Prince Henri Auditoire 02 BW

The role of the Central Banks in Euroland - Yves Mersch

Prague, 28th March 2000

Seule la parole prononcée fait foi.


"Prague is a famous, ancient, kingly seat. In situation and in state complete, in architecture stately". So wrote an English volunteer who fought at the battle of the White Mountain in 1620, John Taylor.

Ladies and Gentlemen,

it is a privilege to have been invited to this historical, beautiful and charming city of Prague, in the heart of Europe. Much of the beauty of this lovely city is due to building work commissioned by members of the House of Luxembourg, notably Charles IV.

I am delighted to speak before such a distinguished audience of the role of the Central Banks in Euroland. Such a title could be ambiguous. My purpose is not to describe the general functions entrusted to Central Banks. We know that most of the Central Banks in Europe were set up in their home countries as early, in many cases, as the 19 th century. Their main function was to issue banknotes. Progressively their role has changed profoundly: they were just issuing banks, but now they have been transformed into institutions charged with the definition and implementation of monetary policy.

From 1 st January 1999 the euro has been introduced in eleven of the fifteen EU Member States. The former national currencies remain as temporary expressions of the single currency. Apart from introducing the euro, the Eurosystem has been set up primarily to conduct monetary policy. Its first objective is, as we know, to maintain price stability. Let me remind you that if the Treaty refers to the European System of Central Banks (ESCB) as a new institution and the ECU as a new currency, the terms which have been used since last year, are the Eurosystem and the euro respectively.

The Eurosystem is composed of the newly created European Central Bank (ECB) together with the national central banks (NCBs) of the States participating in Economic and Monetary Union (EMU). For these countries this is a new challenge and it provides them with a new framework in which to develop their activities.

In this context the Luxembourg situation is specific: the Banque centrale du Luxembourg (BCL) had to be established ( together with the ECB on 1 st June 1998) in order to comply with a specific provision of the Maastricht Treaty. The new law establishing the BCL is dated 23 rd December 1998. It entered into force at the beginning of the activities of the Eurosystem on 1 st January 1999. So undoubtedly the BCL is the most recently born NCB; its statute was drafted so as to comply fully with the requirements of EMU. If the BCL is the youngest NCB, it is not really the smallest one. The relative weight is not to be judged only in view of the number of staff members or by the key of capital subscription of the European Central Bank (ECB). This gives the BCL 0,15% of the capital of the ECB. At the Board its Governor is represented with an equal vote alongside 10 other Governors of NCBs and 6 members of the Executive Board. This voting weight of 1/17 th is sometimes depicted in the media of larger countries as an example of overrepresentation of small countries. They forget to mention that a Central Bank is about liquidity in the economy and Luxembourg represents far more than 1/17 th of the total liquidity of the euro area.

I now wish to comment more specifically on the institutional framework, leaving to other speakers the discussion of the practical organisation of the Eurosystem and the division of labour between the ECB and the NCB's.

The dual capacity of the NCBs

The NCB's are legal entities set up by the laws of their respective States. They are, at the same time, an integral part of the ESCB. The Treaty imposes basic tasks on the Eurosystem. Among the main priorities the first is to define and implement the monetary policy of the Community.

The Treaty conferssome competences on the ECB, others on the NCBs. Article 14 of the Statute of the ESCB-ECB, refers specifically to the national central banks as Members of the Eurosystem.

The statutes of NCBs themselves must be compatible with the Treaty, and have to that extent been partially harmonised in the process of legal convergence. The cohesion inside the system is guaranteed: "the NCBs are an integral part of the ESCB and shall act in accordance with the guidelines and instructions of the ECB".

This applies of course to the functions of Central banks transferred to ESCB, mainly monetary policy, payment systems, reserve management, exchange rate operations, banknote issuance and advisory functions, but not prudential supervision since the Treaty limits the role of the ECB to contribute to the work of national authorities in this area.

If NCBs are independent from Governments, the Eurosystem is also independent from individual NCBs in the area of transfer of sovereignty to the European level. In other areas NCBs remain independent from the Eurosystem and subject to the rules of national organisations of constitutional power.

NCBs have thus a dual capacity at national and European level. This is true for the division of competence according to functions of Central Bank transferred to the Eurosystem and functions that remain of national competence according to the European Treaties like prudential surveillance.

But this dual capactiy applies also to the implementation of monetary policy and to the decision making process involving Governors of NCBs in the Governing Council of the ECB in their personal capacity.

The NCBs and the decision-making process of the ECB

  • Personal independence of members of the Governing Council

Each Governor enjoys a dual capacity, acting both as Chief Executive of his NCB and as Member of the Governing Council. As a Member of the Governing Council the Governor acts in his personal capacity and not as the representative of his NCB. Each Governor contributes to the work of the Governing Council through his personal participation but in such a way that the Eurosystem can benefit from the work done in his NCB.

In fact, it is quite simply not appropriate to consider the participation of the Governors of NCBs in the Governing Council as protection of national interests in the decision-making process of the ECB. The Governors do not represent their own NCB. Indeed, the participation of Governors from countries of very different sizes provides an element of independence and, even more, of cohesion. Even though Governors are not appointed according to a common procedure but according to separate national procedures, the mandate of each Governor is protected, under the Statute for the duration of his term of office. His removal during his term of office (which shall be not less than five years) is subject to Community procedure and, eventually to a judgement by the Court of Justice of the European Communities.

The basic voting procedure is one man, one vote. Weighted voting is limited to financial (as opposed to monetary) decisions where the NCB Governors are representatives of the ECB. Comparisons should not be made with the Council of Ministers of the EU where qualified weighted voting is becoming the normal voting method. The EU procedure takes into account of the importance of each Member State. On its side, the Governing Council of the ECB should not be seen, legally, as a body in which national interests are debated. Thus, even the enlargement of the European Union will not lead to a "re-nationalisation" of the ECB.

The Governing Council of the ECB is empowered to take the most important and strategically significant decisions affecting the Eurosystem.

"The Governing Council shall formulate the monetary policy of the Community including, as appropriate, decisions relating to intermediate monetary objectives, key interest rates and the supply of reserves in the ESCB, and shall establish the necessary guidelines for their implementation".

The role of a Governor should not be compared with that of "Landeszentralbankpräsident" in the Deutsche Bundesbank, neither with that of the Governor of a US regional Reserve Bank.

The Federal Open Market Committee (FOMC) is composed of eight permanent members, seven members of the Federal Reserve Board (FRB) and the President of the Federal Reserve Bank of New York. This committee also includes four members from among the other eleven Governors of the Regional Reserve Banks on a rotating basis. The US approach is more centralist. The presence of the Governor of the Federal Reserve Bank of New York is explained by the fact that the New York Bank has exclusive competence for the operational implementation of policy. This structure is quite different from that of the Eurosystem. At the Deutsche Bundesbank the nine "Landeszentralbankpräsidenten" are members of the "Zentralbankrat" together with the President, the Vice-President and up to eight further members of the "Direktorium". The "Landeszentralbanken" are fully integrated into the Deutsche Bundesbank. They have no legal personality. The former principle, under which each "Land" enjoyed the presence of its own "Landeszentralbank" no longer applies.

  • Committees of the ESCB

The decision making process of the Governing Council benefits also from the ESCB "committees". These committees are composed of representatives of the ECB and of the NCBs of each participating Member State. They provide for technical analysis, contribute to the preparation of decisions, and help to follow up the implementation of these decisions. Thus forecasts developed inside some committees and involving staff from both the ECB and NCBs have contributed to the decision-making process. Nevertheless, it should be recalled that the work of the ESCB committees is preparatory. The committees help the decision-making bodies of the Eurosystem but they are not part of these bodies and they do not take any binding decisions. The Governing Council remains sovereign.

  • NCB preparatory analysis

Beyond their participation in the Committees, the NCBs also contribute directly to the decision-making process in the Eurosystem insofar that each NCB has to prepare the analysis of the relevant problems so as to enable its Governor to take part in the discussions of the Governing Council.

In the area of statistics, euro area figures are not published nationally, but aggregated at the ECB to prepare decisions on the ground of common euro area wide statistics.

Other statistical material is prepared by NCBs to assist their Governor for the Governing Council meeting; yet other statistics are required for national purposes.

In the Eurosystem research work remains largely decentralised but is co-ordinated. Much research is conducted in the various departments of NCBs, in the economic, financial, legal and technical fields. The single voice policy which is a basic requirement, does not imply the absence of decisions inside the system.

The implementation of monetary policy

  • Decentralised implementation

The Statute contains the general principle that "to the extent deemed possible and appropriate" it is up to the NCBs to carry out those operations that are required to perform the tasks of the system.

There is a presumption that the operational activities of the system, which have been decided upon by the ECB, take place at decentralised level.

Usually, for commentators, this provision relates to the principle of subsidiarity. It is true that according to the Treaty this principle applies only in areas "which do not fall within the exclusive competence of the Community". Although monetary competences have been definitively transferred from the NCBs to the ECB, the implementation of monetary policy decisions is conducted on a "shared" basis within the Union.

For the implementation of monetary policy, the NCBs are responsible for maintaining relations with their counterparts, which are local credit institutions. A centralised approach is not necessarily ruled out, but any decision in this field has to be taken by the ECB on a case-by-case basis according to the discretion of its decision-making bodies.

The operations required to implement decisions of the ECB are conducted at national level under national legislation. Contrary to other operations in the field of payment and security settlement systems there is so far no "remote access" for the credit institutions. These must make use of the facilities provided by their own central bank. In the event of a default on a part of a credit institution, the sanction procedure is initiated by the relevant NCB, on behalf of the ECB.

In implementing its monetary policy, the Eurosystem bears in mind principles such as equal treatment, decentralisation, cost-benefits ratio and harmonisation.

The Eurosystem is not comparable with the FED in which the Federal Reserve Bank of New York conducts operations according to decisions taken at federal level.

The NCBs also contribute to the communication policy of the Eurosystem in the monetary field. Until there is a complete integration of financial, economic and social policies the single monetary policy has different consequences in the different Member States. The monetary authorities not only have to keep the market informed but must also keep in touch with policy-makers, to contribute to an adequate policy mix in view of the needs of national and regional authorities.

The NCBs will be responsible for issuing the euro banknotes as from 1 st January 2002. They are actively involved in the preparatory work for this operation. The manufacture of euro banknotes has already started. The Treaty provides for the exclusive right of the ECB to authorise the issue of such notes. An intensive information campaign will be conducted by the Eurosystem from August this year.

The Treaty provides that some areas shall be treated through joint actions on the part of the ECB and the NCBs, for example international cooperation where improvements are expected.

The NCBs have provided the ECB with foreign reserve assets totalling an amount to 50 000 million euros. This amount will probably be increased when the regulation "on further calls of foreign reserve assets" is adopted. These assets are managed on behalf of the ECB by those NCBs which have transferred them. The other foreign reserve assets held by NCBs are managed by them according to common rules.

  • Direct implementation

Some specific functions are entrusted exclusively to the ECB under EU rules (legal acts, sanctions, external representation, opinions . . . ).

In most cases it is up to the discretion of the decision-making bodies of the Eurosystem to decide on the way in which such functions should be carried out, either on a centralised basis or on a decentralised one. So theoretically the ECB has a choice between direct or indirect implementation, but any centralised implementation must be justified in view of the principle of subsidiarity. Such centralisation can be expected with respect to the external representation of the ESCB - for instance relations with international organisations and third countries.

The objective is to achieve operational efficiency inside the Eurosystem. Generally this efficiency is to be enhanced with local proximity. National procedures may be used. Common policy can tolerate some divergence, in order to cope with particularities of national banking systems, historical and structural differences. Smooth functioning is compatible with decentralisation as long as it does not lead to a new fragmentation of the single market of financial services. The monetary policy is single. This is an overriding principle. It must therefore be implemented without discrimination ensuring a level playing field. This principle has to be borne in mind when the opportunity for some operations of the system to be centralised either totally or partially is debated.

The other functions of NCBs

The NCBs perform functions other than those directly related to monetary policy. Some of these functions are mixed, carried out in accordance with decisions of the ECB. The Statute permits NCBs to carry out, also, non-Eurosystem functions unless these interfere with the objectives and tasks of the Eurosystem.

  • Mixed functions

I will not discuss the involvement of NCBs in matters which complement the implementation of monetary policy.

The ESCB decides how the ECB shall be represented in measures of international cooperation concerning the tasks entrusted to the Eurosystem.

Most important, we must remember the significance of the role of NCBs in the fields of payment systems, communication policy and statistics. As far as statistics are concerned, the Statute assigns to the NCBs the task of assisting the ECB to collect the necessary statistical information.

May I draw your attention to an important competence mentioned in the Statute: "the ECB and national central banks may provide facilities, and the ECB may make regulations, to ensure efficient and sound clearing and payment systems within the Community and with other countries".

The payment systems oversight is one of the core competences attributed to the NCBs. That an adequate distinction between prudential supervision and oversight of payment systems is made is a matter for national legislation. This is the reason why the ECB has recently adopted a critical opinion on draft legislation in a Member State because that State failed to make a distinction between the two tasks.

The main focus of prudential supervision, however, is the safety and soundness of individual financial institutions, whereas the primary focus of oversight is placed on the clearing and payment systems themselves in order to ensure their smooth operation, to avoid systemic risk within or between such systems and to ensure the efficient and sound transmission of monetary policy impulses.

  • National functions

"National central banks may perform functions other than those specified in this Statute unless the Governing Council finds, by a majority of two thirds of the votes cast, that these interfere with the objectives and tasks of the ESCB. Such functions shall be performed on the responsibility and liability of national central banks and shall not be regarded as being part of the functions of the ESCB".

One of the main activities assumed by NCBs outside the Eurosystem is that of prudential supervision. In this field the ESCB has an advisory function and has to contribute to the stability of the financial system. The Treaty also provides for the possibility of assigning to the ECB specific tasks in prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.

In the long run one might imagine that certain functions developed with success at one national level might encourage the NCBs of other countries to develop them. Discussions have already begun, for instance, concerning certain central bank services such as:

  • credit registers,
  • databases on annual accounts,
  • research and analysis of national economy,
  • fight against money laundering,
  • investment advisor and manager for governments or other public bodies,
  • communication, and so on.


At present, there are nearly 60 000 staff members in the different NCBs which participate in the ESCB and less than 800 at the ECB. Such figures are not to be seen as the expression of some balance of power. The Eurosystem is composed of the ECB together with the NCBs. It is a complex architecture which has avoided a difficult legal merger between different legal entities. The NCBs, on their side, contribute effectively to the smooth functioning of the system as a whole. The NCBs enjoy legal, financial and social autonomy, but they must comply with decisions of the ECB, in particular with guidelines and instructions relating to operational tasks.

The present situation is not final. The organisation of the system is still in progress. A number of studies are in progress, aimed at providing a blueprint of the future organisation of the system and the full participation of both present and future members of the Eurosystem. Many important problems, such as income distribution and social policy, and the external representation of the Eurosystem will need consideration in the future. These subjects are not for today.

Thank you, Ladies and Gentlemen.