounted up in the successful implementation of the EMU and finally in the establishment of the European Central Bank (ECB) will be examined in the following. The historical examination of the subject of matter leaves the “cornerstones” of the integration process not fully exploited because of the limited format of the paper but it will provide a sufficient overview for the concern of the article.

The establishment of a common market in Europe seamed to be the mayor integration objectives of the EC treaties of 1951 and 1957. Economic and monetary policy was only concerned as a “matter of common concern”, which was coordinated through “recommendations”.^[1] A further reaching concentration of national policy areas on a supranational level was out of sight in this early period of integration process of the EC. The first proposal for an economic and monetary union was then issued by the European Commission during the second stage of the Customs Union in 1962, whereby the Brighton Woods exchange rate system still was in place as a functional tool to balance currency disparities worldwide.^[2] Caused by tensions in this worldwide exchange rate system, which increasingly interfered in the free movement of goods and capital in Europe, a working group under the Prime Minister of Luxembourg, Pierre Werner developed a plan (Werner Plan) to establish the EMU.^[3]

Despite the fact that the Werner group had issued detailed intermediate and final stages for implementing the EMU, the Council decided on principle in 1971 only to implement the first stage of the EMU and to leave out the remaining proposals. Although the member states of this early form of EMU had experienced a relatively good cooperation with the inter-European exchange rate margin of the so called “currency snake”, the call of the European Commission for a deeper economical integration was not heard. Weakened by this unwillingness for deeper integration by the member states and the different reactions of member states on the oil crisis’s in the 1970’s a full employment of the EMU had failed that time.^[4]

As in the second half of the 1970 the economic stability of the EC was threatened by the policies of the two competing groups which resulted in the breakdown of the “currency snake”, the spirit of integration was rediscovered and the European Monetary System (EMS) together with the European Currency Unit (ECU) where installed in order to cope with the emerged exchange rate disparities in the EC.^[5] The designated aim of the EMS was to recreate a stable climate in Europe. Despite the fact that the EMS was designed as a definite monetary system, disagreements about its final shape and economic divergences in Europe disabled this new attempt to fully converge the member state economical policies as well. Even so, the new emerged level of convergence in monetary policy in the Community, generated by the EMS, set a base for the ideological recovery of the earlier failed concept of the EMU in the 1980’s.^[6]

Later on the Single European Act of 1987 proposed the creation of the European Union as the ultimate goal for the community and also strengthened the further development of the single market. As a result of that, the president of the Commission Jacques Delors together with the EC central bank governors and some independent advisers developed a plan (Delors Plan) to realize the EMU in three stages.^[7] After the approval of the plan by the European Council and the implementation of the first stage of the EMU in July 1990, the conference of Rome in December 1990 generated the needed treaty amendments in order to realize the further implementation of the EMU.

2.2 The establishment of the ECB

The earlier description of the “uneven road” towards the establishment of a monetary union in Europe will now be continued with a brief treatment of the introduction process of the European Central Bank as independent institution responsible for the monetary policy in Europe. For the reason of the compact format of this paper the following establishment process of the ECB will again only focus on some selected stages in the initiation of the ECB and is not suppose to contain a full coverage of the available information on the subject of matter.

As a matter of fact that the ECB was actually initiated by the second and third stage of the establishment of the EMU, the first stage which entered came into force in July 1990 will not be examined here, although it was an important step for the coordination of national monetary and economical policies in the participating member states.^[8]

The Maastricht Treaty of 1993 laid down road for the second and third stage of the EMU and in the aftermath of this treaty, the start of the second stage of EMU was set to January 1994.^[9] In the course of this stage the National Central Banks (NCBs) where prohibited to grant loans to the public sector^[10], and therefore the member states where enforced to stricter obedience to budgetary discipline. This step to cut short the exclusive availability of the central banks and theire funds to the national governments set the base for the later independence of the ECB. Another important step towards the EMU and ECB in this phase was the foundation of the European Monetary Institute (EMI) in 1994.

[...]

^[1] Deutsche Bank, (2004), Tilch (2000)

^[2] See loc. cit.

^[3] Deutsche Bank, (2004), Tilch (2000)

^[4] See loc. cit.

^[5] See loc. cit

^[6] See loc. cit.

^[7] Deutsche Bank, (2004), Tilch (2000)

^[8] See loc. cit.

^[9] Deutsche Bank, (2004)

^[10] Article 101 of the EC treaty: cited from (Deutsche Bank, (2004))