EU: Monetary policy If

The European Union lacks a real general (political) government. The EU even lacks a proper economic government, but there is a monetary government in place for 320 million EU citizens in 15 member states: the Eurosystem, constituted by the European Central Bank (ECB) and the national central banks of the euro area, within the broader European System of Central Banks (ESCB).

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The objectives of economic and monetary policy are laid out in Article 4 of the Treaty establishing the European Community (TEC).

The European Union, or more precisely, the European Community (EC), has set out common goals for the member states and the EC: an economic policy based on close coordination of member states’ economic policies, on the internal market and on common objectives. It is based on an open market economy with free competition.

These activities include the single currency (euro) and the conduct of a single monetary policy and exchange-rate policy with the primary objective to maintain price stability and, without prejudice to this objective, to support the general economic policies in the Community, in accordance with the principle of an open market economy with free competition.

The guiding principles for the Member States and the Community are: stable prices, sound public finances and monetary conditions and a sustainable balance of payments.

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Despite the common objectives, Paul Craig and Gráinne de Búrca offer a thoughtful reminder of the tensions between economic and monetary policy in ‘EU Law ─ Text, Cases, and Materials (Oxford University Press, 4th edition, 2007), page 741:

“The relationship between monetary policy and broader economic policy remains problematic. The EC has far greater control over monetary policy, as encapsulated in the Euro and the attendant ECB, than it does over broader economic policy. This is so notwithstanding the stability and growth pact. The EC is nonetheless caught in a conundrum in this respect. It is generally recognised that there is an intimate relationship between monetary policy and economic policy; if countries run long-term budgetary deficits then this will cause the currency markets to take a poor view of the value of the Euro. There are however political difficulties for the EC in extending control over national economic policy, or even in making full use of the existing regime, lest it be accused of excessive centralization of economic decision-making.”


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Article 8 TEC (ex Article 4a) sets out the basic institutional rules for monetary policy, with the establishment of the European system of central banks and the European Central Bank (OJ 29.12.2006 C 321/47):

Article 8 TEC

A European system of central banks (hereinafter referred to as ‘ESCB’) and a European Central Bank (hereinafter referred to as ‘ECB’) shall be established in accordance with the procedures laid down in this Treaty; they shall act within the limits of the powers conferred upon them by this Treaty and by the Statute of the ESCB and of the ECB (hereinafter referred to as ‘Statute of the ESCB’) annexed thereto.

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Eurosystem and euro area (Eurozone)

The Governing Council of the European Central Bank has agreed to use the term ‘Eurosystem’ to denote those components of the European System of Central Banks that carry out its basic tasks, i.e. the European Central Bank and the national central banks of those Member States which have adopted the single currency in accordance with the Treaty establishing the European Community.

I am going to use ‘euro area’ and Eurozone interchangeably.

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Objectives of monetary policy

Article 105 TEC (ex Article 105) sets out the objectives of EC monetary policy and mandates the European Central Bank (ECB) and the broader European System of Central Banks (ESCB) to implement EC monetary policy (OJ 29.12.2006 C 321 E/87).



Price stability

The primary objective of the ESCB is to maintain price stability (Article 105(1) TEC), meaning a low level of inflation.

The ECB’s Governing Council has defined price stability as "a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%. Price stability is to be maintained over the medium term".

The Governing Council has also clarified that, in the pursuit of price stability, it aims to maintain inflation rates below, but close to, 2% over the medium term.

Article 2 of the Protocol (No 18) on the Statute of the European System of Central Banks and the European Central Bank, as presented in the latest consolidated version of the treaties, OJ 29.12.2006 C 321 E/256, reiterates the basic treaty provisions on the objectives. .


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Secondary objectives

The other objectives of the Eurosystem are clearly secondary to 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 TEC.

The ESCB shall act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Article 4 TEC.

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Tasks of the Eurosystem


The basic tasks to be carried out through the ESCB are laid out in Article 105(2) and in Article 105(5) TEC.

The tasks are repeated in Article 3 of the Statute.

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The Eurosystem (ESCB) defines and implements the monetary policy of the Community.

Chapter 4 of the Statute ‘Monetary functions and operations of the ESCB’ (Articles 17 to 24) define various operations.


For more detail, see the consolidated version of Guideline of the European Central Bank of 31 August 2000 on monetary policy instruments and procedures of the Eurosystem (ECB/2000/7)
(OJ 11.12.2000 L 310/1):

http://www.ecb.europa.eu/ecb/legal/pdf/02000x0776-20080101-en.pdf


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The Eurosystem conducts foreign-exchange operations consistent with the provisions of Article 111 TEC.

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Foreign reserves

The Eurosystem holds and manages the official foreign reserves of the Eurozone member states.

See the ECB web page ‘Foreign reserves management/operations’:

http://www.ecb.europa.eu/ecb/legal/107663/1011/html/index.en.html


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Target2 payment system

The Eurosystem promotes the smooth operation of payment systems.

See Guideline of the ECB of 26 April 2007 on a Trans-European Automated Real-time Gross settlement Express Transfer system (TARGET2) (ECB/2007/2), OJ 8.9.2007 L 237/1, and
Decision of the ECB of 24 July 2007 concerning the terms and conditions of TARGET2-ECB (ECB/2007/7), OJ 8.9.2007 L 237/71.

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Prudential supervision

Pursuant to Article 105(5), the ESCB shall contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system.

Article 25 of the Statute places clear limits on the ECB’s powers to act independently, stressing the contributory role:

Article 25 ECB Statute

25.1. The ECB may offer advice to and be consulted by the Council, the Commission and the
competent authorities of the Member States on the scope and implementation of Community
legislation relating to the prudential supervision of credit institutions and to the stability of the
financial system.

25.2. In accordance with any decision of the Council under Article 105(6) of this Treaty, the
ECB may perform specific tasks concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.


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Advisory functions

Mandatory consultation

According to Article 105(4) TEC, the ECB shall be consulted on future legislation by the European Community and the national authorities, as the case may be:

— on any proposed Community act in its fields of competence,

— by national authorities regarding any draft legislative provision in its fields of competence, but within the limits and under the conditions set out by the Council in accordance with the procedure laid down in Article 107(6).


Own accord opinions

The ECB may submit opinions to the appropriate Community institutions or bodies or to national authorities on matters in its fields of competence.


These functions are echoed in Article 4 of the Statute, with a reference to Article 42 on complementary legislation.

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Article 105(6) TEC: The Council may, acting unanimously on a proposal from the Commission and after consulting the ECB and after receiving the assent of the European Parliament, confer upon the ECB specific tasks concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.

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Statistical information

Article 5 of the Statute, the ECB, assisted by the national central banks, collects necessary statistical information.

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International cooperation

Article 6 of the Statute sets out that the ECB, within the ESCB area of competence, decides how the ESCB shall be represented. The ECB and, subject to its approval, the national central banks may participate in international monetary institutions.

This is without prejudice to Article 111(4) TEC on the Council’s powers to decide on the position of the EC at international level as regards issues of particular relevance to economic and monetary union and on its representation.

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Reporting commitments

According to Statute Article 15 the ECB has an obligation to publish reports and statements free of charge to interested parties, i.a. quarterly reports, consolidated weekly financial statements and annual reports.

Basic information about the European Central Bank and its activities is abundant and well ordered on:

http://www.ecb.europa.eu



Ralf Grahn