Report by the Court of Auditors on the operational efficiency of the management of the European Monetary Institute and the European Central Bank for the financial year 1998 together with the replies of the European Central Bank
Date: 2000-04-06
Institutions: European Court of Auditors
Subjects: European Central Bank, European Court of Auditors, European Monetary Institute, financial year, management, report

12.5.2000

EN

Official Journal of the European Communities

C 133/1

I

(Information)

COURT OF AUDITORS

REPORT BY THE COURT OF AUDITORS

on the operational efficiency of the management of the European Monetary Institute and the
European Central Bank for the financial year 1998 together with the replies of the European
Central Bank

(2000/C 133/01)

CONTENTS

Paragraph

Page

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

EXAMINATION OF THE EMI(cid:146)S ACTIVITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE LIQUIDATION OF THE EMI . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

ACTIVITIES IN 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

THE EFFICIENCY OF THE MANAGEMENT IN 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Budgetary management and monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Project management and monitoring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Extraordinary bonus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1-3

4-8

9

10-12

13-22

14-17

18-20

21-22

Annexes 1-4. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2

2

2

3

3

3

4

4

6

Replies of the European Central Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10

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Official Journal of the European Communities

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INTRODUCTION

1. The European Central Bank (ECB) replaced the European
Monetary Institute (EMI) on 1 June 1998. The EMI had been in
existence since 1 January 1994, with the task of contributing to
the realisation of economic and monetary union (EMU), in par-
ticular by realising the conditions necessary for the transition to
the third stage of that union and the introduction of a single cur-
rency.

2. The Court has presented four reports on the results of audits
carried out as part of the examination of the efficiency of the
EMI(cid:146)s management for the financial years 1994 to 1997 (1). In
1998, the ECB completed the task of preparing for the third stage,
which had been started by the EMI, and took over on its own
account management of the tasks that had previously been car-
ried out by the latter. During that year it was not carrying out
normal central bank activities and went through a transitional
period marking the continuation, rather than the breaking off, of
the work of the EMI, which went into liquidation on 1 June 1998.
An annual report presenting both the financial statements of the
ECB as at 31 December 1998 and the final accounts of the EMI as
at 31 May 1998 was published in April 1999.

3. As the Court(cid:146)s mandates with regard to the EMI (2) and the
ECB (3) are identical, it is reporting for 1998 on the efficiency of
the management, of the EMI (for the first five months) and of the
ECB (for the remainder of the year). Two sections are devoted to
an examination of the EMI(cid:146)s activities and its liquidation respec-
tively.

EXAMINATION OF THE EMI(cid:146)S ACTIVITIES

4. The EMI(cid:146)s main object was to carry out the necessary prepara-
tory work for the third stage of EMU, leading up to the establish-
ment of the European System of Central Banks (ESCB), the pur-
suit of a single monetary policy and the introduction of a single
currency. In order to achieve that the EMI was given the task of
strengthening the coordination of national monetary policies,
with the aim of ensuring price stability and improving the con-
vergence between the economies of the Member States.

(1) These reports were all published in the Official Journal (OJ C 394,
31.12.1996 for 1994 and 1995; OJ C 42, 9.2.1998 for 1996; OJ
C 164,10.6.1999 for 1997).

(2) Article 17(4) of the Protocol on the Statute of the EMI (annexed to the
EC Treaty) reads, (cid:145)The provisions of Article 248 of this Treaty shall
only apply to an examination of the operational efficiency of the
management of the EMI(cid:146).

(3) Article 27(2) of the Protocol on the Statute of the ESCB and of the
ECB (annexed to the EC Treaty) reads, (cid:145)The provisions of Article 248
of this Treaty shall only apply to an examination of the operational
efficiency of the management of the ECB(cid:146).

5. This work took the form of publications, studies, working
papers, consultations, opinions and recommendations, prepared
by members of the EMI(cid:146)s staff and by subcommittees and work-
ing groups of experts from the EMI and the national central banks.
Among the subjects covered were: monetary policy, exchange-
rate policies, macroeconomic and monetary statistics, payments
systems, the issue of euro banknotes and coins, harmonisation of
accounting rules and standards, information and communica-
tions systems, banking supervision and legal questions. In opera-
tional terms, this involved the development, testing and integra-
tion of ECB and ESCB systems and procedures, together with the
completion under strict time constraints of a considerable num-
ber of major projects.

6.
In addition to the four annual reports for the financial years
1994 to 1997 the EMI published around 40 reports, some of
which were particularly important, notably the reports on the
single monetary policy in the third stage of EMU, the progress
reports on the Trans-European Automated Real-time Gross settle-
ment Express Transfer system (TARGET) project and the reports
on convergence in the European Union (EU).

7. Between 1994 and 1998 the EMI replied to 123 requests for
consultation on areas covered by its terms of reference: from the
Council (24) and the Commission (five) in relation to proposals
for Community regulations, and from the authorities of EU Mem-
ber States (94) in the case of draft national texts of a legislative or
executive nature.

8. Since the establishment of the EMI financial investments have
generated total interest income amounting to some ECU 144 mil-
lion, whilst extraordinary income amounted to ECU 24 million.
Expenses amounted to ECU 185 million in total, which breaks
down as ECU 96 million for staff costs, ECU 77 million for other
administrative expenses, ECU 11 million depreciation and ECU 1
million valuation differences. Investments accounted for ECU 40
million over the full period.

THE LIQUIDATION OF THE EMI

9.
In accordance with the provisions of Article 23 of the Statute
of the EMI, all assets and liabilities of the EMI automatically passed
to the ECB (4) when the EMI went into liquidation on 1 June 1998.
The procedure for liquidating the EMI was laid down in Decision

(4) Article 23(1) of the Protocol on the Statute of the EMI (annexed to the
EC Treaty) reads, (cid:145)In accordance with Article 109l of this Treaty, the
EMI shall go into liquidation on the establishment of the ECB. All
assets and liabilities of the EMI shall then pass automatically to the
ECB. The latter shall liquidate the EMI according to the provisions of
this Article. The liquidation shall be completed by the beginning of
the third stage(cid:146).

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No 10/98 of the EMI Council of 5 May 1998. The negative bal-
ance on liquidation of the EMI, amounting to ECU 17 625 220,
was offset against the national central banks(cid:146) contributions to the
resources of the EMI.

THE EFFICIENCY OF THE MANAGEMENT IN 1998

ACTIVITIES IN 1998

10. The number of permanent staff employed by the EMI, which
was 334 at 31 December 1997, was 407 persons on 31 May 1998.
Of that total, 402 were transferred to the ECB on 1 June 1998 and
375 of them subsequently signed contracts of employment with
the ECB for periods extending beyond 31 December 1998. As of
31 December 1998 the ECB had a permanent staff of 534 per-
sons, 54 of whom held managerial positions.

11. The ECB(cid:146)s Annual Report for 1998 describes, firstly, the pre-
paratory work for the third stage of EMU and the changeover to
the single currency and, secondly, the activities of the ESCB. Some
20 legislative texts have been adopted by the ECB in that context.

12. 1998 was the last year before the start of the third stage of
EMU and the introduction of the euro. The ECB took over from
the EMI, which had already made significant progress in prepar-
ing the operational framework for the Eurosystem (1) surround-
ing the implementation of monetary policy. In September 1998,
for example, the ECB published a report presenting the instru-
ments of this monetary policy, which include a minimum reserve
requirement (2), open market transactions (3) and standing facili-
ties (4).

(1) The Eurosystem comprises the ECB and the national central banks of
the Member States that adopt the euro in the third stage of EMU. It is
administered by the Governing Council and the Executive Board of
the ECB.

(2) The requirement for institutions to hold minimum reserves with their
central banks. In the minimum reserve framework of the Eurosystem,
the reserve requirement of a credit institution is calculated by multi-
plying the reserve ratio fixed for each category of items in the reserve
base by the amount of those items in the institution(cid:146)s balance sheet.
(3) Operations executed on the ECB(cid:146)s initiative in the financial markets
and involving one of the following transactions: (1) buying or selling
assets outright (spot or forward); (2) buying or selling assets under a
repurchase agreement; (3) lending or borrowing against underlying
assets as collateral; (4) the issue of central bank debt certificates; (5)
the collection of deposits; (6) foreign exchange swaps between domes-
tic and foreign currency.

(4) An ECB facility available to counterparties on their own initiative. The
Eurosystem offers two standing facilities: the marginal lending facil-
ity, which allows counterparties to receive overnight credit, and the
deposit facility, whereby they may make overnight deposits at the
ECB.

13. Following its audits the Court sent observations and recom-
mendations to the ECB(cid:146)s management. Some of these warrant
mention in this report.

Budgetary management and monitoring

14. On 6 January 1998 the Council of the EMI adopted a budget
covering the full financial year 1998 for EMI but not for ECB, as
at that time the future organisation of the ECB and the precise
rank mix of its initial staff complement remained to be decided.
The first ECB budget was then intended to comprise two parts,
namely the part of this EMI budget transferred to the ECB and the
additional resources needed for the ECB. Given the uncertainties
as to the precise foundation date of the ECB, the EMI management
decided to assume 1 July 1998 as a starting date for the first ECB
budget and to implement the EMI budget until that date. They
also decided to include items from the EMI budget in the ECB
budget only after review of their necessity. At its first meeting on
9 June 1998, the Governing Council of the ECB confirmed the
validity of the EMI budget as being up until approval of the ECB
budget for the second half of 1998. The latter was approved by
the Governing Council on 7 July 1998 at a provisional level of
ECU 96,7 million and subsequently reduced, in September 1998,
to ECU 79,8 million.

15. However, the EMI budget was not revised following the deci-
sion to change its horizon from December to June 1998. The
report on the implementation of the budget as at 30 June 1998
thus attributes to the EMI an outturn of ECU 48,5 million for
expenditure for the first half of 1998 and compares this figure
with ECU 110,2 million (the amount budgeted for the EMI up to
December 1998), thus giving an apparent rate of implementation
of 44 %. No comparison was provided in terms of the budget for
the first five months or the first six months of 1998.

16. The report on the implementation of the budget at 31 Decem-
ber 1998 provides an analysis of budgetary implementation for
the second half of 1998 only. It shows a sum total of ECU 60,3
million for expenditure, compared with the revised budget of ECU
79,8 million, giving an implementation rate of 75,5 %. This
includes, however, EMI expenditure for which invoices were
received after 30 June 1998. In any case, having regard to the way
in which budget implementation for the first half year was analy-
sed (see paragraph 15), information about the consolidated bud-
get outturn for the 1998 year was not available and thus could
not be forwarded to the Governing Council.

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17. Due to the divergence between accounting and budgetary
periods, the service responsible for budget monitoring did not
carry out any reconciliation of the expenditure outturn and the
expenses shown in the profit and loss account, whether for the
ECB (period 1 July to 31 December 1998) or for the EMI (first five
months of the year). In consequence, the reliability of the infor-
mation presented has not been verified by arithmetical or account-
ing checks.

FCRS 1 budget and accepted a supplementary budget, for which
part of the amounts had already been committed as of the date
when it was adopted. The FCRS 2 budget of DEM 450 000 was
thus used to cover the overruns on FCRS 1 before they had been
authorised. In addition, a firm of consultants was engaged as from
the beginning of July 1998, although the contract was not signed
until 2 October. Moreover, the contract in question is somewhat
vague as to the consultants(cid:146) remit and obligations vis-(cid:224)-vis the
ECB, especially as regards deadlines and costs. Furthermore, as of
end-1998 the ECB had still not designated a full-time manager for
this project, although that was essential for monitoring the work
of the consultants.

Project management and monitoring (1)

18. Project monitoring procedures could be improved to render
assessment of the state of progress of projects easier and better,
in respect of both timepath and budget utilisation.

(a) The method adopted does not always guarantee that the
monitoring is objective and reliable. The progress of a project
is, in fact, assessed mainly in terms of the consumption of
resources, which, taken on its own, as an indicator, does not
reflect how far the project has progressed, especially in the
case of complex, interdependent projects, and does not allow
any overruns of resources or time limits to be pointed out in
good time, as in the case of the foreign currency reserves sub-
ledger (FCRS) projects (2). This weakness is accentuated by the
fact that there is no commitments accounting system;

(b) it is difficult to track project development simply and coher-
ently between years; over a period of time projects are, in fact,
renumbered, re-named, re-scaled, merged or subdivided, and
the list that appears in the budget monitoring report does not
allow fast, clear identification; moreover, the monitoring
reports do not provide information on transfers of funds, so
that it is not possible to ascertain the position regarding the
funds available for each project.

In the case of the FCRS projects, which are intrinsically linked
19.
and intended to monitor the foreign currency reserves accounts,
DEM 2 million was spent in the first half-year of 1998, a figure
which already exceeded the total budget for the year, which was
adopted in April 1998 (DEM 1,78 million). In the second half-year
the competent internal authority formalised the cost overruns ret-
rospectively by means of transfers from the FCRS 2 budget to the

(1) The term project covers the work of fitting out buildings as well as
the development of IT systems and the work associated with the vari-
ous stages of EMU (statistics, databases, introduction of banknotes
and coins, etc).

(2) See also the Court(cid:146)s Annual report concerning the financial year 1997,

20. The department responsible for providing organisational
support for market operations and the related risk management
(middle office) used the Eurosystem software for managing the
pool reserves, even though the software in question proved to be
inadequate as an automated solution. Part of the middle office
budget (DEM 850 000) was spent on making it possible for the
system to be operated manually at the beginning of the third
phase. DEM 300 000, which was, theoretically, for the fees of the
consultants needed to research and develop the computer speci-
fications, was spent on analysing the software capabilities and
producing a set of middle office procedures.

Extraordinary bonus

21. On 24 March 1998 the EMI Council, in the capacity of bud-
getary authority, decided to grant an extraordinary bonus to part
of the EMI(cid:146)s staff on the occasion of the establishment of the ECB,
in recognition of the effort made by them. This bonus was to
come on top of the normal merit pay distributed every year since
1996. The Council had set a figure of DEM 1,9 million as the total
amount to be distributed by way of the extraordinary bonus (3)
but, as a result of the way in which the decision (4) was imple-
mented, the total cost was DEM 2,8 million and some employees
received bonuses of up to 38 % of their annual basic salaries, even
though, theoretically, the maximum was 13,5 % (5).

(3) The additional budget for the merit payments was, in the words of the
Council decision, (cid:145)directed especially at those who did not receive
compensation for overtime performance and was differentiated accord-
ing to performance and duration of employment at the EMI(cid:146).

(4) The Council decision stipulated that the extraordinary bonus would
cover the 18-month period 1 July 1997 to 31 December 1998. How-
ever, when the measure was implemented the annual performance
rate was multiplied by the period of service, which could be as long
as 54 months.

(5) Highest given per year, 9 % of basic salary, which is equal to 13,5 %

paragraphs 12 and 13, OJ C 164, 10.6.1999, and p. 3.

for a period of 18 months.

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22. The DEM 0,9 million overspending was funded by a transfer
from the normal merit pay budget following the executive ser-
vice(cid:146)s decision not to apply the normal merit pay procedure for

the second half of 1998. Neither that decision nor the transfer to
the extraordinary bonus budget was authorised by the Council.

This report was adopted by the Court of Auditors in Luxembourg at the meeting on 6 April 2000.

For the Court of Auditors

Jan O. KARLSSON

The President

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Official Journal of the European Communities

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ANNEX 1

Balance sheet of the ECB as at 31 December 1998

Assets

Liabilities

31.12.1998

I. Claims on non-euro area residents denominated in

I.

Intra-ESCB liabilities

foreign currency
Balances with banks and security investments, external
loans and other external assets

343 047

II. Claims on non-euro area residents denominated in

euro
Balances with banks, security investments and loans

3 739 796

II. Other liabilities

Off-balance-sheet instruments: revaluation differences
Accruals and deferred income
Sundry items

III. Other assets

Tangible and intangible fixed assets
Other financial assets
Accruals, deferred expenditure and sundry items

III. Provisions

30 112
25 277
4 012

IV. Revaluation accounts

V. Capital and reserves

59 401

VI. Profit for the year

(ECU 1 000)

31.12.1998

0

725
4 173
78 551

83 449

31 007

698

3 999 550

27 540

Memorandum item
Forward claims denominated in euro

282 930

Memorandum item
Forward liabilities denominated in foreign currency

282 930

Total assets

4 142 244

Total liabilities

4 142 244

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ANNEX 2

Profit and loss account of the ECB from 1 June to 31 December 1998

(ECU 1 000)

Expenses

Income

1.6.(cid:151)31.12.1998

1.6.(cid:151)31.12.1998

Interest expenses

Write-downs on financial assets and positions

Staff costs

Other administrative expenses

Depreciation of (in)tangible fixed assets

Profit for the year

Total expenses

2 684

22 249

29 745

30 230

8 076

92 984

27 540

Interest income

Realised losses/gains arising from financial operations

Other income

97 852

22 182

490

Total income

120 524

Total

120 524

Total

120 524

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Official Journal of the European Communities

12.5.2000

ANNEX 3

Balance sheet of the EMI as at 31 May 1998

(ECU 1 000)

Assets

Liabilities

31.5.1998

31.12.1997

31.5.1998

31.12.1997

I

EMS-related assets
Holdings of gold
Holdings of US dollars

I

EMS-related liabilities
ECU issued to EU central banks

23 765 015
40 324 022

26 228 411
38 791 624

64 089 037

65 020 035

II Other assets

II Other liabilities

Cash and bank sight accounts

7 590

24 164

Time deposits

Tangible assets

Other assets

594 708

597 500

29 554

24 751

4 121

2 346

635 973

648 761

Creditors and other liabilities
Provision for pensions and similar obliga-
tions
Other provisions
Contributions from EU central banks (pur-
suant to Article16(2) of the EMI Statute)
General reserve fund
Deficit for the year

64 089 037

65 020 035

64 089 037

65 020 035

20 093

11 535

7 397
10 534

615 574
4 402
(22 027)

6 131
11 120

615 574
17 124
(12 723)

635 973

648 761

Total assets

64 725 010

65 668 796

Total liabilities

64 725 010

65 668 796

Memorandum item
Forward claims in ECU (from revolving quar-
terly swaps)

Memorandum item
Forward liabilities in gold and US dollars (from
revolving quarterly swaps)

64 089 037

65 020 035

64 089 037

65 020 035

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ANNEX 4

Profit and loss account of the EMI for the period 1 January to 31 May 1998

(ECU 1 000)

Expenses

Income

1.1.(cid:151)31.5.1998

1.1.(cid:151)31.12.1997

1.1.(cid:151)31.5.1998

1.1.(cid:151)31.12.1997

Staff costs

Other administrative expenses

Depreciation of tangible assets

Valuation loss

14 850

19 010

2 729

Total expenses

36 589

24 927

28 613

3 012

464

57 016

Interest income

Extraordinary income

Valuation gains realised at liqui-
dation

10 240

1 249

3 073

Total income

14 562

Deficit for the year

22 027

Total

36 589

57 016

Total

36 589

43 377

916

44 293

12 723

57 016

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REPLIES OF THE EUROPEAN CENTRAL BANK

Paragraph 17 (Budget management)

As regards the Court(cid:146)s observation on the non-establishment of
an annual summary reconciliation for 1998, the ECB would like
to emphasise that such an exercise was only suspended for 1998
and only on an exceptional basis. This exception was acknowl-
edged by the ECB Governing Council when considering the 1998
Year-end Quarterly Budget Monitoring Report in March 1999.
The exception derived from the non-availability of homogeneous
data due to the differences in accounting principles, in charts of
accounts and IT systems in use. The common practise of estab-
lishing such an annual summary reconciliation shall be resumed
for the years 1999 onwards.

Paragraph 18 (Project management)

The EMI project organisation and control procedures in force in
1998 were revised in 1999 thereby building on lessons learned
during the lifetime of the EMI.

The referred renaming, re-scaling and some mergers of individual
projects were unavoidable given operational circumstances in a
fast-moving environment and were duly examined and authorised
by the relevant ECB decision-making bodies. In order to identify

projects over time, individual project codes similar to budget
centre numbers existed for each project in the ECB(cid:146)s budget sys-
tem since 1996. From mid-1999 onwards, this code was also pro-
vided as additional information in in the Quarterly Budget Moni-
toring Reports, thereby enhancing the ability to better track project
development over time.

Paragraph 21 (Extraordinary bonus)

The ECB acknowledges that the wording of the EMI Council Deci-
sion may lead to the conclusion that a special budget of DEM 1,9
million was created for the payment of the extraordinary bonus
and that this only covered the 18 month period from 1 July 1997
to 31 December 1998. Actually, when sending the request to the
EMI Council, the intention of the proposal was to ask for an
increase in the existing budget with a view to covering the extraor-
dinary bonus which would reflect service up to the full lifetime
of the EMI, i.e. four-and-a-half years. In doing so, account was
taken of the likely underspending of the normal merit pay budget
for 1998 and the utilisation of the resulting surplus funds for the
payment of the extraordinary bonus. The actual combined expen-
diture on both measures was in line with the budget which had
been enhanced in this manner, and the highest extraordinary
bonus amounted to 9 % per year of service with the EMI. The
extraordinary bonus was merely an acknowledgement rather than
a compensation of the high number of extra hours worked by the
EMI staff.