Tuesday 14 October 2008

EU: Monetary policy IIb ECB and prudential supervision

Has European Community (European Union) monetary policy, based on the single currency (euro), advanced during the protracted treaty reform process since the 2001 Treaty of Nice?

In particular, given the present financial turmoil, did the European Convention offer anything, which could have prevented or mitigated the problems of today concerning the lack of European level prudential supervision?

We compare the proposal of the European Convention (Article III-77) with the current Article 105 of the Treaty establishing the European Community (TEC) on the objectives and the basic tasks of the European System of Central Banks (ESCB) and the European Central Bank (ECB).

After that we look at some legal materials and descriptions of the proposal of the European Convention in the draft Constitution.

Would the government positions in 2008 remain what they were in 2003?


Texts compared

There are some (material) differences in the referrals and the text between Article III-77 of the draft Constitution and the existing Article 105 of the Treaty establishing the European Community (TEC).

Price stability was retained as the primary objective, but the Union’s general objectives in Article I-3 had been reformulated with regard to Article 2 TEC.

The second referral in paragraph 1 underwent a change, too. The contents of Article 4 TEC and Article III-69 were practically identical, but what had been guiding principles for the European Community (former European Economic Community, EEC) generally, became the introductory principles for economic and monetary policy ─ a policy area ─ within the context of the unified European Union (which would have abolished the EC ─ EU duality).

In paragraph 2, the foreign exchange operations consistent with Article 111 TEC moved the Article referred to from the section on monetary policy to the chapter on international agreements (Chapter VI).

The real difference was that the legal base concerning prudential supervision of credit institutions and other financial institutions, in paragraph 6, underwent a change. The draft Constitution replaced unanimous Council decisions by European laws.

The European Convention started the practice to replace the acronyms ESCB and ECB by the European System of Central Banks and the European Central Bank.


Convention Working Group

For a look at the background, you can read the Final report of Working Group VI on Economic Governance, CONV 357/02 (21 October 2002. The remarks give an indication of the discussion on monetary policy (page 3):

"A large number of members of the group consider that the tasks, mandate and statute of the European Central Bank should remain unchanged, and should not be affected by any new treaty provisions. However some consider that its mandate should be widened to include the objectives of growth and employment

The group also discussed the accountability and transparency of the ECB. Some consider that there is scope for improving the accountability of the ECB, and have put forward ideas such as enhancing the ECB's reporting to the European Parliament, giving the EP a greater role in the designation of ECB Board members, and providing for the obligatory publication of ECB minutes. Others consider that the ECB has already demonstrated a commitment to increased openness, and do not therefore think that any changes are necessary.

The group agrees on the importance, in the light of enlargement, of amending Article 10 paragraph 2 of the ECB statutes relating to the working methods of the ECB's Governing Council, and invites the ECB and/or the Commission to make use of the enabling clause included in the Treaty of Nice to make proposals for amending Article 10 paragraph 2 of the ECB statute as soon as the Nice Treaty enters into force."

The Working Group Report is available at:



de Poncins

Étienne de Poncins presented the proposed text of Article III-77 of the draft Constitution in ‘Vers une Constitution européenne’ (Éditions 10/18, 2003), and he remarked on the changed legal base concerning prudential supervision, on page 302:

« Commentaire : le paragraphe 6 permet de confier à la Banque centrale européenne des missions particulières avant trait au contrôle prudentiel. Aujourd’hui cette décision requiert l’unanimité du Conseil et l’avis conforme du Parlement européen. La procédure législative ordinaire sera d’application, le Conseil se prononçant à la majorité qualifiée. »



Sweden remains outside the third phase of economic and monetary union (EMU), without a derogation, but following the 14 September 2003 referendum.

The government of Sweden briefly mentioned the proposed amendment on prudential supervision in the draft Constitution in ‘Europeiska konventet om EU:s framtid’ (Utrikesdepartementet, Departementsserien (Ds) 2003:58, 2003). The relevant passage is on page 55:

“Vidare föreslås ändrade beslutsregler för överföring av tillsynsbefogenheter för den finansiella sektorn till Europeiska centralbanken (ECB).

On page 56 the government noted the favourable opinion of Sveriges Riksbank (Sweden’s central bank) regarding the abandonment of the unanimity rule concerning prudential supervision:

”Sveriges riksbank stödjer konventets förslag om att frångå kravet på enhällighet vid beslut om att ge ECB särskilda uppgifter i samband med tillsynen av kreditinstitut och andra finansinstitut. Riksbanken har inte heller några invändningar mot förslaget om att ändra beslutsordningen för justering av ECB-stadgan.”



Ahead of the intergovernmental conference (IGC 2003─2004), but after the euro referendum, the government of Sweden described the proposed provision on prudential supervision, in ‘Europeiska konventet om EU:s framtid’ (Regeringens skrivelse 2003/04:13, den 2 oktober 2003), on page 49:

”Europeiska centralbankens tillsynsbefogenheter och stadgar

Konventet föreslår att beslutsregeln för överföring av tillsynsbefogenheter för den finansiella sektorn till Europeiska centralbanken (ECB) skall ändras. I dag krävs enhällighet i rådet och samtycke av Europaparlamentet. Förslaget innebär att rådet skall besluta med kvalificerad majoritet och att Europaparlamentet skall ges medbeslutande för en sådan överföring. Vidare föreslås att Europaparlamentet ges medbeslutande beträffande vissa frågor i stadgan för Europeiska centralbankssystemet.”

On page 50 the Swedish government revealed its own ‘farsighted’ position. Supervision of financial markets is a matter for the member states. According supervisory functions to the European Central Bank should continue to be ruled by unanimity:

”Medlemsstaterna bör även fortsättningsvis själva kunna avgöra hur de organiserar övervakningen av de finansiella marknaderna. Det är därför inte lämpligt att släppa på kravet om enhällighet för överföring av tillsynsbefogenheter från medlemsstaterna till ECB.”


United Kingdom

The United Kingdom has opted out of the third stage of economic and monetary union (EMU). (In the latest consolidated version of the treaties, Protocol (No 25) on certain provisions relating to the United Kingdom of Great Britain and Northern Ireland, OJ 29.12.2006 C 321 E/299).

Between the European Convention and the intergovernmental conference, the UK government presented its general approach ─ most British ─ in ‘A Constitutional Treaty for the EU; The British Approach to the European Union Intergovernmental Conference 2003’ (Cm5934, September 2003), under Economic Governance on pages 34─35:

“74. Many of the issues discussed in the European Convention and raised in the draft Constitutional Treaty could have significant consequences for the future performance of EU economies. The draft Constitutional Treaty proposed by the Convention has proposed changes to the EU’s existing system of economic governance and other aspects of the EU fiscal framework; the institutional balance between the Union and Member States in economic policy coordination; and the role of the Eurogroup, the informal grouping of euro area finance ministers. The Government will oppose any such proposals which might lead to unnecessary rigidities or undermine the central role of Member States in determining their economic policies. It will work to ensure outcomes that will bolster stability, promote flexibility and enhance the ability of European countries to raise productivity and employment levels.

75. The draft Treaty does not alter the terms of the UK’s Economic and Monetary Union protocol (allowing the UK to decide whether or not to join the euro). This will need formally to be re-adopted on the conclusion of the IGC.”



Finland has adopted the euro currency, but relinquishing unanimity when transferring prudential supervision to the European Central Bank did not find favour with the Finnish government in 2003.

In the view of the Finnish government, in ‘Valtioneuvoston selonteko Eduskunnalle konventin tuloksista ja valmistautumisesta hallitusten väliseen konferenssiin’ (VNS 2/2003 vp), joint supervision was not appropriate, given the sensititvity of these questions and their economic repercussions (page 66):

”Perustuslaillisella sopimuksella muutetaan myös joitakin päätöksentekomenettelyjä talous- ja rahapolitiikan alalla. Lainsäädäntömenettely ulotetaan kattamaan myös rahoituslaitosten valvontaa koskevien erityistehtävien siirtäminen EKP:lle (III-77 artikla) sekä EKP-järjestelmän perussäännön tiettyjen artiklojen muuttaminen (III-79 artikla). EKP:lle voidaan normaalia lainsäädäntömenettelyä noudattaen antaa erityistehtäviä jotka koskevat luottolaitosten sekä muiden rahoituslaitosten kuin vakuutusyritysten toiminnan vakauden valvontaa. Nykysopimuksessa tämä edellyttää neuvostossa yksimielisyyttä. Suomen taholta ei yhdistetyn valvontavastuun tavoittelua unionissa ole pidetty tarkoituksenmukaisena, koska kyse on erittäin herkkäluonteisista kysymyksistä joilla on myös taloudellisia vaikutuksia. EKP:n keskuspankin perussääntöä voidaan puolestaan jatkossa muuttaa ministerineuvostossa määräenemmistöllä myös komission, ei vain EKP:n aloitteesta. Tämän on pelätty heikentävän keskuspankin asemaa. Suomen edustajat konventissa vastustivatkin näitä muutoksia.”


We have seen that in 2003 none of our sample of three governments wanted to approve the proposal by the European Convention to facilitate the creation of joint financial supervision at European level, under the auspices of the European Central Bank.

In the following instalment we look at how the IGC 2004 and the Constitutional Treaty treated the proposals in the draft Constitution.

What was, and given the current financial crisis, what should have been the response in 2004 and later?

Ralf Grahn

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