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REPORT     
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23 March 1998
PE 223.957/fin. A4-0110/98
on democratic accountability in the 3rd phase of EMU
Committee on Economic and Monetary Affairs and Industrial Policy
Rapporteur: Mrs Christa Randzio-Plath
Following the request by the Conference of Committee chairmen, the President of Parliament announced at the sitting of 24 October 1997 that the Committee on Economic and Monetary Affairs and Industrial Policy had been authorized to present a report on democratic accountability in the 3rd phase of EMU and on 21 November 1997 that the Committee on Institutional Affairs had been asked for its opinion.
 A MOTION FOR A RESOLUTION
 B EXPLANATORY STATEMENT
 OPINION
 Annex 1

 Following the request by the Conference of Committee chairmen, the President of Parliament announced at the sitting of 24 October 1997 that the Committee on Economic and Monetary Affairs and Industrial Policy had been authorized to present a report on democratic accountability in the 3rd phase of EMU and on 21 November 1997 that the Committee on Institutional Affairs had been asked for its opinion.

The Committee on Economic and Monetary Affairs and Industrial Policy had appointed Mrs Christa Randzio-Plath rapporteur at its meeting of 29 October 1997.

The Subcommittee on Monetary Affairs considered the draft report at its meetings of 9 December 1997, 5-6 January, 4 February and 3 March 1998.

The Committee on Economic and Monetary Affairs and Industrial Policy considered the draft report at its meetings of 25 February and 18 March 1998.

At the last meeting it adopted the motion for a resolution by 53 votes to 3.

The following took part in the vote: Karl von Wogau, chairman; Katiforis, Garosci and Secchi, vicechairmen; Randzio-Plath, rapporteur; Areitio Toledo, Arroni, Berès, Billingham, Camisón Asensio (de Brémond d'Ars), Carlsson, Cassidy (for Christodoulou), Caudron, Donnelly, Ettl (for Kuckelkorn), Fayot, Filippi (for Fourçans), Friedrich, Gallagher, García Arias, Gasòliba i Böhm, Glante, Glase (for García-Margallo y Marfil), Harrison, Hautala, Hendrick, Herman, Hoppenstedt, Ilaskivi, Imbeni, Kestelijn-Sierens, Langen, Larive, Lindqvist (for Cox), Lukas, Lulling, Mather, Metten, Mezzaroma, Miller, Murphy, Paasilinna, Peijs, Pérez Royo, Pomées Ruiz (for Konrad), Rapkay, Read, Riis-Jørgensen, Rübig, Svensson, Theonas (for Ribeiro), Thyssen, Torres Marques, Watson, Wibe and Wolf (for Soltwedel- Schäfer).

The opinion of the Committee on Institutional Affairs is attached.

The report was tabled on 23 March 1998.

The deadline for tabling amendments will be indicated in the draft agenda for the relevant partsession.


 A MOTION FOR A RESOLUTION

Resolution on democratic accountability in the 3rd phase of EMU

The European Parliament,

- having regard to Articles 106 to 109l of the Treaty on European Union (TEU),

- having regard to Articles 15 and 50 of the Statute of the European System of Central Banks and of the European Central Bank (hereafter referred to as the Statute of the ESCB),

- having regard to Rule 148 of its Rules of Procedure,

- having regard to the report of the Committee on Economic and Monetary Affairs and Industrial Policy and the opinion of the Committee on Institutional Affairs (A4-0110/98),

A. whereas the TEU establishes the political, institutional, functional, financial and staffing independence of the future ECB and whereas this independence only can be altered by means of a unanimous decision of the Member States,

B. whereas, within a democracy, the starting point has to be that policy decisions should be transparent and accountable; whereas, within the limits necessary in order to ensure a high level of growth and employment, this principle should apply to the conduct of monetary policy by the ECB,

C. whereas the independence of the future ECB will only meet with public acceptance if the ECB enjoys a high degree of legitimacy; the only way to ensure this is full accountability of the ECB for its actions,

D. whereas it is essential for the ECB to establish its credibility in relation to financial markets and other economic and social actors; a high degree of transparency in monetary policy decisionmaking will be the best way of underpinning this credibility,

E. whereas co-ordination of monetary and economic policy is essential to the smooth functioning of EMU,

F. whereas the objective of price stability implies that the future ECB should act against inflationary as well as deflationary pressures which seem durable,

1. Welcomes the fact that, under Article 105 of the Treaty on European Union, the primary objective of the ECB is to maintain price stability, and considers that the best guarantee of this is an independent ECB;

2. Recalls Article 105.1 which recognizes the capacity of monetary policy to support the general economic policies of the Community and to contribute to the achievement of the objectives of the Community and as laid down in Articles 2 and 3a of the Treaty, without prejudice to objective of price stability;

3. Notes that central bank monetary policy decisions influence real economic variables such as investment, employment and growth;

4. Points to the fact that the independence of the future ECB will go further than that of any other central bank, and that this unprecedentedly high degree of independence will call for a correspondingly high level of democratic accountability, as real independence requires legitimacy and transparency in order to be credible and lastingly accepted;

5. Stresses that as the future ESCB and the ECB will conduct a single monetary policy for all the Member States taking part in European monetary union, democratic accountability must similarly be exercised at the European level and that, as the only directly elected institution at this level, the European Parliament is a particularly appropriate institution to hold the ECB to account;

6. Points to the existing undertakings entered into and honoured by the EMI towards Parliament with regard to the regular provision of information and the frequency of meetings within the Subcommittee on Monetary Affairs;

7. Calls therefore for the organisation of a dialogue between the European Parliament and the future ECB on monetary and economic affairs, the framework for which dialogue should be confirmed through a mutual agreement;

8. Recognizes the fact that the TEU does not determine the precise definition of price stability, nor by whom this concept is to be defined of by whom the price stability target is to be set, so that it is therefore clear that these tasks will now fall to the future ECB according to Article 12 of its Statute; emphasises that this fact increases the need for democratic accountability and calls on the future ECB clearly to announce its definition of price stability and to report annually its price stability target to the European Parliament;

9. Calls on the future ECB also to make clear the definitions and its use of operational targets to reach the price stability target; Underlines the need to guarantee the transparency of major decisions concerning monetary policy, as well as their background, in order to prevent a deficiency of information and misleading market expectations, and thereby contribute to containing speculation and misinterpretation;

10. States its intention to evaluate the ECB's performance with reference to a range of values for the rate of growth of consumer prices below as well as above target set by the ECB;

11. Gives notice of its intention, in addition to the presentation of the ECB Annual Report foreseen in Article 109b.3, to convene quarterly meetings on recent monetary and economic developments with the President and/or other members of the Executive Board;

12. Gives notice, too, of its intention to invite the ECB President to take part in the general debate on monetary and economic developments over the previous and the current year, on the basis of the Annual Report of the ECB and the Annual Economic Report produced by the Commission;

13. Urges the future ECB to include in its annual report:

- a description and evaluation of recent inflation trends and an explanation of past monetary policy decisions in the light of these trends and how they comply with the price stability target set, its inflation forecasts and comparisons of these with the price stability target set, as well as the forecasts for real GDP growth upon which its target is based;

- information concerning the use of intermediate monetary targets;

- a description of how monetary policy can support the general economic policies in the Community, as well as their appraisal of the extent to which monetary policy has in fact supported these general economic policies, without prejudice to maintaining price stability in accordance with Article 105 in the TEU;

14. Considers it worthwhile that the quarterly reports referred to in Article 15.1 of the Statutes of the ECB and the ESCB should report on the monetary policy of both the previous and the current quarter, as well as on the activities of the ESCB;

15. Calls, in addition to the provisions in Article 10.4 of the Statute of the ESCB, for the minutes of the ECB Council meetings to be published in the form of summaries including the decisions taken and the reasoning behind them at the latest by the day after its next meeting, these summaries also to explain how the decisions are linked to and affect other policies; calls also for full, detailed minutes to be published at the latest five years after the meeting;

16. Calls on the governments of the Member States not to appoint candidates that do not have the approval of the European Parliament; calls, in the light of this experience, for legal consolidation of this practice at a later stage;

17. Urges an examination of the need for a set of rules for the coordination of economic policy in Europe, possibly in the form of an interinstitutional agreement between the European Parliament, the Commission and the Council, including the procedure of the Annual Economic Report, the broad economic guidelines and the excessive deficit procedure; Given that the Luxembourg European Council made headway with the notion of more concerted coordination of national economic policies and, more particularly, employment policies. Parliament ought also to be able to be consulted on these issues beyond what is already laid down in Articles 109q and 109s. Here, too, an undertaking to consult ought to be negotiated with the other institutions concerned;

18. Instructs its President to forward this resolution to the Commission, the Council and the European Monetary Institute.


 B EXPLANATORY STATEMENT

The European Central Bank: dialogue with the European Parliament essential

The democratic accountability of monetary authorities

The Maastricht Treaty created the European System of Central Banks. As from 1 January 1999, when European Monetary Union is launched, the European Central Bank (ECB) will decide monetary policy on behalf of the countries participating in monetary union. For the first time, there will be a sector in which policies within the European Union are determined federally. At the same time, a monetary policy institution will be established with unprecedented powers. The great economist Josef Schumpeter believed that a nation's monetary system reflected all aspects of the nation's intentions, actions, vicissitudes and indeed its very essence. If, as he asserted, the state of a nation's monetary system is a symptom of its general condition, the introduction of the euro and a single monetary policy could also serve to Europeanize public opinion - a body of opinion which is necessary in any democratic system.

1. The independence of the ECB

The Maastricht Treaty lays down that the future ECB is to be independent politically, financially, in its actions, organizationally and in terms of staffing. The Statute of the ECB and the Maastricht Treaty take to new lengths the principle that a central bank should be independent, as the ECB will be more independent - and its independence will carry greater weight - than has been the case with any central bank in any other political system in history. Empirical research certainly shows that success in combating inflation correlates with the independence of a central bank. The European Parliament has from the start advocated that the future ECB should be independent. Thus its independence is quite rightly an element in European Monetary Union and will contribute materially to its success. Unlike national banks of issue, however, the ECB will not be based on a functioning political system featuring multiple power centres and institutions. Through the many years of monetary dialogue between the European Parliament's Subcommittee on Monetary Affairs and the Presidents of the European Monetary Institute and of the national banks of issue during the first and second stages of monetary union, the European Parliament has repeatedly observed that the central banks have come to terms very thoroughly with the economic, employment, social and financial policy situations and decisions of the individual Member States and that regular dialogue exists between the national banks of issue and national governments, and in some instances also with national parliaments. Monetary policy is not, after all, neutral.

The independence of a central bank entails a large measure of responsibility for economic and social development. This is particularly true of the future ECB. Article 105 et seq. of the Maastricht Treaty and Articles 2 and 7 of the Statute of the European System of Central Banks and of the European Central Bank stress the importance of this independence. Unlike any other central bank, the ECB is also assigned the priority objective of price stability. Article 105 lays down that 'the primary objective of the ESCB shall be to maintain price stability. Without prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in Article 2.'

2. The role of the European Central Bank in the Maastricht Treaty

The Maastricht Treaty is based on the assumption that in the long run political, economic and social stability is attainable only if prices are stable. The ECB has the task of pursuing a tight monetary policy in order to maintain price stability. Its monetary-policy approach and instruments must be wielded in such a way as not to allow any monetary inflation potential. However, the Maastricht Treaty does not indicate how price stability is to be defined. Under Article 12 of the Statute, it is up to the future ECB to define it.

The Bundesbank and the US Federal Reserve are unlike the ECB in that they are functionally independent. Like the ECB, on the other hand, neither of them is subject to any form of supervision. However, both are required to support the policy of the current government. Moreover, both of them are dependent on the legislature in that they were set up by ordinary federal legislation. Ordinary federal legislation could at any time be adopted to redefine their tasks or strip the bank of issue of its duty. The ECB, by contrast, owes its existence to a binding international treaty, which can only be amended unanimously and which requires ratification in all EU Member States.

The ECB will be the first supranational monetary authority in history and, by virtue of the status conferred on it as described above, it will enjoy unprecedented powers which it can - and must - use both to fight inflation and to improve overall economic development. Although it has proved possible to attain a large measure of price stability in states with a strongly independent bank of issue, that need not mean that the monetary policy of such banks has contributed constructively to economic growth. The Maastricht Treaty does not provide for any method of resolving conflicts of interest within the Community. By leaving it to the ECB to define price stability, the Treaty also gives it power over economic policy. It will be the ECB which decides whether to make central bank funds available and what interest rates should be payable on them, which in turn will have implications for economic growth, investment and employment.

3. Comparison of the independence and accountability of central banks

The independence of central banks is a relatively recent development, and is not an element in the tradition of European constitutional history, which has been marked by the principle of the division of powers formulated by Montesquieu. Historically, the idea of the independence of central banks derived from John Adams' concept of checks and balances; thus it forms part of the US constitutional tradition. Even in the USA, the concept of an independent central bank was not uncontroversial. In the 19th century the first US central bank, the Bank of the United States, was described as a 'monster' because - so claimed the then Chairman of the Democratic Party and future President Andrew Jackson - a central bank would mean that a small number of people would control the political conduct of the majority, because those few people would control the labour and income of large sections of the population. In 1832 President Jackson vetoed the existence of the central bank. It was not until 1913 that the Federal Reserve was set up as the US bank of issue, answerable to Congress. The Central Bank Act established the legal basis for an independent central bank which - according to its former President Ben Strong - was responsible for resolving conflicts of interest and lay 'between the devil and the deep blue sea'.

In Europe the first independent central bank system was established in Germany after the First World War at the initiative of the Allies, but was stripped of its independence on the advent of the Third Reich. After the Second World War the USA insisted on a federal independent central bank system in the Federal Republic of Germany. The independence of the central bank came in for debate in Europe at the beginning of the 1970s with the Werner Plan, and the concept of an independent European central bank arose and was incorporated into the Delors Report and the Maastricht Treaty.

The arguments in favour of an independent ECB are convincing. It must be independent in order to avert the danger of fiscal inflation. Only it can guarantee a continuous stability policy, because, unlike governments and parliaments, it can take decisions without reference to electoral considerations. Moreover, a bank of issue system is expected to take its decisions more quickly and efficiently. In view of the growing importance of global money markets and financial markets, this argument has gained in significance.

It does not go without saying that central banks should be independent. In the 19th century, when central banks were set up modelled on the Bank of England (governed by the British Bank Charter Act of 1844), strict rules were laid down to limit the discretion of the central bank with regard to the issue of banknotes. Initially they were privately owned, but later they were nationalized and became subject to political control and political instructions. This inaugurated a period of reduced independence for central banks, but as it came to be empirically recognized that low inflation could best be guaranteed by independent central banks, rules were altered in the 1880s and 1890s with the purpose of rendering them more independent again. Thus the statutes of the European banks of issue mark a high point in the history of the independence of central banks.

In comparison with virtually all the other European banks of issue, the German Bundesbank enjoys the maximum independence, as, to quote Section 12(2) of the Bundesbank Act, it 'shall be independent of instructions from the Federal Government in exercising the powers assigned to it by this Act'. Since 1948, the Bundesbank has repeatedly demonstrated this independence. It is not accountable to the Bundestag.

Central and Eastern European states, as well as Sweden, Norway and Finland, while guaranteeing the independence of the central bank, involve their parliaments in monetary policy. The same is true of Canada, Australia and New Zealand. Here, the independence of the central bank is guaranteed, although it is possible for the president of the central bank to be dismissed if the central bank fails to achieve the price stability objective agreed between it and the government and presented to parliament.

Legal convergence with regard to the independence - institutional, in terms of staffing, operational and financial - of national banks of issue in the EU and in other European countries too has reached an advanced stage. The legislative process needs to be completed in 1998. All central banks in the EU already have a duty to pursue the objective of monetary stability, and their independence has either been secured or will be guaranteed by legislation before the end of 1998. Transparency and compulsory reporting are provided for by some central bank legislation or statutes. Monetary dialogue with national parliaments is provided for in France, Greece, Spain, Ireland, Sweden, Finland, Italy, Luxembourg, Portugal and the United Kingdom. In Spain the budget of the Bank of Spain must also be submitted to Parliament for approval. Thus, as central banks have become increasingly independent of political instructions from the executive, the trend towards legitimation by means of the transparency of monetary decisions through monetary dialogue with parliaments has been accentuated. The American system of democratic accountability is particularly highly developed, as Congress may at any time amend the legislation concerning the bank of issue, while hearings are numerous and detailed, and minutes and details of the votes taken at meetings of the bank of issue are published. Moreover, the appointment of the seven Governors of the bank of issue requires the approval of the Senate. In addition, the US bank of issue is by law responsible, through its monetary policy, for full employment and balanced economic growth (the Humphrey-Hawkins Act of 1978).

4. The role of the European Parliament

The European Parliament possesses powers of participation in monetary affairs. Thus the Maastricht Treaty and the Statute give the ECB not only rights but duties. It has a duty to report to the European Parliament, so that there are the rudiments of democratic accountability along the lines of that which exists in the United States, for example.

The annual reports of the EMI and the later ECB provided for by the Treaty are instruments to create greater transparency in the field of economic and monetary policy. Thus Article 109b(3) of the EC Treaty lays down: 'The President of the ECB shall present this report to the Council and to the European Parliament, which may hold a general debate on that basis.'

But the EMI/ECB is required to report not only to the European Parliament in plenary but also to the appropriate committees, particularly the Subcommittee on Monetary Affairs. Article 109b(3) of the Treaty lays down: 'The President of the ECB and the other members of the Executive Board may, at the request of the European Parliament or on their own initiative, be heard by the competent committees of the European Parliament.'

The Maastricht Treaty expressly provides for monetary dialogue with the European Parliament.

(1.) Assent procedure (Art. 189b, EC Treaty)

Art. 106(5) Amendment of certain articles of the ESCB Statute

Art. 105(6) Conferment on the ECB of specific tasks with regard to the supervision of credit institutions

(2.) Cooperation procedure (Art. 189c, EC Treaty)

Art. 103(5) Adoption of detailed rules for the multilateral surveillance procedure (applied as one of the provisions pursuant to the Stability Pact and for EMS II)

Art. 104a(2) Prohibition of privileged access by central government bodies or Community institutions to credit facilities

Art. 104b(2) Prohibition of liability for commitments of public authorities or for public debt

Art. 105a(2) Measures to harmonize denominations and technical specifications of coins in circulation

(3.) Consultation procedure

Art. 104c(14) Replacement of the Protocol on the excessive deficit procedure; provisions for the application of the excessive deficit provisions (applied as one of the provisions pursuant to the Stability Pact and for EMS II)

Art. 106(6) Adoption of various provisions of the Statute of the ESCB

Art. 109(1) Exchange rate between the euro and third-country currencies

Art. 109a(2)(b) Appointment of the President of the ECB and members of the Executive Board

Art. 109f(1) Appointment of the President of the EMI

Art. 109f(6) Provisions concerning consultation of the EMI by the Member States

Art. 109f(7) Conferment on the EMI of other tasks in preparation for the 3rd stage

Art. 109j(2) Transition to the 3rd stage

Art. 109j(3) Setting the date for transition to the 3rd stage and determining which Member States fulfil the convergence criteria

Art. 109j(4) 3rd stage by 1 January 1999 and single currency

Art. 109k(1) Member States with derogations

Art. 109k(2) Abrogation of derogations

Art. 109l(1) Adoption of various provisions of the ESCB Statute

Art. 109l(5) Setting of a fixed exchange rate against the euro

Art. 235 To be applied when adopting measures for the introduction of the euro

(4.) Information of the European Parliament

Art. 73g(2) Lifting economic sanctions

Art. 103(2) Council recommendation on the broad guidelines of economic policies

Art. 103(4) Report by the President of the Council and the Commission to the EP in plenary on the results of multilateral surveillance, appearance of the President of the Council before the Committee on Economic and Monetary Affairs, additional reporting to the Subcommittee on Monetary Affairs

Art. 103a(2) Financial assistance

Art. 104c(11) Penalties for excessive deficits

Art. 109(1) Adoption, adjustment or abandonment of the central rate of the ECU

Art. 109b(3) Submission of the ECB's annual report; general debate or hearing of the President of the ECB

Art. 109c(2) Composition of the Economic and Financial Committee

EMI Statute Submission of the annual report of the EMI, and subsequently of the ECB, to the EP together with the annual accounts

Art. 11(3) Hearing of the President of the EMI by the Committee on Economic and Monetary Affairs

5. The form to be taken by monetary dialogue under monetary union

The Maastricht Treaty and the Statute of the ESCB and ECB provide for monetary dialogue. Firstly, cooperation between the European Council and the Commission and the ECB is provided for. Secondly - a state of affairs which has no parallel in the Bundesbank Act - both the Treaty and the Statute institutionalize monetary dialogue with the European Parliament. Even at the time of conclusion of the Treaty, therefore, the governments and central bank presidents assumed that the independence of the ECB and its democratic accountability were two sides of the same coin and that the high degree of credibility and trustworthiness of the future ECB would be supported by a high degree of transparency of monetary-policy decisions. Thus democratic accountability is already provided for in embryonic form. A joint declaration or agreement between the European Parliament and the ECB need to ratify and flesh out the dialogue. The dialogue should concentrate on the following fields of action:

(a) the procedure for appointing members of the ECB's Executive Board;

(b) reporting to the European Parliament;

(c) the ECB's publications.

(a) The procedure for appointing members of the ECB's Executive Board

The European Parliament has to be consulted about the appointment of the six members of the Executive Board by the Governments of the Member States acting at Head of State and of Government level (Article 106). The same applied to the appointment of the President of the EMI during the second stage of EMU, and the relevant provisions have been put into practice. Before the two candidates for the post of President of the EMI, Alexandre Lamfalussy and Wim Duisenberg, were appointed, hearings were held in the appropriate committee of the European Parliament. These hearings - held in public, on the model of those in the American Senate - afforded an impression of the candidates' personal integrity, professional competence and views on monetary and economic policy. On each occasion, the European Parliament then approved the appointments in plenary. The President of the European Parliament forwarded the result of the vote to the Heads of State and of Government. No conflict arose, because the candidates were convincing.

As regards the appointment of members of the ECB's Executive Board, Rule 36(1) and (5) of the Rules of Procedure of the European Parliament lay down: 'The candidate nominated as President of the European Central Bank shall be invited to make a statement before the committee responsible and answer questions put by members.' 'The same procedure shall apply for nominations for VicePresident and Executive Board Members of the European Central Bank and for President of the European Monetary Institute.' The European Parliament may either approve or reject a nomination. The European Council may disregard a rejection. Unlike in the United States, the nomination process does not comprise a ratification procedure. The European Parliament has no power to enforce its decision. It cannot even legally prevent a nomination. This means that the European Parliament has only a political power to assess nominees, and, through its hearing procedure, may help to guide public opinion, thereby promoting the credibility, trustworthiness and legitimacy of the ECB. The ECB will gain in credibility and legitimacy if members of the Executive Board make a convincing impression in public. This will further enhance the position of members of the Executive Board, particularly bearing in mind that they are being called upon to serve on the board of a supranational bank of issue; for public monetary dialogue does not yet exist at European level. It ought to be initiated via monetary dialogue between the ECB and the European Parliament. The first step is participation in the nomination process. It would be desirable for the Heads of State and of Government to undertake not to appoint any candidate who had been rejected by the European Parliament. The European Parliament has made it clear in recent years that it acts responsibly in connection with its hearings and votes. Finally, it must be said that the independence of candidates and of the ECB has been called into question by the discussions about the Bank's first President on the part of certain governments. This form of public controversy was counterproductive and fuelled public mistrust as to the independence of ECB Presidents. The European Parliament has expressed the hope that the first President would be nominated early and that the term of office would not have to be divided between candidates, because only this would comply with the Maastricht Treaty and respect the principle of independence. If the European Parliament rejects a candidate, this must have consequences, even if the Treaty does not stipulate that it shall. In view of the importance of the post and its impact on economic, financial, employment and social policy, the requirements applicable to members of the Executive Board must be very stringent. Their profile will help to prepare the European Union to meet the challenges of the future better. The governors of the central banks, who helped to formulate the relevant provisions of the Maastricht Treaty, deliberately did not take the Bundesbank as the model for the nomination procedure. No doubt they were well aware of the legitimacy and credibility problems. After all, with the inauguration of monetary union not only will the first supranational monetary authority set to work but a new currency, the euro, will be introduced. On the basis of experience for the second term of office of the ECB, the European Parliament must have its power of participation strengthened and its assent must be required for the nomination of members of the Executive Board. There must be the assumption that the Heads of State and Government will not nominate any candidates who have not obtained the political vote of the European Parliament.

(b) Reporting to the European Parliament

The establishment of the ECB is attended by many uncertainties. There will be a strong temptation for the ECB, at the outset of EMU, to prove its credibility in the eyes of the financial and capital markets by pursuing a particularly strict monetary policy. This would be very risky, as too tight a monetary policy on the part of the ECB would seriously aggravate the already difficult situation with regard to investment and employment. This in turn would make it difficult for the public to accept the situation. That is why the definition of monetary stability is so important, and why the definition must be made publicly known, as must the objectives and instruments of monetary policy. The European Parliament considers that a monetary strategy based on a combination of a direct inflation target and a money supply target would be most conducive to monetary stability on the one hand and openness and credibility on the other. Only if specific targets are set can the ECB's monetary policy be assessed accurately. Ultimately, it will be in the ECB's own interests if its decisions on monetary policy and the thinking behind them are announced publicly, because its independence will be enhanced in the same measure as it succeeds in pursuing a convincing monetary policy. The inflation target must be clearly stated so that the public and the markets know what rates of inflation are sustainable or optimal. The fact is that a kind of consensus on stability has been arrived at in the European Union, which is reflected in the low and convergent rates of inflation in the Member States. It would not however be wrong to include interim monetary-policy targets in the monetary approach, as indeed the EMI and the European Parliament have proposed. If this is done, the European Parliament would have to insist on precise medium-term goals for monetary policy, and particularly an inflation target, which need not per se mean a fixed value but might comprise bands. The targets should be accompanied by inflation forecasts so that monetary decisions can be understood better. If rates of inflation are particularly high or low, the European Parliament should call for a specific explanation from the ECB. Maximum openness is vital to make it clear how the Central Bank is taking its decisions and that they are in the interests of the people. There is always a danger that a central bank may take wrong decisions on interest rates during periods of inflation, thereby eroding incomes and employment without braking inflation. Monetary policy has a strong impact on developments in the real economy. It must therefore be possible to establish why and how the ECB is taking its decisions. Otherwise, while focusing on combating inflation, the ECB may unnecessarily fail to take monetary measures which it can and ought to take to bolster growth and employment under Articles 105 and 2 of the Maastricht Treaty.

Monetary policy discussions between the European Parliament and the ECB must take place regularly. The parties must avoid any raising of the temperature which might have an adverse effect on the markets and speculation. Past experience of dialogue between the European Parliament, the Presidents of the EMI and national central banks and the Subcommittee on Monetary Affairs have shown that democratic accountability is perfectly feasible in the form of reports and dialogue. The Maastricht Treaty and the Statute of the ESCB and ECB stress the importance of this dialogue, which may at any time be initiated at the request of the President of the ECB or the European Parliament. The institutionalization of four further dialogues each year with the committee responsible would be sufficient and desirable. In this way greater certainty could be attained concerning monetary policy under EMU than would be possible purely by publishing reports, as the substance of the reports would be determined solely by the ECB. Dialogue with the European Parliament can and must be formalized as a means of constantly compelling the Bank to give comprehensive explanations of its monetary policy decisions. The principle of democracy requires this.

(c) The ECB's publications

The principle of openness is enshrined in the Maastricht Treaty and the Statute of the ESCB and ECB in that they require ECB reports to be published (Article 109b(3) of the Maastricht Treaty and Articles 15 and 10 of the Statute). The reports in question are annual reports facilitating dialogue with the European Parliament concerning the monetary policy pursued in the past and current years and plans for the future. This publication requirement makes the ECB democratically accountable. Admittedly the quarterly reports do not necessarily have to be debated in the European Parliament. A reading of Article 15 in conjunction with Article 12 shows that reporting is expected to cover money-policy definitions, approaches, objectives and instruments, which should be described.

It is right that all ECB reports should be publicly available free of charge. Publication of reports cannot however take the place of the monetary policy dialogue in which the European Parliament participates on behalf of the public.

In order for the monetary decision-making process to be described as open, it is not enough that reports should be published. Monetary decisions must be publicly announced and justified on the same day as they are taken. An important aspect of this is publication of the ECB's minutes of decisions taken at its meetings. The US bank of issue has adopted a practice worthy of emulation which reconciles the need for the bank of issue to be independent with the need for openness of decision-making. Never once has the fact that minutes recording decisions are published at the next meeting after that at which a particular decision was taken caused any turbulence on the markets or concern among investors. Nor has the independence of the US bank of issue been called into question either by the markets or by the presidents or other members of the bank of issue.

Although publication of the voting conduct of members of the respective central bank boards in third countries is perfectly customary, for example in the United States, this should not be required during the first phase of the third stage of EMU. The new supranational authority has no precedent. True, it has its place in the tradition of European central banks and can draw on the achievements of the national central banks. However, it will be hard enough to formulate and implement a uniform monetary policy. This Europeanization process should not be disturbed by speculation about voting. The Executive Board and Governing Council of the ECB must be given every opportunity to reach agreement.

The ECB's budget should also be incorporated in the annual report. In addition, the rules on how the central bank's profits are to be distributed and how the distribution is actually to take place must be published.

6. The role of the ECB in economic and monetary union

The Treaty also introduced a multilateral supervision system to coordinate the economic policies of the Member States more closely and attain lasting convergence of economic performance. It is unsatisfactory that Parliament has not been assigned any role in the process, for which provision has been made, of determining whether the economic policy of a Member State is inconsistent with the broad guidelines of the economic policy of the Community or whether its economic policy risks jeopardizing the proper functioning of economic and monetary union. Article 103(4) of the Treaty stipulates only that the President of the Council and the Commission shall report to the European Parliament on the results of multilateral surveillance. Another reporting procedure applies to the identification of excessive government deficits. Parliament is not involved at all in this process, which is important for the maintenance of budgetary discipline and for the Member States. Parliament does not even have a right to be informed about this. Here too, Parliament's right of codetermination must be improved.

Another element in democratic accountability under EMU is openness about how much freedom of action and decision-making there is in the pursuit of monetary policy in conjunction with the Community's objectives as laid down in Articles 2 and 3a. In order for their important function for economic, financial and employment policy to be assessed, in order for a balanced and appropriate policy mix to be arrived at in the EU, a macroeconomic dialogue with the ECB must also be organized. This is a matter for the European Parliament, as the sole democratically legitimate body. The ECB, after all, has duties to perform in the interests of the European electorate, which are laid down by international law. At a time of mass unemployment, when the European Union's viability for the future is at stake, all the institutions must help to ensure that the Community is not just a forum for the market economy and competition but is marked by solidarity, economic and social cohesion and a high level of employment.


 OPINION

(Rule 147)

Committee on Economic and Monetary Affairs and Industrial Policy

on democratic accountability during the third stage of EMU (rapporteur: Mrs Randzio Plath)

Committee on Institutional Affairs

Draftsman: Mr Fernand Herman

PROCEDURE

At its meeting of 26 January 1998 the Committee on Institutional Affairs appointed Mr Fernand Herman draftsman.

It considered the draft opinion at its meetings of 26 January, 3/4 February and 25/26 February 1998.

At the latter meeting it adopted the following conclusions by 23 votes to 4, with 0 abstentions.

The following took part in the vote: De Giovanni, chairman; Corbett, vice-chairman; Herman, draftsman; Barros Moura, Blokland (for Berthu), Bonde, Cardona, D'Andrea, Dell'Alba (for SaintPierre), Brendan Donnelly, Duhamel, Frischenschlager, Gutiérrez Díaz, (for Puerta), Herzog, Lenz (for Brok), Manzella, Mendez de Vigo, Neyts, Rack, Schäfer, Schleicher (for Salafranca), Schlechter, Schörling (for Aglietta), Sjöstedt, Spaak, Spiers, Tsatsos, Voggenhuber and Pex (for Maij-Weggen, pursuant to Rule 138(2)).

I. THE ECB'S VERY PRONOUNCED INDEPENDENCE

1. To ensure monetary stability, which is regarded as an essential condition for sustainable growth, the signatories to the Treaty of Maastricht agreed to give up their monetary sovereignty, provided that the relevant powers were transferred to an institution whose independence vis-àvis national and Community political authorities would be fully guaranteed.

2. The Treaty of Maastricht and the Statute of the ECB appended to it as a protocol regulate this independent status in a series of provisions on:

- its legal and institutional independence;

- its financial and fiscal independence;

- the conditions under which its senior officers perform their duties and the duration of their term of office;

- prohibiting credit facilities for national or Community authorities;

- prohibiting the seeking or taking of instructions from national governments;

- ....

3. These provisions, taken as a whole, give the ECB and its senior officers a degree of independence enjoyed by virtually no other central bank, with the possible exception of the Bundesbank and the US Federal Reserve.

II. GREATER INDEPENDENCE THAN THAT ENJOYED BY THE BUNDESBANK OR THE US FEDERAL RESERVE

4. Four additional factors help to bolster this independence:

(i) Not content with ensuring the independence of the institution and its senior officers, Member States wished to shield it from the possible pressure, as a result of government deficits, on the creation of money.

To that end, they signed a stability pact in Amsterdam obliging them to abide by strict budgetary discipline, with failure to do so to be penalized. Such a commitment, imposed by no constitution or national law, guarantees that the burden of short-term or structural economic adjustments cannot be borne solely by the monetary authority (varying the policy mix).

(ii) Any provisions guaranteeing the independence of issuing institutions are normally enshrined in a law or, more rarely, in the constitution. Should the monetary authority make improper use of its power, to the detriment of the general interest, the political authority can always change the law or even the constitution. That possibility prompts prudence and responsibility on the part of monetary policy-makers.

To amend the Treaties or the ECB Statute, however, there must be unanimous agreement among the Member States; now there are 15, but there will be 20 or 25 in the future. The threat of having their independence constrained if they were to make improper use of it can but be viewed by the ECB's senior officers as a prospect as remote as it is unlikely.

(iii) The Treaty of Maastricht entitles the political authority to set or modify the euro exchange rate vis-à-vis third currencies. That provision, a traditional feature of national laws, is based on the assumption of a system of fixed exchange rate parities. The only instances where it will apply will cover the exchange rate relationship between the euro and the currencies of the Member States not participating in EMU.

The exchange rates for other third currencies will be set by the market. There are a host of different factors likely to influence those rates, the most important being the ECB's decisions on interest rates and on the management of foreign exchange reserves. It will therefore be the ECB, and not Ecofin, which will decide on the euro's external value, on a daily basis, whatever the Treaty has to say on this.

(iv) The Treaty of Maastricht sets a priority objective for the ECB: price stability. Nowhere does it define, however, what price stability is or, failing that, who can define it. We may thus infer from this that the ECB itself will set the objectives on which it will be judged. It is therefore, as it were, both judge and judged.

III. HOW CAN MONETARY AUTHORITY INDEPENDENCE BE RECONCILED WITH DEMOCRATIC OVERSIGHT OVER THAT AUTHORITY?

The situation before the Treaty of Maastricht

5. In a democracy, anyone in authority is supposed to be answerable, directly or indirectly, to the public or their representatives. The government accounts for its actions before parliament, members of parliament before the public at elections. This mechanism is the basis for legitimacy.

6. In the United Kingdom and in countries with a Romance cultural background or traditions, the monetary authority is very much subordinate to the government, which is accountable solely before parliament. The monetary authority, since it answers to the government, is therefore neither responsible to nor accountable before parliament. The notion of monetary authority independence is accepted in countries where, in the eyes of their citizens, the political authority has been unable to ensure a minimum of monetary stability. In those countries, monetary authority legitimacy is based on monetary policy success. The considerable power exercised by the Bundesbank in Germany stems as much from the faith public opinion has in it, because of the soundness of the Deutschmark, as it does from the independent status imposed on it by the victors of the Second World War, if not more.

7. Independence prevails de facto, but to a lesser extent de jure, in the Netherlands, in Austria and, in an even more watered-down form, in the Scandinavian countries. Since the liberalization and globalization of capital markets, national monetary power has progressively become symbolic in nature. Only the Bundesbank has retained an overriding influence over the capital markets. It is therefore the German model which has prevailed at Union level and which is enshrined in the Treaty of Maastricht. The national parliaments resigned themselves to this all the more easily, it being a power which they had never exercised.

The situation after the Treaty of Maastricht

8. Even before EMU becomes effective, the Member States must undertake to ensure the independence of their central bank. This is a condition for their accession to EMU. What will therefore be the legitimacy of the new European monetary authority, which, as we have seen, will be totally independent? To whom is this authority, enjoying virtually absolute power, going to be answerable? Grudgingly, and lacking any other plausible solution, the signatories of the Treaty of Maastricht drafted the European Parliament. As in 1971, when the establishment of budgetary own resources beyond national parliament oversight led the governments to grant the European Parliament a measure of budgetary power, albeit a most miserly one, the creation of a European monetary authority has induced the same governments to acknowledge a role for Parliament to some extent. Here, too, they have displayed little generosity. The democratic accountability of the ECB is regulated by three provisions of the Treaty:

- Article 109b(3) requires the President of the ECB to present to the European Parliament the annual report on the activities of the European System of Central Banks and on the ECB's monetary policy. The European Parliament may hold a general debate on that basis.

- Article 109b(3), second subparagraph, stipulates that 'The President of the ECB and the other members of the Executive Board may, at the request of the European Parliament or on their own initiative, be heard by the competent committees of the European Parliament.'.

- Under Article 109a(2)(b), the European Parliament must be consulted before the President, Vice-President and other members of the Executive Board are appointed by the governments of the Member States at the level of Heads of State or Government.

9. On the basis of these three provisions, and by applying them to the EMI, the European Parliament has sought as broad an interpretation as possible.

- Accordingly, it has not simply held a debate on the EMI's annual report; it has drawn up a detailed report and adopted a resolution in plenary.

- Regularly, on a number of occasions, it has heard the President of the EMI, with whom it has succeeded in establishing a relationship of trust. Both Mr Lamfalussy and Mr Duisenberg have willingly gone along with this exercise, which they regard as of benefit to their institution.

- Lastly, to lend weight to consultation on the appointment of the ECB's senior officers, the European Parliament has secured the right to organize public hearings at which prospective candidates have submitted themselves to questioning by members, who thus have an opportunity to test the notions candidates have of their accountability and of how they are to answer to Parliament.

IV. CONCLUSIONS: HOW CAN DEMOCRATIC ACCOUNTABILITY OVER THE ECB BE IMPROVED WITHOUT AMENDING THE TREATIES?

10. The Committee on Institutional Affairs, which has been asked for its opinion, requests the Committee on Economic and Monetary Affairs and Industrial Policy, as the committee responsible, to put the following conclusions to the vote:

(i) Parliament ought to be able to secure the conclusion of an agreement with the ECB under which the ECB's senior officers would undertake to make known in advance what their targets were over the following twelve months in terms of monetary stability, interest rates, economic growth and the fight against unemployment, even though this might mean that a judgment was made as to the attainment of these targets in the light of certain well-defined conditions over which the ECB would have no influence.

(ii) Under that agreement, the ECB's senior officers would accept that the level of their remuneration could be affected by the extent to which the stated targets in terms of monetary stability, interest rates and economic growth were attained.

(iii) Points to the existing undertakings entered into and honoured by the EMI towards Parliament with regard to the regular provision of information and the frequency of meetings within the Subcommittee on Monetary Affairs.

(iv) To be effective, policy on monetary stability must also be coordinated with the other economic policies at both national and Community level. The Treaty and the stability pact provide for various types of procedure:

- setting the broad economic policy guidelines, Article 103(2);

- multilateral surveillance, Article 103(3) and (4);

- the excessive deficit correction procedure, Article 104(c).

- conferring of specific tasks relating to the prudential supervision of banks, Article 105(6).

- setting the euro's exchange rates vis-à-vis third countries, Article 109.

The Council must assume its full responsibilities:

(1) It defends the identity of the euro zone vis-à-vis the rest of the world

(2) The power to coordinate policies is not to be left to the Ecofin Council alone, but is a matter for the Council at the highest level.

The treaty only provides for Parliament to be informed. Parliament should be able to be heard. For each of these procedures, an interinstitutional agreement ought to be able to regulate consultation of Parliament under terms to be negotiated, for which the attached model is proposed(1).

(v) The Luxembourg European Council made headway with the notion of more concerted coordination of national economic policies and, more particularly, employment policies. Parliament ought also to be able to be consulted on these issues beyond what is already laid down in Articles 109q and 109s. Here, too, an undertaking to consult ought to be negotiated with the other institutions concerned.

(vi) The President of the Economic and Financial Committee, which will replace the Monetary Committee as of January 1999, ought to be able to continue what has been the practice to-date, i.e. meetings with the European Parliament's portfolio committee whenever there is a change of Presidency or once every six months.

(1)() See Annex 1.


 Annex 1

Preliminary draft interinstitutional agreement between the European Parliament, the Council and the European Commission on the provisions governing coordination of national economic policies

General provisions

A. The purpose of the present agreement is to implement the various procedures existing within the framework of economic and monetary union aimed at coordinating national economic policies.

B. The present agreement aims to guarantee balanced participation by the Community institutions in coordinating national economic policies.

Procedure for formulating broad guidelines (Article 103(2) of the Treaty)

C. The Commission shall forward to the European Parliament and the Council a recommendation on the broad guidelines of the economic policies of the Member States. The European Parliament shall debate the proposed broad guidelines and shall adopt an initial resolution, which shall be forwarded to the Council. The Council shall formulate a draft for the broad guidelines of the economic policies of the Member States and the Community and, taking account of Parliament's resolution, shall report its findings to the European Council.

D. The President of the Council shall appear before the competent committee of the European Parliament and report on the European Council's conclusion regarding the broad guidelines of the economic policies of the Member States and the Community. The European Parliament may hold a second debate with a view to assessing the content of the recommendation in relation to its first resolution and, possibly, to adopting a second resolution.

Procedure for multilateral surveillance (Article 103(3) and (4) of the Treaty)

E. The Commission shall forward to the European Parliament and the Council reports on economic developments in each of the Member States and on the consistency of their national economic policies with the broad guidelines, together with its recommendations in cases where it is established that the economic policies of a Member State are not consistent with the broad guidelines or that they risk jeopardizing the proper functioning of economic and monetary union. The European Parliament shall debate the Commission's recommendations and shall adopt a first resolution, which shall be forwarded to the Council.

F. Where the Council establishes that the economic policy of a Member State is not consistent with the broad guidelines, it may make the necessary recommendations to the Member State concerned, bearing in mind the European Parliament's resolution.

G. The recommendations shall be made public. The President of the Council shall appear before the competent committee of the European Parliament to report on the recommendations adopted. Parliament shall assess the content of the recommendation in relation to its first resolution and, possibly, adopt a second resolution.

Procedure in the event of excessive deficits (Article 104c of the Treaty)

H. The Commission shall forward to the European Parliament and the Council the reports drawn up in the process of monitoring the development of the budgetary situation and the level of government debt in the Member States and the opinions drawn up in cases where there is an excessive deficit or the risk of such a deficit. The European Parliament shall debate these reports and opinions. Where there are excessive deficits it shall adopt a first resolution, which it shall forward to the Council before the adoption of a decision.

I. The Council shall decide whether there is an excessive deficit in a Member State and, taking account of the European Parliament's resolution, shall make recommendations to the Member State concerned in order that the latter may bring that situation to an end within a given period.

J. The President of the Council shall appear before the competent committee of the European Parliament to report on the recommendations adopted. Parliament shall assess the content of the recommendation in relation to its first resolution and, possibly, adopt a second resolution.

K. Where it establishes that there has been no effective action in response to its recommendations within the period laid down, the Council shall make its recommendations public.

L. If a Member State persists in failing to put into practice the recommendations of the Council, despite the notice served by the latter in accordance with Article 104c(9), and if the Member State concerned does not adopt measures aimed at reducing the deficit, the Council may, after giving Parliament the opportunity to state its views on the measures envisaged, decide to apply one or more of the sanctions provided for in Article 104c(11).

M. The President of the Council shall appear before the competent committee of the European Parliament to report on the decisions taken under Article 104c(11) of the Treaty. He shall also inform it of any derogation from one or all of the decisions adopted.

Final provisions

N. The content of the present agreement may not be changed without the consent of all the institutions that have entered into it.

Last updated: 27 March 1999Legal notice