Opinion of the European Monetary Institute on a consultation under Article 109f(6) of the Treaty establishing the European Community (the “Treaty”) and Article 5.3 of the Statute of the EMI, as elaborated in Council Decision 93/717/EC of 22nd November 1993, from the Institut Monétaire Luxembourgeois on a draft legislative provision concerning the implementation of the prohibition of monetary financing as laid down in Article 104 of the Treaty (CON/95/14)
Date: 1995-10-05
Institutions: European Monetary Institute
Subjects: Luxembourg, money, national budget, national law, redemption of public debt

OPINION OF THE EUROPEAN MONETARY INSTITUTE

on  a  consultation  under  Article  109f(6)  of  the  Treaty  establishing  the  European  Community  (the

“Treaty”)  and  Article  5.3  of  the  Statute  of  the  EMI,  as  elaborated  in  Council  Decision  93/717/EC  of

22nd  November  1993,  from  the  Institut  Monétaire  Luxembourgeois  on  a  draft  legislative  provision

concerning the implementation of the prohibition of monetary financing as laid down in Article 104 of

the Treaty.

(CON/95/14)

1.

The present consultation was initiated on 31st August by the Institut Monétaire Luxembourgeois

(the  “Institute”)  and  received  by  the  EMI  on  6th  September  1995.  With  a  view  to  this

consultation, the Institute submitted a draft legislative provision to be included in the Budget Law

of Luxembourg for 1996 and an explanatory memorandum to the EMI. Pursuant to Article 4 of

Council  Decision  93/717/EC  of  22nd  November  1993,  the  EMI  has  been  asked  to  deliver  its

opinion one month after the receipt of the consultation.

2.

The EMI’s competence to deliver an opinion in this consultation is based on Article 1.1, second

indent, of Council Decision 93/717/EC of 22nd November 1993, as the draft legislative provision

aims at the implementation of the prohibition of monetary financing as laid down in Article 104 of

the Treaty and thus affects the powers of the Institute.

3.

The  countervalue  of  the  issuance  of  notes  and  coins  by  the  Institute  -  which  is  subject  to  a

quantitative  ceiling  under  the  monetary  association  between  Belgium  and  Luxembourg  -  is

currently  represented  by  a  non-callable,  non-interest  bearing  claim  of  the  Institute  on  the

Luxembourg  Government.  Consequently,  any  increase  in  the  currency  circulation  automatically

provides  the  Government  with  liquid  funds.    This  procedure  implies  lending  to  the  Government

which  is  in  violation  with  Article  104  of  the  Treaty  and  Article  1,  Section  1(b)  of  Council

Regulation (EC) No. 3603/93 of 13th December 1993.  The Luxembourg legislative authorities

originally intended to remedy this situation in a draft law on the Institute which was submitted to

Parliament  in  December  1993.    This  draft  (Law  No.  3862)  aimed  at  the  implementation  of  all

Treaty provisions concerning Stage Two and also at the introduction of institutional features with

a  view  to  Stage  Three  of  EMU.    The  draft  law  was  submitted  to  the  EMI  for  consultation  on

18th  February  1994  and  the  EMI  delivered  its  opinion  (CON/94/1)  on  12th  March  1994.

However,  as  the  adoption  of  this  law  is  taking  more  time  than  originally  envisaged,  the

Luxembourg legislative authorities have now decided, as a provisional solution for this problem in

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timing,  to  implement  the  prohibition  of  lending  to  the  Government  through  the  Budget  Law  for

1996 in order to ensure an end to the above form of lending at the latest by the 1st of January

1996.  The EMI welcomes these measures (albeit delayed), which are purported  to comply with

Article 104 of the Treaty.

4.

The total claim of the Institute on the Government, resulting from its net currency issuance from

1985 (when it started with these activities) until the end of this year, will be fixed at the level of

the day when the Budget Law for 1996 enters into force (it being recognised that the Institute

has not issued banknotes and coins beyond the level of end 1993).  Although from that moment

on  new  lending  to  the  Government  has  no  longer  occurred,  compliance  with  Article  104  also

requires  conversion  of  the  total  outstanding  claim  into  a  repayable  claim  with  a  fixed  maturity.

According to Article 1, Section 1(b), of Council Regulation (EC) No. 3603/93 of 13th December

1993, any claim against the public sector already existing at 1st January 1994 (when Article 104

came into force) must be repayable and have a fixed maturity. Since the above draft Law No.

3862 does not deal with procedures for ultimate repayment by the Luxembourg Government, the

provision to be inserted in the Budget Law for 1996 deals with this issue as well. In particular, it

is  proposed  that  the  outstanding  claim  be  made  repayable,  while  it  continues  to  be  non-interest

bearing. The Government will assign for repayments 50% of its share in the annual profits of the

Institute  (without  prejudice  to  its  right  to  repay  at  a  faster  rate).  If  after  40  years  there  still

remains  a  balance,  the  Government  will  repay  the  remainder  of  the  claim  in  full.  Should  the

currency circulation at some point in time fall below the remaining balance of the claim, then the

Government  would  maintain  a  deposit  at  the  Institute  to  cover  the  gap.  Since  the  proposed

solution  is  not  inconsistent  with  Article  104  and  Council  Regulation  (EC)  No.  3603/93  of  13th

December  1993,  the  draft  legislative  provision  does  not,  in  principle,  give  rise  to  any  objections

from the side of the EMI.

5.

Notwithstanding  the  above,  the  EMI  should  like  to  recall  that  the  existence  of  non-negotiable,

non-interest bearing claims of a significant size on the Government may be a cause of concern

for  two  reasons.  Firstly,  there  may  be  implications  for  the  distribution  of  monetary  income  in

Stage  Three.  Secondly,  the  flexibility  of  monetary  policy  in  Stage  Three  might  be  adversely

affected (e.g. in case the opportunities for open-market operations are constrained by the claim

of the Institute on the Luxembourg Government). These considerations are also mirrored in the

fourth recital of the Council Regulation (EC) No. 3603/93 of 13th December 1993 and support

the view that it is desirable - albeit not legally required - for such claims to be repaid as soon as

possible,  or  at  least  before  Stage  Three,  or  to  be  converted  into  negotiable  fixed  maturity

securities under market conditions.

In  defending  the  maximum  repayment  period  of  40  years,  the  explanatory  memorandum  to  the

draft  provision  points  to  a  similar  period  accepted  for  Germany  for  certain  claims  of  the

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Bundesbank  on  the  German  public  sector,  thereby  suggesting  that  such  a  long  period  may  be

regarded as normal for compliance with Article 104 of the Treaty. However, several other EU

countries  with  similar  claims  have  settled  for  much  shorter  repayment  periods.  Moreover,  the

claim of the Bundesbank (0.3% of GDP) is substantially smaller than that of the Institute (1.4%

of  GDP;  situation  as  at  end-March  1995).    Furthermore,  the  explanatory  memorandum  states

that if future Institute profits would be similar to the realised profits in the past eleven years, the

Government  would  be  able  to  repay  the  claim  within  roughly  35  years.  Although  it  must  be

admitted  that  profits  of  the  past  are  no  guarantee  for  the  future,  the  final  date  of  repayment

could thus have been advanced.

6.

Finally,  a  comment  can  be  made  regarding  the  provisions  to  guarantee  the  liquidity  of  the

Institute  in  case  the  currency  circulation  would  drop  below  the  balance  of  outstanding  claims

(viz. the Government will cover the gap through a special deposit at the Institute). The need for

such provisions arises from the proposal to disconnect the currency circulation from the claims

on the Government which until now have served as the countervalue. Such provisions would not

be  necessary  if  the  Government  were  to  repay  the  outstanding  claim  at  a  faster  pace  in  full

before the start of Stage Three. This would allow the Institute to rapidly build up its own reserve

asset  position  as  the  countervalue  for  its  currency  circulation,  instead  of  only  gradually  over  a

period of 40 years, during which the Government would continuously have to stand guard against

the eventuality of liquidity problems.

7.

The EMI agrees that this opinion may be made public by the competent Luxembourg authorities

at their discretion.

5th October 1995