Table Of ContentOpen Issuesin European Central Banking
Open Issues in European
Central Banking
Lorenzo Bini Smaghi
Director{orInternationalAffairs
ItalianTreasury
Rome
and
Daniel Gras
DeputyDirector
Centre{orEuropeanPolicyStudies
Brussels
palgrave
macmillan
© Lorenzo Bini Smaghi and Daniel Gros 2000
Softcover reprint of the hardcover 1st edition 2000 978-1-349-41813-8
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CONTENTS
Foreword ix
Introduction
1.Who isin chargeofthe Eurosystem? 5
Introduction 5
1.1.The decision-making process 6
Whatthetreatystates(andwhatitdoesn'tstate) 6
Thebalance ofpower 9
TherisksofaweakECB 11
1.2.Implementation 17
Theinterpretation ofthetreaty 17
Theunderlying reasonsfordecentralization 20
Theconsequences ofdecentralization 23
1.3.Is(de)centralizationsustainable? 25
2.Who takes careoffinancial stabilityin Europe? 29
Introduction 29
2.1.Preventing fmancialcrises 30
Theinstruments 30
Financial regulation intheED 31
Prudential supervision 35
2.2.Financial crisismanagement 40
Solvency andliquiditycrises 40
Bailingoutbanksinmonetaryunion 41
Thelender-of-last-resortinmonetary union 45
Who(intheEurosystem) shouldlendinthelastresort? 49
2.3.ShouldtheEurosystembegranted supervisorypowers? 51
Conclusions 55
Annex 2.1.Doesprudential supervision interfere
withmonetarypolicy? 58
v
VI Contents
3.AreEuropean centralbanks over-capitalized? 67
Introduction 67
3.1.The Eurosystemand itscomponents 68
3.2.AcomparativeG-3perspective 70
Liabilitiesandsize:Acomparisonwith theUS andJapan 70
The compositionoftheasset side:Foreignexchangeassets 73
Balancesheet size:Does itmatter? 76
3.3. CleaninguptheEurosystembalancesheet 80
Aleanbalancesheet 80
Excess foreign exchangereserves? 82
Conclusions 84
Annex3.1.An exampleofsimplicity: The allocationofassets
andreturns intheFederalReserve System 86
Annex3.2.Estimatingtherevaluationreserves using aVaR approach 88
4.Who gets theseigniorage? 94
Introduction 94
4.1. What isseigniorage? 95
4.2. The treaty'sprovisions 96
4.3. Theproblems 98
4.4. The agreednon-solution 103
4.5. Alternativeapproachestophasing-in 105
Conclusions 108
Annex4.1. Legal Issues 111
Annex4.2. The distributionofseigniorageinthecontext
ofthefiscal constitutionoftheEU 112
Contents VII
5.How can theEurosystembecome(and remain)
independent? .. 118
Introduction 118
5.1.Theindependenceprovided bythetreaty 120
Statutoryindependence 120
Functional independence 122
Economic independence 123
Personalindependence 124
5.2.Measuring theECB'sindependence againstthatof
othercentralbanks 125
5.3.Thelimitsofmeasurement 129
5.4.PotentialthreatstotheECB'sindependence 132
Theexchangerateregime 132
NCBs' activities 'outside'the ESCB 136
Conclusions 138
6....and accountable? 144
Introduction 144
6.1.Democratic control,independence andaccountability 144
6.2.Theeconomics ofcentralbankaccountability 147
6.3.Howtoassesscentralbankaccountability? 151
6.4.Howaccountable istheECB? 157
Conclusions 166
7.3X2ConcreteProposalsfor Strengthening
theEurosystem 171
Introduction 171
7.1.Transform theEurosystem intoatrueEuropean CentralBank 171
7.2.Clarifywhoisresponsible forfmancial stability 172
7.3.Clarifyfmancialrelationships withintheEurosystem 174
Contents
Vlll
Annexes
I. Chapters 2and3ofTitleVIonEconomicand
MonetaryPolicyoftheTreatyonEuropeanUnion 177
II.Protocol (No.3)onthe StatuteoftheEuropean Systemof
CentralBanksandoftheEuropeanCentralBank 186
Index 205
NamesIndex 208
List ofTables and Figures
Tables
1.1 StafflevelsattheNCBsandtheEeB, 1998 10
1.2 Eurozone policy indicators 15
1.3 TheEurosystem'smonetary policyoperations 18
1.4 Operational stepsinthetender procedure 19
2.1 EUbankassets, 1996(percentage oftotalassets) 34
2.A.I'· Resultsofregressions 61
3.1 Centralbankbalance sheets(liabilityside) 71
3.2 Index ofcentralbankcapitalization 72
3.3 TheEurosystem'sbalance sheet 81
4.1 Basicdataforseigniorage distribution inEMU 100
5.1 Ranking ofcentralbank independence 127
6.1 Accountabilitycriteria 153
Figures
3.1 Ratiosofforeign assetsandgoldovermonetary base 74
3.2 Average inflation andcapitalization indicator 77
3.3 Indicator ofcentralbank independence andleancapitalization 78
4.1 Theratioofcurrency incirculationtoGDP 102
4.A.l Thedifference between GNPratiosandtheECBcapitalkey 114
FOREWORD
We have both been directly involved for many years in European
monetary integration and have benefited, inour frequent exchanges
of views, from our complementary positions, as official and
independent academic, respectively. This book puts forward a
common reflection onsome key issues inEuropean central banking
that we think, from our privileged viewpoint, represent important
challenges forthe near future ofEurope.
The opinions expressed inthis book reflect only those ofthe
authors. The experience gained in our respective institutions have
nevertheless been essential in providing us with a deeper
understanding of all the aspects related to the economic and
monetary unification of Europe. We are thus grateful to all our
colleagueswith whom we have worked inthe course ofthe lastfew
years. Special thanks are owed to Pierre Jaillet and Ulrich Ramm
who took the time to comment on the manuscript. Daniel Gros'
contribution to this volume would not have been possible without
his many conversations with colleagues at CEPS and from its large
European network.
We also wish to express our gratitude to Franziska Schobert,
who co-authored Chapter 3 and contributed to Chapter 4, to Luigi
Cucca and Anne Harrington who edited the text with great speed
and to Karin Godyns, who followed the project faithfully through
its differentstages.
Brusselsand Rome
June 1999
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