The external representation of the euro area
Tommaso Padoa-Schioppa Member of the Executive Board of the European Central Bank Introductory statement at the Sub-Committee on Monetary Affairs European Parliament, Brussels 17 March 1999
Table of contents
The legal basis
International institutions and forums
I am both honoured and pleased to be contributing to the proceedings of the Sub-Committee on Monetary Affairs of the European Parliament. As the member of the Executive Board of the European Central Bank (ECB) responsible for international relations, I shall contribute to this exchange of views with the Sub-Committee by focusing on the external representation of the Eurosystem, which comprises both the ECB and the 11 euro-area national central banks (NCBs). I shall touch upon the broader issue of the external representation of the euro area as a whole only to the extent that it is relevant to the Eurosystem. As you will be aware, the European Council already addressed this issue at its meetings in Luxembourg in December 1997 and in Vienna in December 1998. Although the main principles on which the euro area's external representation should be based have been developed, a formal decision is still pending. The main reason for this delay is the reluctance of non-EU countries to support what is perceived as an over-representation of the EU in certain forums, such as the G7, as a consequence of EMU.
I shall address five issues. First, I shall clarify the implications of EMU for the external representation of the euro area and the Eurosystem in particular. Second, I shall discuss the legal basis used by the Eurosystem to develop its external representation. Third, I shall review the external representation of the Eurosystem in multilateral institutions and forums, by focusing on international as opposed to European bodies. Finally, I shall deal with the issue of the Eurosystem's representation at the bilateral level. After I have delivered my introductory statement, I shall stand ready to answer questions you might have on this topic.
2. External representation
The introduction of the euro implies a transfer of central banking competence from the national to the Community level. This refers to monetary and exchange rate policies, the conduct of foreign exchange operations, the holding and management of the official reserves of the Member States, the promotion of the smooth operation of payment systems and contributing to the smooth conduct of policies relating to prudential supervision and the stability of the financial system. With the exception of the exchange rate policy, which is a shared responsibility of the ECOFIN Council and the Eurosystem, and banking supervision, to which the Eurosystem contributes, the other tasks are an exclusive competence of the Eurosystem within the euro area.
As far as other economic policies (for example, fiscal and structural policies) are concerned, these remain largely the preserve of the individual euro area Member States. However, EMU implies that these national policies are subject to enhanced co-ordination in accordance with Article 103 (on strengthened Surveillance and broad economic policy guidelines) and Article 104C (on strengthened excessive deficit procedure in the framework of the Stability and Growth Pact).
Depending on whether these economic policies are formulated at the Community or the national level, the external representation of the euro area is organised differently. The singleness of monetary policy implies that the euro area is represented externally by the Eurosystem. A different, and less demanding, solution has to be developed for economic policies which are conducted at a national level, while being co-ordinated at Community level.
As regards monetary policy and the related tasks, which constitute the core activity of modern central banking, a specific feature to be kept in mind is that the Eurosystem is the central bank of the euro area. This implies that, in all institutions and forums, the ECB represents the euro area on matters related to the Eurosystem's basic tasks, while the participation of the euro area NCBs may vary. Specifically, depending on the institution or forum, the format of the Eurosystem may range from a representation by the ECB only (for example in the ECOFIN Council or Euro-11 Group) to participation by all 11 NCBs (for example in the informal ECOFIN), with varying degrees of participation between the two extremes. These differences are attributable, inter alia, to the fact that membership of different forums (for example the G7 or G10) varies across euro area Member States. However, irrespective of its format, the ECB represents the Eurosystem externally whenever issues falling within its field of exclusive competence are discussed. This results from the requirement to represent consistent views in multilateral institutions. It also implies the formulation of common positions, as exemplified by the Eurosystem's contribution to the "Code of Good Practices on Transparency in Monetary and Financial Policies", which is currently under preparation on the initiative of the IMF.
Another specific feature of the external representation of the euro area by the Eurosystem is the difficulty arising from the fact that intergovernmental institutions such as the IMF or the OECD are organised on the basis of a strict correspondence between one currency and one country. Specific arrangements therefore had to be designed in order to enable the ECB to represent the Eurosystem in those institutions as I shall explain in due course.
With regard to other economic policies which are either conducted or only co-ordinated by the euro area Member States at the Community level, the external representation of the euro area also needs to be organised. This applies to exchange rate policy which is both formulated at the Community level and a shared competence with the Eurosystem. As a result, it has proven difficult to find a solution until now, which I shall discuss in a moment. Other economic policies, while remaining the preserve of Member States, are co-ordinated, to varying degrees, at the Community level. As for the Eurosystem, although to a lesser extent, the need to represent consistent positions at the international level implies the formulation of common understandings on relevant issues. Discussions at the IMF Executive Board provides an example, as the Executive Director holding the EU Presidency will present a common understanding on non-monetary policy matters (e.g. fiscal and structural policies) at the forthcoming meeting on the euro area monetary and exchange rate policies in the context of Article IV consultation with Member States.
3. The legal basis
In preparing the external representation of the Eurosystem, the ECB took the view that Article 6 of the Statute of the ESCB, provided a proper and sufficient legal basis for developing arrangements with multilateral institutions and forums. Article 6.1 provides that "in the field of international co-operation involving the tasks entrusted to the ESCB, the ECB shall decide how the ESCB shall be represented". As I have already mentioned, the single monetary policy and the related tasks have been entrusted to the Eurosystem as an exclusive competence. Such an exclusive competence does not apply only within the euro area vis-à-vis the Member States, but extends to the international level, where only the Eurosystem may represent the euro area positions on these matters. Accordingly, when taking a formal decision pursuant to Article 109(4) of the Treaty, establishing the European Community, the ECOFIN Council has to comply with the powers allocated to the Eurosystem under the Treaty. Specifically, an ECOFIN Council decision pursuant to Article 109(4) may only confirm at the international level the allocation of powers existing within the euro area. This is reflected in the report by the ECOFIN Council to the Vienna European Council, where the representation of the Community at the central banking level, alongside the Council/ministerial level, is provided for. In addition, the Eurosystem determines also the modalities of its external representation. The term "how" used in Article 6.1 of the Statute of the ESCB means that it is the ECB's prerogative to decide how it should be represented, whether by the ECB and/or by euro area NCBs. This is in keeping with Article 6.2, which provides that the NCBs' participation in international monetary institutions is subject to the approval of the ECB.
4. International institutions and forums
As discussed, the setting up of the Eurosystem does not easily fit into the structure of international institutions such as the IMF and the OECD, given that the members of these institutions are countries. The assumption implicit in the IMF Articles of Agreement and in the OECD Convention is that national governments are the relevant policy-makers. A similar approach applies to the G10 Ministers and Governors, the origin of which is linked to the creation of the General Arrangements to Borrow (GAB) back in 1965. Since GAB resources complement IMF's ordinary resources, issues discussed by the G10 Ministers and Governors are closely related to IMF policy matters and its proceedings are close to the ones of an intergovernmental institution. By contrast, the G7 Ministers and Governors and the G10 Governors, set up under the aegis of the Bank for International settlements (BIS), are less institutionalised and work rather like informal forums. Against this background, it proved more difficult to work out pragmatic solutions for ECB's representation in intergovernmental institutions than in informal forums.
First, let me consider the International Monetary Fund (IMF). As the cornerstone of the international monetary system, the IMF plays a key role in the process of the multilateral and bilateral surveillance of macroeconomic policies and financial market stability. Note that it is called the International Monetary Fund, because the monetary aspect is crucial. Thus, even though the ECB cannot be a member of the Fund, it was important for it to be represented at the IMF from the start of Stage Three, given the respective mandates of both institutions. At the IMF Executive Board meeting on 21 December 1998 a decision was made to grant observer status to the ECB. The ECB observer participates automatically in all meetings of the IMF Executive Board regarding the surveillance, under Article IV, of the monetary and exchange rate policies of the euro area, the surveillance, under Article IV, of the policies of individual euro area Member States, the role of the euro in the international monetary system, the IMF World Economic Outlook, international capital market reports and world economic and market developments. Moreover, the observer represents the ECB at IMF Executive Board meetings on agenda items recognised by the ECB and the IMF to be of mutual interest for the performance of their respective mandates. On 8 February 1999, Mr. Robert Raymond, former Director General of the European Monetary Institute, was appointed as the ECB permanent representative in Washington D.C. with observer status at the IMF. He has taken up his duties since then.
As noted above, in order to express consistent views on the euro area monetary policy at the IMF, common positions are prepared within the Eurosystem. Accordingly and in the context of Article IV consultation with euro area Members States referred to above, a common position of the Eurosystem on monetary policy matters will be delivered by the ECB observer at the Fund. As far as the Interim Committee is concerned, the President of the ECB participates in its meetings as an observer.
Second, the Organisation for Economic Co-operation and Development (OECD). The OECD is another intergovernmental institution that deals with issues relating to the basic tasks entrusted to the Eurosystem. Using Protocol No 1 to the OECD Convention as a legal basis, the OECD Secretary General confirmed in February 1999 that the ECB would be allowed to participate in the work of the relevant committees and working groups of the OECD. As a result, the ECB is a separate member of the European Community delegation in these meetings alongside the European Commission.
As regards participation in the G10 Ministers and Governors proceedings which are organised in connection with the IMF Interim Committee meetings, the President of the ECB attends with an observer status.
Turning to informal forums, the G7 Ministers and Governors has become a major component of international co-operation arrangements in the field of monetary and financial policies, providing political guidance not only to the major industrialised countries but also to emerging-market and transition economies. Given its role in exchange rate policy co-operation, it is also the forum where the euro area's external representation is most difficult to arrange. This is due to the fact that a trade-off has to be found between the need to accommodate the shared responsibilities at Community level between the ECOFIN and the Eurosystem, on the one hand, and concerns of non-EU members to avoid an over-representation of the euro area. As far as the Eurosystem is concerned, the President of the ECB has been participating in G7 meetings since October 1998 on issues related to monetary policy and multilateral surveillance, including exchange rate policy.
Finally, with respect to central banking forums, the President of the ECB participates in meetings of the G10 Governors organised in the context of the BIS. In addition, ECB representatives also take part in the Committees set up under the G10 Governors's aegis. In contrast to intergovernmental institutions like the IMF and the OECD, the BIS is a central bank institution, as its shareholders come exclusively from the central banking community. Matters dealt with by the G10 Governors and its Committees (e.g. Basle Committee on Banking Supervision, Committee on the Global Financial System) are typically related to monetary and financial developments and systems.
I shall now turn, briefly, to the Eurosystem's representation in European institutions and forums.
5. European forums
Regular hearings of the ECB President and of other Executive Board members before the European Parliament's Sub-Committee on Monetary Affairs are the main part of the inter-institutional relationship between the European Parliament and the ECB. They reflect the readiness of the ECB to be open and accountable in discharging its basic tasks. The ECB has a standing invitation to participate in ECOFIN Council and Informal ECOFIN Council meetings. The President of the ECB is invited to meetings of the Euro-11 Group whenever issues connected with their respective responsibilities for the single currency are discussed. These meetings provide an opportunity for a wide-ranging exchange of information and views between the ECB and EU ministers on issues related to both international and European developments.
Furthermore, the Economic and Financial Committee (EFC) is a key forum for the involvement of the ECB in the preparation of a broad range of issues for discussion and adoption by the ECOFIN Council. The ECB is represented in the EFC by two members of the Executive Board and by two alternate members. Finally, building upon the links already established over the past few years by the EMI, the ECB maintains close working relationships with the European Commission and with other relevant European bodies.
6. Bilateral relations
Closely related to the issue of representation is the Eurosystem's network of bilateral contacts with other central banks throughout the world, since working relationships with them are a component of its international activity. These bilateral relations include both applicant countries and other partner countries of the EU in central and eastern Europe, and non-European countries.
With reference to central and eastern European countries, the current enlargement process of the EU makes it necessary for the ECB to develop working relationships with the central banks of applicant countries with a view to assessing progress towards accession and their eventual participation in the ESCB. Issues of common interest are primarily monetary and foreign exchange policy matters, financial market structures and the legal convergence of central bank statutes in applicant countries.
As regards non-European countries, a number of them, especially outside the G10 Group, have limited opportunities to meet ECB representatives at international meetings. Other ways of developing working relationships have to be found. In this context, I have just visited the central banks of China, Korea and Japan and in Tokyo I held a speech before the Financial Committee on Financial Affairs of the House of Councillors. The purpose of such relations is to make the host institution more familiar not only with the institutional and policy setting of the ECB, but also with the stage of development of the financial market infrastructure in the euro area, which is relevant because many foreign central banks are likely to be interested in investment opportunities in euro-denominated financial instruments. Furthermore, topics of common interest include systemic issues, such as the strengthening of the international monetary and financial system. Bilateral issues, such as operational facilities, co-operation in matters concerning prudential supervision and financial stability, and the provision of technical assistance, potentially in all areas in which the ECB has specific expertise are also of interest to these central banks.
In addition to central banks, the ECB may also establish contacts with other relevant foreign institutions, such as banking supervisory authorities, local banking associations, stock exchanges and national administrations.
By way of conclusion, I would like to stress that the implications of the introduction of the euro for international monetary co-operation are likely to be twofold. First, by reducing the number of major participants the euro should contribute to simplifying international co-operation and make it more efficient. Second, in this new streamlined international setting, the European Union can be expected to play a greater role and to take a higher profile.
As regards the euro area's external representation, the Eurosystem will provide its contribution in line with the basic tasks entrusted to it and in a manner consistent with its statutory mandate to maintain price stability. In discharging its mandate, the Eurosystem will be conscious of the special responsibilities it has within the European Union.