Mr. Liebscher discusses the role of a national central bank within the ESCB
Address by the President of the Austrian National Bank,
as illustrated by the OeNB
Dr. Klaus Liebscher, held at the 26th Economics Conference of the Oesterreichische
Nationalbank on the topic "Economic Policy 2000", in Vienna on 7-8/5/98.
Introduction
Just a few days ago, the key political decisions which will pave the way to EMU
were taken at the summit in Brussels. Based upon the preparatory work of the European
Monetary Institute, the Commission and ECOFIN, the Council of the Heads of State or of
Government agreed last weekend to start Stage Three of EMU on January 1, 1999, with eleven
countries. At the same time, the bilateral exchange rates for the participating currencies, which
are to form the basis for their euro conversion rates, were preannounced. The European Central
Bank will be formally inaugurated in Frankfurt on June 30, and EMU will commence on
schedule on January 1, 1999. These developments have provided the financial markets with
reliable points of reference that will contribute substantially to a calculable development of
exchange rates and interest rates until the onset of EMU.
The general public and the financial markets are now convinced that EMU will
become reality in just a few months' time. By comparison, people know much less about the
institutions that will be responsible for the single monetary policy and, in particular, about the
relationships among them. Will there still be a place left within EMU for today's national central
banks? And if so, which tasks are they going to keep once monetary policy is made in Frankfurt?
These are questions that are frequently asked. And the answers are indeed quite complex.
The basic institutional framework of the European System of Central Banks as defined in the
ESCB/ECB Statute
A superficial glance at the ESCB/ECB Statute lets things appear quite simple.
• The establishment of the ECB in mid-1998 will coincide with the foundation of
the European System of Central Banks (ESCB). The ESCB will consist of the
ECB and the national central banks (NCBs) of the EU member states. From
January 1, 1999, the ESCB will have the sole responsibility for the single
monetary policy within the euro area. In performing its tasks, the ESCB will be
independent of any political instructions and will be committed to the primary
objective of price stability.
• The ESCB will be governed by the ECB's decision-making bodies, led by the
ECB Governing Council, which will consist of six members of the ECB
Executive Board, including the ECB President and Vice-President, as well as
the governors of the NCBs of the euro area. Monetary policy decisions will be
taken centrally, by a simple majority of the ECB Governing Council and based
on the principle of "one member, one vote".
• The ECB Executive Board will conduct monetary policy in accordance with the
guidelines and decisions adopted by the ECB Governing Council. In doing so,
it will issue the necessary instructions to national central banks.
• The national central banks will form an integral part of the ESCB and act in
accordance with the guidelines and instructions issued by the ECB. In
conducting operations within the ESCB's field of competence, the ECB will
rely on the national central banks whenever possible and appropriate.
• Finally, a so-called "General Council" will be constituted as a third
decision-making body. It will assume responsibility for the coordination and
exchange of information between the euro area and EU central banks which
have not yet adopted the single currency, but will not exercise any influence on
the monetary policy of the euro area.
Ample room for manoeuvre in practical implementation
This, in a nutshell, is the ESCB/ECB Statute. Its apparently quite straightforward
structure allows ample room for manoeuvre in actual practice. The European Monetary Institute
in fact devoted quite a substantial part of its preparatory work on EMU to the concrete
assignment of duties and the establishment of procedures within the ESCB.
Let me just quote a few examples of questions that had to be resolved in
compliance with the ESCB Statute: Who within the ESCB will conduct monetary policy
operations? Who will intervene in the exchange markets? Who will manage the foreign exchange
reserves? Do we, inside the euro area, still need national balance-of-payments statistics? Where
will the commercial banks keep their central bank accounts? Which bodies within the ESCB are
to have access to the TARGET cross-border payment system? Who will issue euro banknotes?
Who will print them? Where does the monetary income from the creation of central bank money
originate: at the ECB or at the national central banks? And how is it going to be distributed
within the ESCB? Who will prepare the documents for the meetings of the ECB Governing
Council? Will there still be committees of experts delegated by the national central banks to at
least help prepare the decisions of the ECB Governing Council? How large should the ECB be
by comparison to the national central banks and how much staff will it need?
Each of these questions - and here I have picked out just a few - has been
discussed by the EMI at great length. Most of them have been fully resolved - even though initial
positions were sometimes diametrically opposed. In some cases, transitional rules were agreed
for the initial phase of monetary union; they may then have to be adjusted in the light of
experience gained. Legal instruments have been prepared wherever necessary. When the ECB is
established a few weeks from now, one of its first tasks will be to wind up the discussions and
endorse all of this preliminary work done by the EMI.
The philosophy underlying the organization of the ESCB
How, in the light of the EMI's preparatory activities, will tasks and duties be
distributed within the ESCB? What role will the national central banks play?
The basic philosophy in organizing the ESCB is to have all decisions taken
centrally by the ECB; in effect, decisions on all fundamental issues will be taken by the ECB's
Governing Council. This is the only way in which the uniformity of the single monetary policy
can be ensured across the euro area. The implementation of decisions - that is operations, which
in practice account for most of a national central bank's work - is effected by the national central
banks on a decentralized basis, coordinated by the ECB Executive Board. Like a red thread, these
two principles - centralized decisions and guidelines, decentralized implementation - govern all
the ESCB's operations.
At this point, three concepts must be explained. The first relates to the ESCB's
tasks and functions. The Maastricht Treaty provides a very clear definition of those areas which
from Stage Three of EMU will fall within the Community's field of competence. Thus the basic
tasks to be carried out by the ESCB are to define and implement the monetary policy of the euro
area, to conduct foreign exchange operations in accordance with the exchange rate policy of the
euro area, to hold and manage the official foreign reserves of the member states, and to promote
the smooth operation of payment systems. In the area of the prudential supervision of banks and
financial markets, the ESCB only contributes to the smooth conduct of policies pursued by the
competent authorities. In addition to these basic tasks, the national central banks are free to
perform other tasks, provided they are not incompatible with the objectives of the single
monetary policy.
The second item requiring an explanation is the legal form of the ESCB. The
ESCB has no legal personality of its own. Only its components - the ECB and the national
central banks - have legal personality. The term ESCB therefore only refers to the fact that the
ECB and the national central banks are integral parts of a whole that is guided by a common set
of rules, objectives and duties in both its internal and external relations. This underlines the
federal character of the ESCB and the institutional role of the national central banks as equal
partners within the ESCB.
The third concept that needs to be explained is the principle of "subsidiarity".
Under the principle of subsidiarity, the distribution of all responsibilities and tasks must allow
for a maximum degree of freedom, while at the same time paying due regard to the body politic.
Centralized entities should not monopolize tasks that can be performed by decentralized units.
The centralized entity is to focus on the functions it has to perform in the interest of society as a
whole. The European Union incorporated the principle of subsidiarity in the Maastricht Treaty:
In areas which do not fall within its exclusive competence, the Community shall take action only
if and insofar as the objectives of a proposed action cannot be satisfactorily achieved by the
member states. How then is the principle of subsidiarity to be applied to monetary union? The
transfer of monetary policy from the national to the higher Community level is based on the
conviction that this is in the general economic interest. Only the actual implementation of
monetary policy may - and shall - remain the responsibility of the smaller entities, that is, the
national central banks "to the extent deemed possible and appropriate". Consequently, when we
speak about subsidiarity in the context of EMU, we must distinguish carefully between monetary
policy decisions and their implementation. In the former case, the principle of subsidiarity
provides the motive for centralization, in the latter it is the incentive for decentralization.
Five areas of responsibility of National Central Banks
Against this background, five key areas of responsibility or functions can be
identified for the national central banks. First, the national central bank governors will actively
contribute to all central decision-making processes within the ESCB. In this context the national
central banks will, second, serve as intermediaries between the single monetary policy and
national economic policies. Third, they will act as the ESCB's operative entities in carrying out
monetary and foreign exchange policies as well as policies relating to payment systems and in
compiling monetary and balance-of-payments statistics. Fourth, the national central banks will
contribute the ECB's capital and, as "the owners" of the ECB, also receive their share of ECB
income. Fifth, the national central banks, apart from being ESCB member banks, will continue to
exist as independent institutions outside the ESCB's scope of responsibility and as such will be
free to perform additional functions on their own responsibility. Let me now explore these five
functions in greater detail.
1. Participation in decision-making by the ECB Governing Council
The first area of responsibility relates to the NCBs' participation in
decisionmaking processes. As already mentioned, the ECB Governing Council will consist of the six
members of the ECB Executive Board and, for the time being, the eleven governors of NCBs. At
the start, the ratio between members of the ECB Executive Board and national central bank
governors will therefore be about one to two. This predominance of NCB governors in ECB
decision-making will safeguard that, based on European central banking experience, the required
measure of continuity is achieved in spite of the significant changes on an institutional level.
The ECB Governing Council takes monetary policy decisions by a simple
majority. Each member of the ECB Governing Council has one vote. This also applies to NCB
governors, regardless of whether they are from a small or a large country. This reflects the
intention of the Treaty, according to which central bank governors are to serve on the ECB
Governing Council as individuals, not as "country delegates" or representatives of their
institutions. They are committed to Community objectives and the tasks of the ESCB and are
expected to consider the monetary policy needs of the euro area as a whole. The Treaty therefore
attaches particular importance to the independence of the members of the ECB Executive Board
and the national central bank governors. To ensure their personal independence, the ESCB
Statute defines certain minimum requirements, including a minimum term of office and
protection from early dismissal. These are additional safeguards against attempts to exert
pressure by way of instructions or other influence. The prohibition to issue instructions to NCB
governors applies in fact to all types of bodies, both external and internal, including the
decision-making body of the respective national central bank. The Treaty deliberately refrains
from providing for the disclosure of the minutes of ECB Governing Council meetings and votes
cast by the individual members of the ECB Governing Council in order to assist them in acting
responsibly, to the benefit of the euro area as a whole.
The call on the members of the ECB Governing Council to think "European" has
also been underlined in economic theory as a necessary prerequisite for defining the best possible
monetary policy for the entire euro area. Let us assume, for example, that Austria and a number
of other small and medium-sized countries commanding a majority of votes on the ECB
Governing Board together are enjoying a boom. Let us further assume that Germany and France,
which together account for well over half of the GDP of the euro area, are passing through a
period of recession. If in such a situation the central bank governors of the small countries used
their majority of votes to raise interest rates in the euro area in order to dampen their overheated
economies, they would be opting for a measure inconsistent with the monetary policy needs of
the euro area as a whole. This example, of course, is mere conjecture, a case which is quite
unlikely to develop, particularly as we may expect the business cycles of the euro area countries
to continue to converge as they have for the past few years. The example nevertheless serves to
illustrate the principle that monetary policy decisions of the ESCB must always be to the benefit
of the euro area as a whole and must not cater to national interests.
This also shows very clearly how important it is for each national central bank to
have its own macro-economic analyses available for the meetings of the ECB Governing
Council. The staff of the ECB Executive Board in Frankfurt will certainly draw up a full set of
data and analyses, which will be available to all members of the Governing Council. NCB
governors will, however, be well advised to have their own analyses of developments in the euro
area and the global economy, prepared by their in-house staff of economists and statistical
experts, possibly dealing in greater detail with issues of particular interest from a governor's own
perspective. The example of the Federal Reserve System in the United States shows that
well-prepared information is an indispensable decision aid for the participants of meetings at
which monetary policy decisions have to be taken. The sounder and more compelling the
arguments that a central bank governor presents to the ECB Governing Council, the greater his or
her chance to convince the other members.
The experience of the Federal Reserve System also demonstrates that national -
regional, in the US - central banks can find their own market niches in research and analysis. For
the OeNB, for example, I would see a comparative advantage in studies on the transition
countries.
2. Public relations agent and interface between the single monetary policy and national economic
policies
A second important role of national central banks resulting from the first one is to
act as public relations agents and interfaces between the single monetary policy on the one hand
and the public and economic policy-makers on the other hand. The ESCB's - as indeed any
central bank's - successful implementation of the single monetary policy will depend
substantially on its ability to communicate effectively with the general public and economic
policy-makers.
Like any central bank today, the ESCB will have to keep citizens informed about
its strategy and the motives behind any action it takes. This is the only way to ensure that the
European public will understand, endorse and support its monetary policy. For a number of
reasons, the national central banks will have a central role to play in this context. They are the
ones best acquainted with their countries' weak spots and special concerns. They speak the
language of the people in the countries they represent - both literally and metaphorically. They
have enjoyed the population's confidence for many years. They have a close network of formal
and informal communication channels. And they have the resources required for public relations
work that will reach the general public, a task which may prove time-consuming and make huge
demands on an NCB's manpower resources. The national central banks are therefore ideally
placed for conducting the ESCB's public relations activities in the participating countries. Care
will have to be taken, however, to ensure that such decentralized public relations efforts will still
follow a clear common line.
A second central aspect of the NCBs' intermediary function is their role as a
communication channel to national economic policy-makers. It is in the nature of EMU that one
single monetary and exchange rate policy will apply to the entire euro area. Different national
monetary policy stances to balance differences in economic developments and structures are no
longer possible. The balance must therefore be achieved by means of other economic policy
instruments, i.e. the national fiscal, income and structural policies.
These areas of economic policy are of course beyond the central banks' immediate
scope of competence. It is, however, part of the central banks' responsibility to alert economic
policy-makers at the national level as well as the public to any adjustments that may be
necessary. This is the only way to make sure that the euro area member states will be able to reap
full benefit from EMU and to minimize potential disadvantages. Here, it will be of central
importance that budgetary policies are closely coordinated at the national level, that government
budgets are put on a sound footing in accordance with the provisions of the Growth and Stability
Pact and more flexibility is aimed at in economic structures.
Ideally, EMU will be an incentive for EU governments to tackle pending
economic reforms more swiftly and with more determination. Thus, EMU could act as a catalyst
in European economic development. The significant reform efforts undertaken in the past months
and years in all of the EU member states in the run-up to EMU make me confident that this
positive scenario is attainable. In fact, to some extent EMU has already had highly beneficial
impacts on economic policy in recent years, although it has not even started yet. We must be
aware, however, that the reforms that have been initiated must now be continued and that
participation in EMU requires an increased readiness for permanent change and reform.
As it has been possible during the last year to convince the Austrian population of
the benefits of the euro, I trust that it will be equally possible to motivate the citizens of Europe
to take up the structural reforms that will have to accompany the euro if its full rewards are to be
reaped. Here the NCBs will have to play an important role as mediators, coordinators and public
relations agents in issues dictated by a single monetary policy within the entire euro area and the
economic policies of the member states. Drawing on their economic expertise, the national
central banks will be able to provide valuable assistance to economic policy-makers at the
national level in formulating arguments for the reforms needed. Being independent institutions,
however, they should also stand ready to act as the voice of reason and alert economic
policy-makers in due time if necessary.
3. The National Central Banks as operative entities of the ESCB
Let me now move on to the third key function of the national central banks. The
NCBs will be the operative entities of the ESCB. Preparatory work by the EMI has shown that
decentralization of a very large portion of the central banks' operative activities is both
"possible" and "appropriate". Using advanced information technology, money market tender
operations, for example, can be conducted on a decentralized basis at reasonable expense.
At the same time, the benefits of a decentralized approach are quite obvious. It
will permit the use of the NCBs' infrastructure and the benefit of their experience in conducting
monetary policy and other operations. Watching their national financial markets evolve, the
national central banks have accumulated a wealth of experience over the decades. At the early
stage of monetary union, these markets will still differ substantially. In order to guarantee
nevertheless equal and fair access to central bank liquidity for the large number of the ESCB's
counterparties, the national central banks will assume an indispensable function as intermediaries
between the ECB's monetary policy decisions and the counterparties of the ESCB. The national
central banks will also be best placed to monitor, on a continuous basis, the rapid and substantial
changes in the conduct of market players triggered by monetary union itself. This will ensure that
the ESCB's monetary policy instruments retain their effectiveness and efficiency even in a
rapidly changing environment.
The national central banks will therefore conduct open market transactions and
other monetary policy operations with the banks in accordance with instructions issued by the
ECB. Upon decision of the ECB, they will intervene on the foreign exchange markets. They will
print and issue banknotes. The commercial banks will maintain their minimum reserves with the
national central banks if such reserves are going to be an instrument of monetary policy - which I
would indeed advocate. The national central banks will supervise payment transactions, acting as
system operators in large-volume payments. They will collect statistical data, and they will
continue to cooperate in monetary policy-making on an international level, as in the IMF and
the BIS.
Let me mention just two examples to illustrate the national central
banks' important function in operative business: First, let us consider their role in monetary
policy operations within the ESCB. As a rule, decisions with regard to instruments used to
allocate or withdraw liquidity on the initiative of the ESCB will be taken centrally by the ECB.
However, their implementation and administration - carried out in line with the ECB's
instructions - will largely be the responsibility of the national central banks. Open market
operations will for the most part remain the exclusive task of the national central banks. These
include regular weekly tender operations with a term of two weeks, regular monthly longer-term
refinancing operations with a term of three months, structural open-market operations and,
possibly, the issuance of central bank debt certificates. Only fine-tuning operations, outright
transactions, foreign exchange swaps and the acceptance of time deposits may in exceptional
cases be executed directly by the ECB upon decision of the ECB's Governing Council. As
regards standing facilities, i.e., the marginal lending facility and the deposit facility, banks will be
dealing only with the NCBs. Minimum reserves will also be held exclusively by the national
central banks.
The second example relates to the administration of foreign reserves. The ECB
will be provided with foreign reserve assets for possible interventions in the exchange markets
and to support confidence in the euro. Initially, these foreign reserve assets will amount to a total
equivalent to up to EUR 50 billion (about ATS 700 billion). In the starting phase, the OeNB will
therefore transfer up to about ATS 16 billion of its foreign reserves to the ECB. The national
central banks will continue to manage the transferred foreign reserves on behalf of the ECB on a
fiduciary basis, in compliance with the ECB's investment rules. The predominant part of
Austria's foreign currency reserves will be retained and invested by the OeNB. Transactions by
national central banks involving such foreign currency reserves will be governed by guidelines in
order to prevent any possible undesirable impact on the monetary and foreign exchange policies
of the euro area. Very large foreign currency reserve transactions will even require the approval
of the ECB.
As these two examples clearly illustrate, the operative framework of the ESCB as
prepared by the EMI heavily relied on the national central banks' existing resources and merely
confers the decision-making powers on the ECB.
4. Holders of the capital of the ECB
What kind of role will the national central banks be playing as the "holders of the
capital" of the ECB? The ECB will have a subscribed capital of EUR 5 billion (about
ATS 70 billion). The national central banks will be the sole subscribers to and holders of the
capital of the ECB. Only the NCBs participating in the euro area member states will pay up their
share in the capital. The capital subscription of the national central banks is based on a weighting
of 50% for the share of the respective Member State in the population of the Community and
50% for the share of the respective Member State in the GDP of the Community. The OeNB's
share will amount to about 2.3% or some EUR 115 million (approx. ATS 1.6 billion). Based on
eleven countries participating in monetary union from the start, the OeNB's share in the
subscribed capital will be 2.9%.
Capital subscription entitles the OeNB to a proportionate share in the ECB's
profit. The key for determining the share of capital to be paid up will also be instrumental in
determining the distribution of monetary income earned by the national central banks from the
issuance of central bank money. Under the ESCB's Statute, the monetary income of all
participating national central banks will be paid into a common pool and then redistributed in
accordance with the key for capital subscription. This procedure was chosen because it is
impossible to predict the regional distribution of central bank money creation within the
monetary union. Incidentally, this is not a problem, as the entire euro area will be a single
currency area with identical money market rates and uniformly applicable terms governing the
allocation of central bank money. However, to ensure an equitable distribution of income from
the creation of money within the ESCB, a profit distribution mechanism will be installed. At
least in the early phase of monetary union, however, there will still be substantial differences in
the central banks' balance sheets owing to national differences in the use of cash, payments and
savings habits. Consequently, transitional arrangements have to be made for the initial period
before the monetary income distribution mechanism can be introduced. Once the structures of
national financial markets and the circulation of banknotes and coins begin to converge, it will
become easier to define an appropriate approach to the gradual introduction of the monetary
income distribution mechanism.
5. Other activities remaining within the NCBs' responsibility
Let me now come to the last area of central bank activities. Beside their function
as an "integral part of the ESCB" the national central banks frequently perform a number of
specific duties they have grown into in the course of their history. Such public duties above all
include tasks relating to the supervision of banks and financial markets, carried out either directly
in their function as a supervisory authority or as an expert pool supporting the authorities charged
with banking supervision. Some central banks prepare analyses of the financial statements of
companies established in their countries in connection with their use of instruments of monetary
policy and as a service to the business community. Sometimes, central banks are involved in the
government programs for the promotion of exports and research. Beyond that, central banks
frequently provide financial services to public entities. Some central banks manage accounts for
private-sector customers, much like commercial banks. Other central banks hold interests in
production or service industries, which may be for commercial or strategic reasons.
The Statute of the ESCB does not envisage any forceful dismantling or unification
of the structures that each national central bank has developed in the course of time. They are
therefore free to choose their own legal form and organization. However, it must be clearly
pointed out that any national central bank will perform such additional tasks within its own
responsibility and for its own account and that such tasks are not deemed to be part of ESCB
activities. Furthermore, the ECB Governing Council may decide by a two-thirds majority that
certain activities fail to comply with the contractual and statutory tasks and duties of the ESCB
and may decree their discontinuation. Previous work by the EMI on this issue, particularly
studies on legal convergence, indicate that restrictions will be imposed only if such an activity
threatens to impair the single monetary policy.
Restructuring of the OeNB in the Run-Up to Monetary Union
...The fundamental reorganization of central banking in Europe associated with
monetary union has also required restructuring of the OeNB, involving several levels:
The first of these levels relates to the transformation from a central bank in its
own right to an integral part of the ESCB. The goal and strategy of monetary policy, its
intermediate target as well as the monetary policy instruments must be harmonized with those of
the ESCB. The OeNB initiated this development already several years ago in order to ensure as
smooth a transition as possible for Austria's financial system. After decades of stability-oriented
policies, the transition to the monetary policy goal laid down in the Maastricht Treaty actually
involved no change for us. The move from an intermediate exchange rate target to a new strategy
was preceded in the OeNB by preparatory studies and the development of the required know-how
through research work. Moreover, in recent years the OeNB gradually transformed its monetary
policy instruments into market-oriented instruments. The remaining adjustments to be made in
cooperation with the banks are already far advanced.
A second aspect is the review of the OeNB's areas of operation. The OeNB will in
essence continue its activities in all of its previous areas of responsibility also after Austria's
entry into Stage Three of monetary union. In many fields, however, the focus will change more
or less markedly. The OeNB's macroeconomic analyses, for example, will cover monetary policy
in the entire euro area in order to provide the best possible briefing to the OeNB Governor ahead
of the regular conferences of the ECB's Governing Council. On the other hand, the impact of a
single monetary policy on the Austrian economy will have to be identified and recommendations
worked out for domestic economic policies. Furthermore, the economic development of our
neighboring countries in the east will remain of key interest to the OeNB's analytical work. I
already mentioned the changes in the operative aspects of monetary policy. The OeNB will
continue these activities within the ESCB. The OeNB will also continue to collect monetary and
balance-of-payments statistics in Austria, albeit in a form that has been harmonized for the entire
euro area. In the area of payment systems, monetary union has provided a fresh impetus to the
OeNB. The OeNB has developed and successfully implemented ARTIS (Austrian Real-Time
Interbank Settlement), a new payment system meeting European requirements and ready for
integration into TARGET, the European payment system, from Jan. 1, 1999. The OeNB has also
made intensive and thorough preparations for the production and distribution of the future euro
banknotes. The design contest for the future euro banknotes was won by a graphic artist
employed with the OeNB. By setting up a new printing works for banknotes, the OeNB has the
required technology in place for the production of euro banknotes. In the field of banking
supervision, the current responsibilities of the OeNB are in