0
Master Thesis
Input and output legitimacy in relation to the euro crisis.
H.W. Hoen
1 Content
1 Introduction 3
2 Input and Output Legitimacy 9
3 Road towards the EMU 13
3.1 Historical Development of Monetary Unions in Europe 14
3.2 Historical Development of European Integration 17
3.2.1 Werner Report 18
3.2.2 The Snake 19
3.2.3 The European Monetary System 20
3.2.4 The Delors Report 21
3.2.5 The 1992-1993 Crisis 24
3.3 Legal and Institutional setup of the ESCB 25
3.3.1 Decision-making bodies of the ESCB 26
4 The European Central Bank 30
4.1 Central Bank Independence 30
4.2 Legitimacy 32
4.2.1 Primary Objective 34
4.3 Policies enacted since the outbreak of the crisis 34
5 The ESM 39
5.1 The Euro Crisis 39
5.2 Article 125 TFEU 41
5.3 Treaty Establishing the European Stability Mechanism 44
5.3.1 Procedure for Granting Stability Support 46
5.4 Legal Implications of the ESM 49
2
6 Conclusion 55
7 Bibliography 59
3
Introduction
Within the academic literature concerning the European Union (EU), a reoccurring topic is the so called democratic deficit and how to solve or lessen this in the Union. The presumed lack of European democracy, and whether this constitutes a problem, has been debated for decades. Yet although European integration has resulted in a transfer of sovereignty from the Member States to the European level, the implications of this transfer have not made
headlines, and the democratic deficit debate was largely confined to academic circles. This would change with the outbreak of the financial crisis, and subsequently the European sovereign debt crisis.
Initially, European cooperation after World War II began with the creation of the European Coal and Steel Community in 1956, and additional treaties thereafter focused mainly on the removal of trade barriers and increased economic cooperation. Democratic legitimation was not considered necessary as most decisions were of a technocratic nature and the benefits of increased economic growth provided sufficient legitimation for the pursued policies. As integration deepened, the European Economic Community (EEC) was
transformed into the European Community (EC), and eventually the European Union was established. These transformations worked towards the completion of a common European market and along the way additional policy areas such as the environment and social matters were also included. This expansion of policy areas has been accompanied with increased competences for the European Parliament (EP) in order to provide democratic legitimacy. Meanwhile, the introduction of the euro as a common currency has pooled the monetary sovereignty of the participating Member States in the hands of the European Central Bank (ECB).
4 The crisis intensified and because of market speculations, several euro members experienced problems in refinancing their debt and avoiding a default. In order to prevent an escalation, two temporary crisis mechanisms were setup, namely the European Financial Stability Facility (EFSF) and the European Financial Stabilization Mechanism (EFSM). Their purpose was to provide loans to euro members who could no longer turn to the financial markets because of rapidly rising interest rates. The signing of the European Stability Mechanism Treaty (ESM) in 2012, established an international organization in Luxembourg to provide a permanent firewall to counter market speculations against individual Eurozone members. Since the Treaty on the Functioning of the EU (TFEU) explicitly forbids countries to assume the debt of others, article 136 (3) TFEU was amended, stating that member state whose currency is the euro may establish a stability mechanism, providing a legal basis for the ESM.
During the crisis, the ECB departed from its traditional role of maintaining price
stability when its president Mario Draghi announced on July the 26th 2012 that “Within our
mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it
will be enough”.1Shortly after the announcement, the Governing Council of the ECB
approved the Outright Monetary Transaction (OMT) program to purchase bonds issued by Eurozone members in secondary sovereign bond markets, if requested by an Eurozone member. Even though the program was not immediately activated, the mere announcement caused a significant decrease of interest rates of sovereign bonds. Apart from the OMT program, voices within the ECB grow louder for additional actions to put a halt to the continuing economic problems in the Eurozone.
From a democratic point of view, the steps that have been taken to support the Euro are problematic. The choice to amend the TFEU to enable the creation of the ESM was purposely done in order to avoid any referendums and its procedure only required unanimity from the Heads of State. Yet in the cases that the ESM is used, the liabilities of sovereign bonds has shifted from private hands to Eurozone taxpayers. Once a country is forced to request a bailout through the ESM, its fiscal sovereignty is de facto set aside, as ESM loans are provided under strict conditions dictating privatization programs, austerity measures and institutional reforms. Since succeeding governments are obliged to adhere to the conditions of
1 Speech by Mario Draghi, President of the European Central Bank at the Global Investment Conference in
London. (July 26, 2012).
5 an ESM loan, its citizens have no possibility to exert influence through their national
parliaments.
Apart from the ESM, the role that the ECB has played since the outbreak of the crisis is also questionable. The ECB is a member of the so called Troika, along with the European Commission (EC) and the International Monetary Fund (IMF). Together they are responsible for the design and implementation of the macroeconomic adjustment programs, which are a condition in order to receive loans through the ESM. Yet these programs have profound effects on the citizens of the countries where these are implemented, and entail reforms in the labor markets and privatization schemes.
The institutional design of the ECB aimed to create an institution which is independent from the political spectrum, with the idea that unelected technocrats are better suited to
determine long term policies in the monetary field. Currently however, the ECB is actively taking part in the creation and surveillance of reforms which under normal conditions are to be determined by parliaments.
The capital of both the ECB and the ESM are in the end backed by the citizens of the participating member states, however both the ESM and the ECB are neither democratically elected, nor electoral accountable. Since the outbreak of the euro crisis, European integration between sovereign states has proceeded to levels unknown anywhere else in the world. Yet at the same time, citizens have almost no possibility to use democratic control through either their own national parliament, nor through the EP. The EMU was created in the absence of a political union, and currently political support is lacking to move towards a full political union. At the same time however, the actions to get a grip on the euro crisis have resulted in a transfer of sovereignty from national to European level without being compensated by
increased democratic control.
This paper’s aim therefore is to investigate what the effects are of the increased politization of the ECB and the creation of the ESM for the EU citizens and the democratic process. The main research question therefore reads as follows:
6 In his book, Governing in Europe Effective and Democratic? (1999), Scharpf makes a
distinction between the concepts of input and output legitimacy. Input legitimacy refers to ‘government by the people’ and political policies can be considered legitimate if they reflect the will of the people. Output legitimacy refers to ‘government for the people’ and reflects whether the outcomes of government policies promote the general welfare of the people. The first part of this thesis will therefore briefly elaborate the concepts of input and output
legitimacy as put forward by Scharpf.
The second part will proceed to explain the stages European integration, mainly focusing on the developments that have led to the creation of the European Monetary Union and the introduction of the Euro. European integration has been a continuous process since the start, and in order to understand the current monetary crisis, it is important to comprehend these stages and be aware what the rational and motivations were behind it. Additionally, attention will also be given to which extent input and output legitimate arguments were used or considered during the stages of integration. The last two chapters will focus in depth on the main research question.
Regarding the ECB, the fourth chapter will first take a closer look at the concept of central bank independence in general, and how this is applied in the EMU. This is of relevance because countries that pursue their own monetary policy, although usually requiring qualified majorities, central bank independence can be changed by parliaments. The EMU could be described as a Central Bank without a country, and national parliaments individually have no possibility to influence the ECB.
Once this has been discussed, the chapter will move to a closer inspection of the institutional structure of the ECB, focusing on the legitimacy and transparency aspects of the bank. This part will also draw a couple of comparisons with the Fed. This is done because the Fed is the central bank of a federation which is accompanied by a political union, while this is not the case for the Eurozone.
7 The last chapter of this thesis will center on the creation and inner workings of the ESM. The ESM affects national democracies in two different ways. Each country that participates has agreed to pay its share of the initial capital stock of 700 billion. The purpose is to provide loans to Eurozone countries which face difficulties refinancing their debt in the normal markets, marking a clear departure of the Maastricht Treaty and the so called “no bailout” clause. Secondly, countries which receive loans from the ESM have to agree to austerity measures and implement economic reforms.
The chapter will first discuss the reason why the ESM was established, following with the actual procedures that have been used and the rationale behind it. Once this has been clarified, the chapter proceeds with the institutional arrangements of the ESM and the different procedures to provide loans and other forms of financial assistance.
In order to investigate to what extent it is still possible from a national level to provide input within the ESM, the second part of the chapter will take a closer look to all the legal provisions which are stated in the ESM Treaty. This is done in order to see to what extent national parliaments can still exert influence, since they are one of the most important institutes through which input legitimacy manifests itself nationally.
The last part of this chapter will briefly discuss the situation in Greece, but purely from the perspective of a country which receives loans from the ESM, to illustrate the workings of the ESM from a democratic point of view.
The discussion concerning the democratic deficit of the EU is not new in academic circles but with an eye on the current developments it has become more important than ever. When looking at the public opinion across the EU, support for further political integration at the EU level seems insufficient to move on. Citizens still regard their national political arena as the most important level of politics. The decline in the participation rate for the European elections, which has not passed the 50% for several elections now, indicates that the EU is not the main focus of its citizens.
Meanwhile, in a response to the euro crisis, those countries that are part of the Eurozone have implemented several rules and institutions which resulted in further
8 more or less dictated by the former group. Yet these developments have not been
accompanied by more democratic input at the EU level for its citizens.
9
Chapter 2
Input and Output Legitimacy
With the fall of the Berlin Wall and the collapse of communism in Russia and Eastern Europe, the world appeared to stand on a new crossroad where liberal democracies seemed to have won all the ideological battles of their time. American political scientist Francis Fukuyama even proclaimed that this would mark the end of history as liberal democracies and market capitalism would spread across the world and become the final form of government, as no competing systems were left to challenge this system.
It is currently twenty-five years since the end of the cold war and one cannot escape the fact that the optimism of the early nineties concerning the supremacy of liberal
democracies has not mirrored in real life. On the one hand, states such as Russia and China illustrate an alternative way of governing which combines authoritarian rule with economic growth. On the other, the birthplace of democracy, namely Europe, is facing a crisis as trust in institutions is decreasing and voter participation in elections is on the decline for years.
Already in 1999, Fritz Scharpf, a German professor Emeritus and Director of the Max Planck Institute for the Study of Societies, published the book Governing in Europe: Effective and Democratic? In his book, Scharpf argues that the decline of the political legitimacy in Western Europe is due to the processes of economic globalization and European integration, which have eroded the problem-solving capacities of political systems.
Scharpf argues that in democratic theory, the legitimization of the governing authority is derived from the manifestation of collective self-determination. One can distinguish
between two elements of democratic self-determination which are distinct but at the same time complementary: input-oriented legitimization and output-oriented legitimization.
Regarding the concept of legitimation, Scharpf states that it implies “a socially
sanctioned obligation to comply with government policies even if these violate the actor's own interests or normative preferences, and even if official sanctions could be avoided at low cost.”2 According to this, legitimacy depends on what the prevailing preferences are in in a society. Scharpf argued that in Western constitutional democracies, legitimacy is based on the
2 Fritz,W, Scharpf “Problem-Solving Effectiveness and Democratic Accountability in the EU,” MPIfG Working
10 trust that the constituency has in the institutional arrangements which make certain that the governing process is able to adapt to the preference of the electorate.
Input-oriented legitimization entails the preferences of the community and can be described as governance by the people. As it is unlikely that a situations arises were the entire community favors the same policy, it is necessary to move to majority decision-making. Yet, this could lead to a tyranny of the majority, where minorities get overridden and the majority preference dictates the political process. Scharpf argues that it is therefore important that members of a community have to some extent a “thick” collective identity, which deprives
majority rule of its threatening character.3 Within nation states, the sociocultural identity has
been formed through the course of history and therefore, majority decisions are accepted as a regular outcome in decision-making. Within a democratic nation state, the input legitimacy is provided by representative institutions such as parliaments through which representatives are elected by its citizens. Through these same elections, representatives can be held accountable for the articulation of citizens’ preferences. On the EU level however, Scharpf states that because of the cultural, linguistic, ethnic and historical diversity, a “thick” identity is absent, decisions taken by majority rule lack input-oriented legitimacy.
Output legitimation on the other hand entails the process of solving problems through collective action and promotion of the common welfare of a community. These kind of problems affect all and cannot be solved at either the individual level or through the markets. Scharpf argues that although output legitimation also needs a community or constituency, it
does not require the same “thick” identity as input legitimation.4 Because of the nature of the
problems, there is no need for the constituency to be identical, as long as they face common problems. Therefore in contrast to input legitimacy, the EU can serve as a fitting constituency for output legitimacy. Due to the fact that these problems are often caused by factors which have an impact on large numbers of people, effective solutions require long-term and
multi-purpose governing structures.5
Both concept of legitimacy display a tension. In the case of input legitimacy, the so called tyranny of the majority constitutes a problem, especially in heterogeneous nation states. Usually institutional arrangements have been put in place to prevent democratic majorities from infringing on the rights of minorities. Output legitimacy suffers from a tension between on the one hand keeping government powers in check, while at the other hand ensuring that a
11 government possesses effective problem solving capabilities. Within democratic states there is a wide variety of institutional arrangements concerning input and output legitimacy. These varieties depend on historical contexts and the composition of the nation state. What they all have in common though, is electoral accountability, which functions as one of the most important input-oriented mechanisms to ensure that governments are focused on the common interest of their constituencies.
At the national level in constitutional democracies, the concepts of input and output legitimacy complement each other, forming the whole picture of legitimate exercise of
governmental authority. The legitimacy problem of the EU lies in the fact that the nation state is the only sensible other reference to draw comparisons with.
The debate concerning the democratic deficit can only be solved if it is accepted that
the EU is fundamentally different from the democratic nation state.6 According to Scharpf, as
long as there is no European ‘demos’ with some sort of thick identity, the EU can only aspire output-oriented democratic legitimacy. Since this is based on interest, the lacking common identity causes no reason to accept solidarity sacrifices, leading to two consequences
according to Scharpf. Firstly, without solidarity among different members of the EU, there is no ground to favor direct forms of democracy over representative ones. Secondly, in the absence of solidarity, institutional norms and incentive mechanisms are the two cornerstones of output legitimacy which need to keep two clashing purposes in check. At the one hand the abuse of public power should be tackled while at the same time effective problem solving should be promoted.
Within the broader IR debate concerning the democratic deficit of the EU, the opinions differ greatly. On one side of the debate, it is argued that institution such as the EP, need to be involved more in policy making, since it is the only institution directly chosen by the
European constituency. On the other side, it is argued that because the EU does not possess a “demos”, the democratic deficit cannot be easily overcome by simply granting more decision powers to European institutions at the cost of national parliaments.
Jürgen Habermas, a German sociologist and philosopher who is associated with the Frankfurt School, for example partly underwrites the position of Scharpf in an article in the Roadmap for a Social Europe. He wrote that the constituencies of participating member states passively support European integration, characterized by an indifferent attitude, as long as the
12 EU creates economic gains. According to Habermas, “The Union has legitimized itself in the eyes of the citizens primarily through its outcomes and not so much by the fact that it fulfilled
the citizens’ political will.”7 This correponds with the input and output concepts of
legitimation of Scharpf
Vivian Schmidt, who is the Jean Monnet Professor of European Integration, Professor of International Relations and Political Science at Boston University, approaches the matter in a different way.She argued that because of the eurocrisis, intergovernmentalism has bypassed the European Parliament and the European Commission. According to Schmidt, the
institutional balance needs to be restored to the situation before the crisis. “With regard to the Eurozone crisis in particular, it would mean bringing the EP into the decision-making
process.”8
The aim of this thesis is not clarify which of these positions is right or false, as arguments for and against both sides of the debate are abundant. The fact remains that European integration is constantly evolving, and EU citizens are more and more affected by decisions made by the EU. Yet at the same time, the voter participation at the EU level has been decreasing for the last decades, indicating that citizens still regard the national political level as the most relevant stage. The input output legitimacy framework of Scharpf has been chosen, because it can be used to distinguish between the input from a national point of view, and the output and its consequences that is produced at the EU level.
Now the concepts of input and output have been clarified, the next chapter will proceed with the development and evolution of the EMU. A brief introduction will be given to the concept of a central bank and how this development. Additionally several historical monetary union in Europe will also be briefly discussed before the chapter moves on to the main part of overviewing the European integration which led to the creation of the EMU and the euro. Alongside this overview, the concepts of input and output legitimacy will be used to see to what extent these were considered by policy makers.
7 Jürgen Habermas, “Democracy, Solidarity and the European Crisis,” Roadmap of a Social Europe (October
2013):4.
8 Vivien Schmidt, “Democratizing the Eurozone,” Social Europe (15th of May, 2012)
13
Chapter 3
Road towards the EMU
Before turning to the ECB and the ESM, this chapter will first delve into the historical
development of central banks and secondly will turn to previous monetary unions that existed in Europe. Although central banks today are common in most countries, they do not function in the same way, nor do they possess identical policy goals. Historical circumstances are at the root of the foundations of central banks in specific countries and affect the way central banks policies are prioritizes. To give an illustration; a well-known example is the Deutsche Bundesbank and their extreme focus on keeping a curb on inflation, fuelled by German experience of hyperinflation during the inter-bellum.
The birth of the modern global financial system occurred in the seventeenth century in the Kingdom of Sweden. In those days Sweden was a continental power in Europe with an empire covering the modern day Baltics and parts of Russia, Germany and Poland. However, Sweden lacked a banking system at the time, which were already well established in cities such as Amsterdam, Hamburg and London.
It was by royal degree on November 30, 1656, that the Swedish King Karl X Gustav
authorized the creation of Stockholms Banco.9 It was to be led by Johan Palmstruch, the son
of a Dutch merchant from Riga. At the time the Swedish currency was based on copper, which is a heavy metal and therefore, not very practical to carry if one needs a significant amount of money. The first step Palmstruch made was to store the copper in the bank’s vault and return a paper note as receipt, which resulted was a gigantic increase in deposits, which in
1660 reached an equivalent of $76 million dollars.10
The real game changer in this still infant financial industry was caused by a
devaluation of the Swedish Daler in 1660, which resulted in a bank run. Palmstruch found a solution in 1661, handing out credit notes (Kreditivsedlar) which could be freely traded and were not attached to one particular bank account. Although paper money existed before, this marked the first time that the credibility was backed by a financial institution rather than a precious metal, a practice which today is applied to all central banks. This credibility soon vanished with the sharp increase in paper money, essentially the first time inflation occurred
14 due to using the printing press, and the Swedish government liquidated the Stockholms Banco in 1667. Still an institution was needed and desired in order for commerce to take place more fluently, and in 1668 the Sveriges Riksbank was established. It was the world’s first central bank and continues to be the Swedish central bank this very day.
An interesting element in this case is that at the time, the Sweden had a parliament with four groups being represented, namely the nobility, the merchants class, the clergy and the peasantry. Especially the nobility and merchants were eager to establish an institution that could provide loans for investments, and managed to convince the clergy. The peasants on the other hand disagreed that this new institution should be backed legally and financially by the state. This was motivated on the grounds that the peasants did not expect much benefits from
such an institution and that they did not comprehend the business of a bank.11 In the end the
three groups proceeded and created the Sveriges Riksbank in 1668, without the participation of the peasants. Comparing the position of the peasants to the working class now, it is easy to see how their objections back then are quite relevant in today’s crisis, with the exception that the contemporary working class is not in the position to escape from the banking system.
3.1 Historical Development of Monetary Unions in Europe
Since the introduction of the digital euro on January 1999 and in the physical form of coins and banknotes in 2002, the common currency has been adopted by nineteen European states. A generation of Europeans is growing up without having any notion of the Dutch Guilder, the Deutschmark or French franc except from history books. Yet the idea of a common currency for Europe is not new and multiple attempts have been made to unite groups of countries on the continent. Several attempts in different geographical areas have been made during the 19th century of which some succeeded and others failed.
This part will briefly outline these monetary unions. It is important to emphasize the difference between national and multinational monetary unions in this case. The first is comprised of both monetary and fiscal coordination and often coincides with the borders of a nation-state or a group of states which are grouped in both an economic and political union, such as the different nations making up the United Kingdom. In a multinational monetary union, sovereign states fix their exchange rates in order that the different currencies are exchangeable in all participating countries. In such a union, there is no central bank
15 During the 19th century, the Italian kingdoms under the lead of the Kingdom of
Sardinia moved forward to unite the peninsula both politically and economically. The multiple Italian kingdoms used their own currency, making trade less efficient due the fact
that 90 different coins were circulating as legal money.12 In 1861 the Kingdom of Italy was
officially proclaimed under the King Victor Emmanuel II and in 1862 a single monetary system was introduced, using the Sardinian Lira and abolishing the other currencies that were still in circulation. In the following decades the Italian banking system functioned without a single monetary authority. This would change in 1891 when low reserve levels among Italian banks lead to a liquidity crisis, due to overprinting by multiple banks issuing banknotes. Three were brought under government supervision while three others were merged to form the Banca d’Italia, which today is still the Italian central bank. Through fiscal discipline, due to the fact that the Banca d’Italia was responsible for 75% of all the note issuing in Italy, the Lire would enter a period of monetary stability until the outbreak of the First World War in 1914.
In 1865, the Latin Monetary Union (LMU) was established between France, Switzerland, Italy and Belgium, which by the year 1889 also included Greece, Spain,
Romania, Bulgaria, Venezuela, Serbia and San Marino. Under the LMU, national currencies were interchangeable because of standard which were set so national currencies could be exchanged, as at the time many national currencies were made from silver and gold. This immediately posed a problem for the LMU, as many coins did not contain the official purity that countries claimed it had. Other problems that the LMU faced were members exporting inflation by flooding other countries with silver coins and running budget deficits. The union was held together because weaker members believed they could not afford to exit the LMU, while stronger members such as France feared the economic collapse of weaker states, therefore keeping the union intact. With the outbreak of the First World War the LMU was
suspended, although officially it would take until 1927 before the union was dissolved.13
Although not successful, the LMU did serve as inspiration for another attempt to create a common currency area in Europe, namely the Scandinavian Monetary Union (SCU) which was initially formed in 1873 by Sweden and Denmark. Two years later Norway joined the union which had a gold based currency in which all three countries used the Krona as
12 Bordo, D. Michael and Lars Jonung “The Future of EMU: What does the History of Monetary Unions Tell
us?” Working Paper 7365. (1999): 9.
13 Bae, Kee-Hong and Warren Bailey “The Latin Monetary Union: Some Evidence on Europe’s Failed Common
16 common currency. Despite the Krona, all three countries retained their monetary sovereignty as there was no central bank but their monetary policy was restricted by the gold standard.
In the end the SMU faced the same fate as the LMU and it did not survive the First World War. Governments needed to print ever larger quantities of paper money in order to support the ongoing war efforts. Since these paper banknotes were not accepted as legal
tender in other countries, the LMU practically ceased to exist.14 The SMU would also
disappear as a result of the outbreak of the Great War. The export of gold was prohibited and the Scandinavian banknotes could no longer be traded for gold. Because the money supply was no longer dependent on the gold supply the exchange of Scandinavian notes at par ceased to exist. Eventually the SMU was disbanded in the beginning of the 1920s.
The last case concerning the introduction of a Monetary Union was the German reunification in 1870 under the Kingdom of Prussia. Before the unification, the geographical area that would later constitute the German Empire under Bismarck was divided by dozens of kingdoms and principalities who were united in the Deutscher Bund, which all issued their own currencies. In 1834, economic integration took a step forward with the creation of the
Zollverein, a customs union to manage economic policies and tariffs. After the victory in the
Prussian-Franco war in 1871, William I of Prussia was named German Emperor and the German Empire came into being. Following unification, the Mark was established as the new German currency, and in 1875 the Reichsbank became the successor of the Prussian Bank and become the central bank of the German Empire.
When comparing these earlier monetary unions there is an important institutional difference. In the national monetary unions that were setup in the Kingdom of Italy and the German Empire, the political integration occurred first and once this process was completed, the monetary integration followed. In both cases, a central bank was created to manage the issuing of money and to ensure that an institution could function as a lender of last resort. The multinational unions that were setup in Scandinavia and the Mediterranean applied monetary integration without having political integration. Although the SMU functioned rather stable until the outbreak of the First World War, the LMU was plagued by several members who were temporary excluded for committing fraud with the purity of coins and by members issuing banknotes to make up for the fiscal deficits.
14 Bordo, D. Michael and Lars Jonung “The Future of EMU: What does the History of Monetary Unions Tell
17 The introduction of a common currency in Europe is certainly not a new idea and as the previous part has indicated, several attempts have been made in the last two centuries. The next part will proceed to clarify the events that lay at the foundation of the eventual
introduction of the ECB and the euro.
3.2 Historical development of European Integration
After Europe witnessed the massive destruction that two World Wars caused in little over thirty years, many European politicians realized that in order to create a prosperous and peaceful continent, the mayor European powers needed to be embedded in some kind of structure to prevent another armed conflict. In 1952 the European Coal and Steel Community (ECSC) was established by France, West Germany, Italy, the Netherlands, Belgium and Luxembourg. By pooling coal and steel together under a common High Authority, war would become “not merely unthinkable, but materially impossible,” as French foreign minister
Robert Schuman stated in his proposal.15 Interestingly, Schuman already stated in his speech
in 1950 that the creation of the ECSC was merely the first step towards a federation of Europe.
In 1957, the Treaty of Rome was signed by the original six participating countries of the ECSC, created the European Economic Community (EEC) which would be comprised of a general common market and an atomic energy community. The purpose of this treaty was firstly the promotion of the economic cooperation among the signatories, but more
importantly, to move “towards the closer unification of Europe.”16
Although these treaties emphasize the importance of economic integration, monetary integrations was not prominently visible at this stage. An explanation can be that
internationally, monetary management was quite stable due to the Bretton Woods system that was setup after the Second World War. Key features of this system were that all countries tied their currencies to gold in order to maintain their exchange rates. However by the end of the 1960s, it became increasingly difficult for the US to defend the fixed peg of the dollar. Due to the military expenditures for the Vietnam War there was an outflow of dollars, and for the US
15 “The Schuman Declaration – 9 May 1950.”
http://europa.eu/about-eu/basic-information/symbols/europe-day/schuman-declaration/index_en.htm.
16 “Treaty establishing the European Economic Community, EEC Treaty - original text (non-consolidated
18 government is became increasingly difficult to be able to exchange dollars for gold at a fixed rate. In 1971, the US gave up the gold standard, also known as the Nixon shock.
3.2.1 The Werner Report
It was in 1970 that the first concrete plan was presented to move to an economic and monetary union. Under the lead of Mr. Pierre Werner, the Prime Minister and Minister of Finance of the Luxembourg Government, the Werner Report was published in order to outline the stages of economic and monetary union in the EEC. The beginning of the report clearly states that the final objective is to find the elements that are necessary for the “existence of a
complete economic and monetary union.”17 This was needed because of the general economic
disequilibrium in member countries affected the free movement of goods, services and capital according to the report.
The report also clearly indicates what the implications of a monetary union would be. First of all, it requires the total convertibility of the currencies within the union, elimination of fluctuating margins in exchange rates along the uncontrolled liberation of the movement of capital. The creation of this economic and monetary union, according to the Werner Report will “effect a lasting improvement in welfare in the community” and lead to “a high level of
employment and stability.”18
Whether this monetary union functions with national monetary symbols or with a new currency is not relevant from a technical point of view. It is interestingly however that the report favors the adoption of a new single currency because of psychological and political considerations; “the adoption of sole currency which would confirm the irreversibility of the venture.”19
In order for this monetary union to function properly, the Werner report recognized that all monetary decisions such as the interest rates or management of reserves needed to be centralized. Likewise, representation in international organizations concerning economic or financial matters as well as representation with third countries needed to be centralized at a
17 “Report to the Council and the Commission on the realization by stages of
ECONOMIC AND MONETARY UNION in the Community.” Werner Report (1970): 9.
18“Report to the Council and the Commission on the realization by stages of
ECONOMIC AND MONETARY UNION in the Community.” Werner Report (1970):10.
19 community level. Lastly it is noteworthy that the Werner report also highlighted the fact that
an economic and monetary union on the long run cannot exist without a political union.20
Overall the report does not pay any attention whether a move to an economic and monetary union should require democratic backing from the citizens of the participating countries. It does however recognize that the transfer of powers from the national to the community level to realize an economic and monetary union, will need to be accompanied by a political union. The focus of the report is put on output legitimate arguments of increased economic growth and welfare for those who would participate in the project.
3.2.2 The Snake
In end of the 60s and the early 70s, European markets were destabilized by revaluation of the
Deutschmark in combination with the depreciation of the French franc.21 In order to facilitate
monetary stability, a couple of measures were taken, under the lead of the German Minister for Finance and Economic Affairs, Karl Schiller.
Because the Bretton Wood system no longer functioned, the European currencies were pegged to the dollar under the Smithsonian Agreement, which was signed in December 1971. This agreement was similar to the Bretton Woods system since parities were set between
European currencies and the dollar, however the convertibility of the dollar into gold was
abandoned. Under the Smithsonian Agreement,the states also agreed to limit the fluctuation
of their currencies to ±2.25 percent from the mean exchange versus the dollar, which would
become known as the tunnel. A year later in on the 10th of April 1972 the Basle Agreement
was concluded by the central banks of eleven countries, known as the snake, to limit fluctuations between the European exchange rates. At the time the United Kingdom, Denmark and Ireland were scheduled to join in 1973 and additionally Sweden and Norway also participated in the project. This agreement limited the fluctuation between European currencies to ±2.25 percent, therefore reducing the size of the snake by half compared to the tunnel.
The snake in the tunnel system was a short-lived construction, as the Smithsonian system fell apart and the dollar became a free floating currency in 1973. The UK, Ireland and Denmark were forced to leave the snake after a few weeks as their currencies faced
speculative attacks. By the year 1976 the only five EC members remained in the snake
20 Ibidem, 12.
20 together with Norway and Sweden, known as the mini snake, which was a quite stable
mechanism.22
3.2.3 The European Monetary System
As the UK, Italy and France had all experienced falling currencies and inflation in 1976, they had been forced out of the snake, and the UK needed to request additional loans from the IMF. In combination with the second oil crisis in 1979, due to the Iranian Revolution, these two events caused the economies of several EC members to move into stagflation. Under these conditions, a country faces high inflation as well as high unemployment while the economic growth rate slows down. This is a problematic situation because policies to curb the inflation rates, such as raising the interest rates, leads to a decline in the money supply which affects the unemployment levels. It was therefore of importance to stabilize the exchange
rates.23 Under the lead of Germany and France, the EC established the European Monetary
System (EMS) and the Exchange Rate Mechanism (ERM). With the exception of the UK, all EC members were part of this new attempt to stabilize the currency situation.
The EMS functioned on the basis of parity grid system, whereby the fluctuation of the weakest and strongest EC currency was not allowed to exceed a band of ±2.25 percent. In contrary to the snake in the tunnel, median exchange rates relative to the European currency unit (ECU) were used rather than the US Dollar. An exception was also made for those countries that were not able to remain in the “mini snake”, who needed to keep their currencies within a fluctuation band of ±6 percent.
The ECU, the replacement of the dollar, was a currency basked which encompassed all the currencies of the EC members and was used as the unit of account. The ECU was used as the standard monetary unit of measurement for goods, services and assets in the EC and was used by central banks as means of settlement and reserve. This was facilitated by the
European Monetary Cooperation Fund (EMCF) with the aim to use the ECU as settlement currency among EC members rather than using the US dollar. The idea behind this
mechanism was that it would become the foundation for a future single currency.
The EMS would function until the introduction of the digital euro in 1999 and had some considerable effects on the participating countries. Because the EMS used fixed
21 exchange rates with limited fluctuations, the coefficients of variation among the different currencies were limited compared to currencies such as the dollar or pound, which had adopted a floating exchange rate.
Since central banks needed to intervene to keep their respectable currencies within the band of fluctuation, a convergence of economic conditions such as inflation occurred. Due to its economic strength and stability the Deutschmark became the EMS anchor currency. Because the Deutsche Bundesbank main priority had been to curb inflation, due to historical reasons, other countries needed to follow the same anti-inflation policies. Another effect of the convergence of the inflation was that it led to a growing confidence in the system.
3.2.4 The Delors Report.
In April 1989 the Delors Report was published by the European Commission President Delors of France. The reports, which was officially called the Report on Economic and Monetary Union in the European Community, outlined three phases in which the EC would transform itself towards an economic and monetary union, as the name suggests. Prior to this report, a white paper on the completion of the common market was launched which specified the programs and methods for a unified economic area. On December 1985 the Single European Act (SEA) was signed which had set the end of 1992 as the date for the completion of the single market.
According to the Delors report, an economic and monetary union would need to have irrevocably fixed exchange rates between currencies, and eventually a single currency. This needed to be accompanied by the complete freedom of the movement for persons, goods, services and capital. Additionally, a common monetary policy is needed for the union in
combination with a high degree of compatibility of economic policies.24
The report also recognized that the creation of an economic and monetary union would require a treaty change, due to the fact that a single decision-making body was required for a monetary union. It was proposed to implement the economic and monetary union in three stages, and the report states that although there are different stages, to commence on the first
stage means embarking on the entire process.25
24 Jacques Delors. “Report on Economic and Monetary Union in the European Community.” Committee for the
Study of Economic and Monetary Union (April 1989): 13.
22
The first stage began on the 1th of July, 1990 and entailed the initiation of the entire
process and was mainly concerned with the completion of the internal market by the removal of all physical, technical and fiscal barriers. Additionally the economic and fiscal policy coordination was to be strengthened.
As already indicated earlier, the second stage could not be initiated without a treaty change and this would be handled at the EU summit in Maastricht, the Netherlands, in December 1991. This treaty, which officially was called the Treaty on the European Union, would be the foundation for the creation of the Euro. It entered into force in November 1993 and it was decided that stage two commenced on the 1 of January, 1994.
Although the Delors report had called for a creation of the European System of Central Banks (ESCB) in order to prepare a common monetary policy to be implemented in the last stage, this was done by the newly established European Monetary Institute (EMI). The EMI, possessing its own legal personality and being encompassed of the fifteen EU members, was the forerunner of the ECB and was thus tasked with the coordination of monetary policies among EU’s central banks. This did not mean however that the EMI possessed any decision-making powers, and the responsibility concerning monetary policies was still located at the national authorities. It was also decided that governments were no longer allowed to receive financing from their national central banks.
During a summit in Madrid on the 15th and 16th of December 1995, the decision was
made to let the final stage of the Economic and Monetary Union commence on the 1th of January 1999 and it was agreed that this would become a single currency named the “euro”. These decisions were based on the “Green Paper on the Practical Arrangements for the Introduction of the Single Currency” by the EC, published in May 1995. The EC proposed to divide the last stage into three separate parts, the first being the launch of the EMU. This is comprised of establishing the ESCB and the ECB as well as appointing the executive board of the ECB. Competent authorities were also to begin with the printing of the new coins and
paper money in this stage.26
The second stage would permanently fix the conversion rates of the Member States currencies and the ESCB would officially assume the responsibility for the monetary policy. To facilitate the payments between member states, the TARGET (Trans-European Automated Real-time Gross Settlement Express Transfer System) system was set-up as well. The last
26 European Commission “Green Paper on the practical arrangements for the introduction of the single
23 stage would entail the final introduction of the physical euro notes and coins, which took place in 2002.
The implementation of the Green Paper’s phases were made concrete on June 1997, during the European Council Summit in Amsterdam, where the EU’s Heads of government agreed to amend the Maastricht treaty. These amendments also included the Stability and Growth Pact (SGP), which can be considered to be a collection of procedures and rules laid down for the functioning of the EMU. Since the EMU was set-up in the absence of a political union, a framework of some kind was needed to keep national fiscal policies in check.
The SGP has been amended in 2005 and in 2011 as a response to the euro crisis, and consists of two arms. The first is the preventive arm, which aims to ensure that all member states conduct their fiscal policy in a sound way, and finds its legal basis in Art 121 TFEU. A central element is the country-specific medium-term budgetary objective (MTO) which is defined in structural terms. A country’s budget can simply be understood as the total public expenditures and revenues in a specific year whereas a structural budget balance indicates how high the expenditures and revenues would be when the output levels are at the potential level. The MTO is country specific as such as it considers the buildup of a country’s economy and the possibility of fiscal risks to the sustainability of public finances.
Under the preventive arm, member states submit annually a stability (euro members) or convergence (Non-euro members) program (SCP) which are thereafter assessed during the European Semester by the European Commission (EC). These are used by both the EC as the Council to determine if Member States meet their MTO’s. Besides the MTO, other factors are included in the SCP like underlying economic assumptions such as growth and
unemployment, and policy measures how to achieve the MTO.
The second is the corrective arms, which is a mechanism that is activated in cases of excessive deficits, and finds its legal basis in Art. 126 TFEU. According the treaties,
Eurozone members are not allowed to have a fiscal deficit exceeding three percent relative to their Gross Domestic Product (GDP) while the government debt may not exceed sixty percent relative to their GDP.27
Should such an excessive deficit occur, the council will give the recommendations of the Commission to the member state in question regarding how to stabilize the situation. Should the member state fail to alter the situation the council may give specific measures
27 Consolidated version of the Treaty on European Union - PROTOCOLS - Protocol (No 12) on the excessive
24 within a specific timeframe to bring the deficit back within the allowed three percent. The last step consists of several steps that the Council can take, including imposing fines.
The three percent fiscal deficit and sixty percent government debt were not the only economic convergence criteria which countries needed to fulfill in order to be accepted into the last stage of the EMU. Countries also needed to display price stability, where consumer price inflation was not allowed to be 1.5 percent higher than the average of the lowest three countries. Additionally, the long-term interest rate was not allowed to be two percent higher than the average of the lowest three. Lastly, the currencies of countries needed to have
maintained its fluctuation band within the ERM without any devaluation for the last two year.
3.2.5 The 1992-1993 ERM crisis
On the 2nd of June 1992, Denmark organized a referendum concerning the Maastricht treaty which ended in a no vote. Since all EC members needed to ratify the treaty in order for it to come into effects, the Edinburgh agreement was reached, which among other matters provided an opt-out for Denmark to join the euro. Consequently, a second referendum resulted in a yes vote for the revised Maastricht treaty.
During the period between September 1992 and August 1993, the participating countries in the ERM were at multiple times hit by speculative attacks against their
currencies. On the 16th of September the UK’s pound sterling was forced out of the, today
better known as Black Wednesday because it was unable to keep the currency to the agreed lower limit. Italy, which had suffered from a downturn in economic activity combined with a deteriorating fiscal deficit, was also forced out of the ERM that same day.
25 3.3 Legal and Institutional setup of the ECB
With the accession of Lithuania on the 1th of January 2015 the number of Eurozone countries has risen to nineteen. All monetary matters for the Eurozone, which is comprised of 332 million EU citizens, are taken by the ECB and implemented through the national central banks (NCB’s) of the participating Member States. The legal basis for the ECB can be found in the Treaty on European Union (TEU) the Treaty on the Function of the European Union
(TFEU) and theStatute of the European System of Central Banks and of the European Central
Bank.
The ECB became an official EU institution (Art 13 TEU) when the Lisbon Treaty came into force. This entails, among other things, that the ECB is bound by the principles of subsidiarity and proportionality (Art. 5 TEU), it should observe the equality of its citizens (Art. 9 TEU), give citizens the opportunity to exchange their views (Art. 11 TEU), and conduct its work as openly as possible (Art. 15 TFEU).
Still, the ECB enjoys an independence which few central banks in the world possess. According to Article 130 TFEU, neither the ECB nor the NCB’s are allowed to take
instructions from other Union institutions, Member State governments or any other body. Additionally, the members of the decision-making bodies of both the ECB and NCB’s are to be free of any influence attempts in the performance of their tasks. In the area of its financial management the ECB possess independence from other parties due to the fact that it has its own budget. Furthermore, the ECB is prohibited from providing loans to national public sector entities or any other EU body. Lastly, the NCB governors and the Executive Board can only be removed in the case if incapacity or serious misconduct while the Court of Justice of the European Union (CJEU) is the only competent organ to settle disputes.
26 The price stability which is pursued by the ECB can be defined as the year-on-year increase in the Harmonized Index of Consumer Prices for the Eurozone below, but close to 2% over the medium term. This definition also implies that inflation figures that fall
significantly below 2% or a situation of deflation also constitute a threat to the price stability. Although all competences concerning the monetary policy of the Eurozone are placed in the hands of the ECB, the individual Member States decide how to conduct their own fiscal policies. This institutional setup is unique as no other currency area in the contemporary world displays this combination of centralized monetary policy and decentralized fiscal policy.
3.3.1 Decision-making bodies of the ESCB
The Executive Board of the ECB is comprised of the President Mario Draghi, the Vice-President Vítor Constâncio, and four other members, who are all appointed by the European Council. The board members are installed for eight years non-renewable and is limited to nationals of the Member States. The main tasks of the Executive Board are the implementation of the monetary policy of the union in accordance with the guidelines and decisions which are taken by the Governing Council.
The Governing Council of the ECB is comprised of the executive board and all the governors of the NCB’s of the Eurozone. It is tasked with the formulation of the monetary policy of the Union such as key interest rates, making decisions relating to intermediate monetary objectives, matters concerning the supply of reserves in the ESCB and provide the
necessary guidelines for their implementation.28
Every member in the Governing Council used to have one vote, and should a tie occur,
the president of the ECB has a casting vote. On the 19th of March 2009, the Governing
Council adopted a decision for the implementation of a rotation system concerning the voting rights. Due to the fact that additional countries have adopted the euro throughout the years, it becomes more complicated to reach consensus. It was decided upon that the rotation system will come into force once the number of NCB governors exceeds 18. The first adaptation occurred therefore on the 1th of January 2015, since Lithuania has adopted the euro as the nineteenth country.
28 Article 12, Protocol (No 4) On the Statute of the European System of Central Banks and of the European
27
29
Since the first adaptation of the Council, there are two groups of countries. The first group will be composed of the five largest economies in the Eurozone, namely Germany, France, Italy, Spain and the Netherlands, who will have four votes that rotate every month. The
Second group is composed of the remaining fifteen countries who possess eleven voting rights which also rotate on a monthly basis. The Executive Board of the ECB will maintain their permanent vote in both reformed councils.
Once the number of Member States exceeds 21, which depends on the speed of the remaining non-euro EU members in meeting the admission criteria, a new rotation system be
implemented. The first group will undergo no changes but a second and third group will be installed. The second group will be comprised of medium sized economies and possess eight
voting rights while the last group possess three voting rights. The Governors of NCB’s that
are not eligible to vote are still entitled to attend meetings, participate in discussing and bring forward arguments to influence the other Governors.
29 Deutsche Bundesbank “How voting rights rotate on the ECB Governing Council.” (2014-09-19)
28 The Third decision-making body is the General Council, which consists of the
President and Vice President of the ECB and the Governors of the NCB’s of the EU. The Main task of the General Council has been to take over the former tasks of the EMI in the field of the introduction of the euro in those states which have not met the criteria. Being labelled “Member States with a derogation” in the TFEU, all EU members without the euro have an obligation to fulfill the criteria in order to access the EMU (Art. 140 TFEU). Only the UK and Denmark are excluded from this obligation due to the fact that they have negotiated an opt-out under the Maastricht Treaty. The General Council will remain operational as long as there are Member States with a derogation (Art. 141 TFEU).
Monetary Unions without being complemented by a Political Union in Europe have in the relative recent history not been successful. The first serious investigation concerning a
European Monetary Union, the Werner Report, also recognized that in the long term the EMU would need to be accompanied by a Political Union.
29 evolved among the constituencies of different participating states. Only three countries have given their constituency the option to voice their opinion concerning the Maastricht Treaty directly, in the form of a referendum (France, Ireland and Denmark).
Little attention was given as well to what the effects of the EMU would have for national democracies, as it entailed a significant transfer of sovereignty. Only 15 years after the signing of the Maastricht Treaty would the full implications of this sovereignty transfer become visible for those countries that participate in the euro.
30
Chapter 4
The European Central Bank
The first chapter explained the history of different monetary unions and the process which eventually led to the creation of the euro. This chapter will take a closer look at the concept of central banks and the arguments which argue in favour for their institutional setup in the form of independent institutions. Thereafter, this chapter will proceed to explore what the
implications are of this independence to individual euro members. This will be done by analysing several programs that the ECB has launched since the outbreak of the crisis.
4.1 Central Bank Independence.
The function of money and the ability to create it are crucial elements in our economic system. History has shown us repeatedly how the ability to create money, should it be used in an unwise manor, can lead to souring inflation and devastate economic growth. In previous times, governments were restrained because the value of a currency was tied to commodities such as gold. Although this limited the amount of money the government print, it also
prevented it from printing more in times of higher demand for its currency. Additionally, new discoveries of gold could cause inflation whereas deflation could be caused if the economy
grew faster than the supply of gold.30
Eventually governments changed this commodity money based on gold to a fiat currency system. Rather than a commodity such as gold, the money in a fiat system derived its value from the fact the government backs the currency. In such a system, a government must be credible and citizens should be guaranteed that the government will not resort to monetary policy to finance government spending.
Perhaps the strongest case for independence and against political oversight is derived from the nature of the political system itself. In democratic countries, the time between elections is commonly four to five years, and the goal of most governments or presidents is to secure a second term in office. Citizens judge their governments on the basis of a stable state of affairs but perhaps most importantly, the state of the economy. Few political parties have
30 Christopher. J. Waller, “Independence + Accountability: Why the Fed Is a Well-Designed Central Bank,”
31 reaped the benefits in an election of a reform that their predecessors had initiated fifteen years earlier. This makes it tempting to implement policies which will yield results on the short term, ideally in the run-up to the elections to successfully win a second term.
In order to emphasize the credibility of a currency, institutional arrangements were put in place so that the control of the money supply was put in the hands of unelected officials, which would lead the “central bank.” Central Bank independence is supported by a number of arguments, as some have already been mentioned, and through its assumed success in
Western countries, many countries around the world have increased their central bank
independence to different degrees.31
A second arguments centres around the nature of monetary policy itself. Central banks have a number of instruments to influence the supply of money and thereby influence the economy, such as setting the market interest rate and conducting open market operations. It takes time however until the effects of such policies unfold, therefore monetary policy should be conducted within a long timeframe, something that the political process often lacks. Besides it is often argued that monetary policy is a technical field in which politicians should not engage without sufficient specialisation.
The main problem is however, as political control over the monetary policy is not desirable, neither is full independence for a central bank. Politicians are chosen by the people to represent their ideas in the political arena and through periodical elections they are judged by the electorate in the form of either a re-election or a ticket to the opposition benches. A central bank is not chosen by the people on the grounds previously mentioned, yet decisions taken by a central have a profound effect on people’s life. Additionally, just as is the case with political matters, the opinions relating to what constitutes the best monetary policy also
change with time. The trend towards more independence for example is quite recent and occurred because there exists a strong consensus among central bankers that this is actually better. Because the world of central banks is managed by a relatively small group of bankers and economists, they do not represent the diversity of economic opinions that exist in their field. There exists an inherent tension between democratic accountability on the one hand and conducting independent policy on the other.
31Christopher. J. Waller, “Independence + Accountability: Why the Fed Is a Well-Designed Central Bank,”
32 4.2 Legitimacy of the ECB
In the case of the ECB, its input legitimacy is derived from the European Treaties, which have been debated and signed by all national parliaments and governments, and in some countries by voters directly through a referendum. Through these treaties, ex-ante rules and goals have been drafted by which the ECB is to operate, as well as its independence. Yet although the ECB’s creation is democratically legitimized, its institutional set-up limits additional input significantly. This is because changing the rules or goals of the ECB requires a treaty change, which in turn needs to be approved by all the national parliaments. Whereas democracies are characterized by periodic election and therefore give a time component to policy making, technocratic institutions such as the ECB are practically not bound by this. From the perspective of a single country, it is impossible to exercise any additional input in matter relating to the ECB, unless it manages to convince every other country in the EU.
Scharpf also argued that in the case of the ECB, its legitimacy is often naturally
assumed because the central banks of liberal democratic sovereign countries outside of the EU tend to possess the same degree of independence. Yet this analogy is false because efforts to alter the ECB’s policy requires the consent of all Member States and their parliaments,
making it much more complex to do so.32
So the question is how the ECB, in the almost complete absence of extra input legitimacy, is democratically legitimized? According to a common theory of democracy, the transfer of power over the economy to an independent institution can only be justified as long
as the monetary policy is transparent and its policymakers can be held accountable.33
Although the ECB is comprised of 28 countries, its transparency concerning its meetings and decisions is rather thin. The President of the ECB is responsible to communicate the results of its meetings to the outside world. The council’s minutes are not published and the voting results are also secret; the idea behind this set-up is that a member of the council can vote without their own national government attempting to influence the decision. However, delegating monetary matters to an independent bank can only be democratically justified if the bank conducts its business transparent and if there is a way to hold it accountable post-ante.
32 Scharpf. W. Fritz “Legitimacy Intermediation in the Multilevel European Polity and Its Collapse in the Euro
Crisis.” MPIfG Discussion Paper 12/6 (October 2012) 19.
33 The accountability of the ECB manifest itself is several way. Firstly, the ECB
publishes a weekly financial statement on Tuesday, stating developments of monetary policy operations. Secondly an Economic Bulletin (formerly known as the Monthly Bulletin) is published two weeks after each Governing Council meeting, explaining the decision which
were made.34 Lastly the ECB provides an Annual Report to the EP, EU Council, EC, and the
European Council.
Since the EU is supranational organization, the assessment whether its institutions act within the powers that are conferred to them by the Treaties are limited to the General Court and the Court of Justice of the European Union (Article 256 TFEU in accordance with Article 263 TFEU). This means that these are the only two that could reverse a decision of the ECB, which is an EU institution (Article 13 (1) TEU). Furthermore, the monetary policy of member states with the euro falls within the exclusive competence of the Union (Article 3 (1) (c)).
It is important to note that the CJEU is known to rule in favour of more integration. As the first article of the Treaty on the EU states, the goal is the creation of an ever closer union among the peoples of Europe. To illustrate, in 1963, the predecessor of the CJEU ruled the in the case Van Gend en Loos that provisions of the EEC could be invoked before courts in the member states, known as the direct effect of EU law. One year later, in the case of Flaminio Costa v ENEL, the outcome of the ruling was that EU law is supreme to national law. These two rulings have profoundly changed the character and application of EU law, and caused results which were never intended by those countries which signed the Treaty of Rome in 1957.
When compared with the Fed in the US or the Bank of England (BoE), the ECB has been granted a high level of independence while its accountability and transparency is less
extensive.35 Decisions or actions of the ECB can only be reversed by the CJEU, which
possesses no democratic legitimacy. The US Congress on the other hand has the possibility to
reverse a decision, although this has never actually occurred.36
In contrary to the ECB, the Federal Reserve System (Fed) is directed to fulfil a dual mandate of stable prices and maximum employment. The reason for this can be derived from the fact that the Eurozone members still possess fiscal sovereignty, and decide themselves how to tackle problems such as unemployment.
34 ECB “Economic Bulletin (formely Monthly Bulletin)
https://www.ecb.europa.eu/pub/economic-bulletin/html/index.en.html.
35 Dirk, Meyer. “Unabhängigkeit und Legitimität der EZB im Rahmen der Staatsschuldenkrise.” Kreditwesen 3
(2011): 128.
