Deficiencies in European Monetary Union's Credible Commitment Against Monetary Expansion

Cornell International Law Journal

Volumn 33, Issue 1, 2000, Pages 263-295

  Nellis, Nahalel A ^a  

^a NONE

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EID: 0034401441     PISSN: 00108812     EISSN: None     Source Type: Journal    
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References (247)

1. Sweden, Denmark, the United Kingdom and Greece (hereinafter "derogation states") have not yet joined monetary union. See OFFICE FOR OFFICIAL PUBLICATIONS OF THE EUROPEAN COMMUNITIES, YOUR BUSINESS AND THE EURO: A STRATEGIC GUIDE 12 (1999). Greece has expressed its desire to join by January 1, 2001. See id.
2. See generally DIRECTORATE GENERAL XV OF THE EUROPEAN COMMISSION, ACCOUNTING FOR THE INTRODUCTION OF THE EURO (1997). For example, from January 1, 1999, businesses may invoice in euros, hold a bank account in euros, make electronic payments in euros and, in most participating Member States, file tax and social security returns in euros. See YOUR BUSINESS AND THE EURO, supra note 1, at 9.
3. See generally DIRECTORATE GENERAL XV OF THE EUROPEAN COMMISSION, ACCOUNTING FOR THE INTRODUCTION OF THE EURO (1997). For example, from January 1, 1999, businesses may invoice in euros, hold a bank account in euros, make electronic payments in euros and, in most participating Member States, file tax and social security returns in euros. See YOUR BUSINESS AND THE EURO, supra note 1, at 9.
4. See generally Opinion of the Economic and Social Committee on "Employment Policy and the Role of Socio-economic Organizations in the Third Phase of Economic and Monetary Union," 1.3.2.2 and 5.4, 1999 O.J. (C 40) 12 (1998) (stating "if Member States fail to coordinate economic policies adequately, the single currency may well turn out to be an enormous disappointment" and that socio-economic organizations can cause inflationary pressures). Adjustment of the money supply to counter recessions (i.e., counter-cyclical policy) is termed "monetary policy" by economists. See JOSEPH E. STIGLITZ, ECONOMICS 681 (1993).
5. Cf. Geoffrey P. Miller, An Interest-Group Theory of Central Bank Independence, 27 J. LEGAL STUD. 433 (1998) (analyzing, in the context of the U.S. political economy, the methods used by politicians to extract funds from interest groups).
6. See The Euro: Neurosis, ECONOMIST, Feb. 27, 1999, at 73 [hereinafter Neurosis].
7. See Wolfgang Manchau, ECB Faces Conflicting Signals From Euro-Zone, FIN. TIMES, Mar. 9, 1999, at 2.
8. See ECB Keeps Rates on Hold as Euro Hits New Lows, AGENCE FRANCE PRESS, Mar. 4, 1999, at financial pages 1.
9. See Neurosis, supra note 5, at 73 ("Wim Duisenberg, the President of the European Central Bank, also blames the euro's weakness on politicians - most notably Oskar Lafontaine . . .").
10. See Worst of Both Worlds: Conflicts Between Central Bankers and Politicians Could Leave the Euro-Zone with Complete Policy Paralysis, FIN. TIMES, Feb. 10, 1999, at 24 (stating "the social democratic governments . . . are in power in all but two of the euro-zone's member states").
11. See id. Price stability is defined as keeping inflation between zero and two percent in the medium term. See id.
12. See ECB Keeps Rates on Hold As Euro Hits New Lows, AGENCE FRANCE PRESSE, Mar. 9, 1999, at financial pages 1 (quoting Wim Duisenberg as saying "we share, with the European Commission, the concern over the determination, particularly of the large countries to adhere to the aims of the stability and growth pact," and defining the large countries as France and Germany.) The Stability and Growth Pact promulgates terms for euro zone countries to bring their budgets close to balance or even into surplus in the medium term. The Pact was finalized at the Amsterdam European Council in 1997 and has the force of law. See Patrick R. Hugg, Transnational Convergence: European Union and American Federalism, 32 CORNELL INT'L L.J. 43, 56 (1998); see also INTERNATIONAL MONETARY FUND, WORLD ECONOMIC OUTLOOK, Oct. 1997, at 58.
13. See ECB Keeps Rates on Hold As Euro Hits New Lows, AGENCE FRANCE PRESSE, Mar. 9, 1999, at financial pages 1 (quoting Wim Duisenberg as saying "we share, with the European Commission, the concern over the determination, particularly of the large countries to adhere to the aims of the stability and growth pact," and defining the large countries as France and Germany.) The Stability and Growth Pact promulgates terms for euro zone countries to bring their budgets close to balance or even into surplus in the medium term. The Pact was finalized at the Amsterdam European Council in 1997 and has the force of law. See Patrick R. Hugg, Transnational Convergence: European Union and American Federalism, 32 CORNELL INT'L L.J. 43, 56 (1998); see also INTERNATIONAL MONETARY FUND, WORLD ECONOMIC OUTLOOK, Oct. 1997, at 58.
14. See ECB Keeps Rates on Hold As Euro Hits New Lows, AGENCE FRANCE PRESSE, Mar. 9, 1999, at financial pages 1 (quoting Wim Duisenberg as saying "we share, with the European Commission, the concern over the determination, particularly of the large countries to adhere to the aims of the stability and growth pact," and defining the large countries as France and Germany.) The Stability and Growth Pact promulgates terms for euro zone countries to bring their budgets close to balance or even into surplus in the medium term. The Pact was finalized at the Amsterdam European Council in 1997 and has the force of law. See Patrick R. Hugg, Transnational Convergence: European Union and American Federalism, 32 CORNELL INT'L L.J. 43, 56 (1998); see also INTERNATIONAL MONETARY FUND, WORLD ECONOMIC OUTLOOK, Oct. 1997, at 58.
15. See, e.g., Peter B. Kenen, The Transition to EMU: Issues and Implications, 4 COLUM. J. EUR. L. 359 (1998) (stating "monetary union . . . can amplify differences in real economic conditions when its members experience different shocks and there is insufficient wage flexibility or labor mobility in the union.")
16. See TREATY ESTABLISHING THE EUROPEAN COMMUNITY, Feb. 7, 1992, O.J. (C 224) 1 (1992), [1992] 1 C.M.L.R. 573 (1992) (available at 〈http://www.europe.eu.int/eur-lex/ en/treaties/index.html〉) [hereinafter EC TREATY].
17. See generally COMMITTEE FOR THE STUDY OF ECONOMIC AND MONETARY UNION, REPORT ON ECONOMIC AND MONETARY UNION IN THE EUROPEAN COMMUNITY (1989) [hereinafter Delors Report], See also CARLOS JAVIER MOREIRO GONZALEZ, BANKING IN EUROPE AFTER 1992, at 80 (1993) ("[T]he legitimate concern of all Central Banks . . . is to assure the monetary authorities, called upon to manage a Federal European Bank [the ECB], a sufficient degree of independence vis a vis political authorities, which are always suspected of inflationary laxity regarding the financing of internal deficits through money creation."). In this Note, "monetary expansion" refers to expansion of a Member States' money supply by either fiscal or monetary policy.
18. See generally COMMITTEE FOR THE STUDY OF ECONOMIC AND MONETARY UNION, REPORT ON ECONOMIC AND MONETARY UNION IN THE EUROPEAN COMMUNITY (1989) [hereinafter Delors Report], See also CARLOS JAVIER MOREIRO GONZALEZ, BANKING IN EUROPE AFTER 1992, at 80 (1993) ("[T]he legitimate concern of all Central Banks . . . is to assure the monetary authorities, called upon to manage a Federal European Bank [the ECB], a sufficient degree of independence vis a vis political authorities, which are always suspected of inflationary laxity regarding the financing of internal deficits through money creation."). In this Note, "monetary expansion" refers to expansion of a Member States' money supply by either fiscal or monetary policy.
19. See infra Part II; see generally Barry R. Weingast, The Economic Role of Political Institutions: Market-Preserving Federalism and Economic Development, 11 J.L. ECON & ORG. 1 (1995) (discussing applications of the theory of credible commitments).
20. See infra Part II.
21. See CHRISTOS HADJIEMMANUIL, THE EUROPEAN CENTRAL BANK AND BANKING SUPERVISION 11, n. 24 (Joseph J. Norton ed., The London Institute of International Banking, Finance & Development Law) (1996) (stating that even in regard to European monetary union, "political decision-makers in governments and parliaments are likely to abandon their professional commitment to price stability [because] the structure of their incentives is such that their economic policies will probably be influenced much less by long term considerations of sound money than by the desire to finance public spending and to manipulate monetary conditions for the purpose of achieving short-term economic growth, in order to procure political benefits and alleviate electoral pressures").
22. See STIGLITZ, supra note 3, at 982 (presenting, in a general textbook on economics, the monetarists' approach to formulaic control of the money supply contrasted with the new Keynesian approach, which advocates additional use of discretionary monetary policies). See also ANTHONY SAUNDERS, FINANCIAL INSTITUTIONS MANAGEMENT 86 (1994) ("[U]nderlying the movement of interest rates is the strategy of the central bank or the Federal Reserve.").
23. See Miller, supra note 4, at 442-44. See also STIGLITZ, supra note 3, at 915 and 922 (discussing Keynesian monetary theory and alternative ways that monetary policy works).
24. See STIGLITZ, supra note 3, at 976-77 (discussing basic economic principles of inflation) and SAUNDERS, supra note 18, at 86-97 (providing a financial model to measure risk to banks arising from adjustment of interest rates).
25. See STIGLITZ, supra note 3, at 977 (discussing the Phillips curve). See also Michael J. Artis & Zenon G. Kontolemis, Inflation Targeting and the European Central Bank, ECO No. 98/4 at 2 (1998) (predicting and assessing a model for varying levels of inflation among Member States).
26. An analogy can be made to cutting a pie. The total pie represents the gross domestic product (overall domestic earnings) of an economy, and each slice of the pie symbolizes each unit of money in the economy. As the number of slices increases - i.e., as the supply/amount of money increases - each slice becomes proportionately narrower. Thus, if the size of the pie remains the same, each slice becomes narrower, and each unit of money correspondingly loses value. The phenomenon of reducing the size of the piece of the economy's productivity, measured by its money, or currency unit of account, is called inflation.
27. See STIGLITZ, supra note 3, at 653 (discussing basic principles of inflation).
28. See Miller, supra note 4, at 442 and HADJIEMMANUIL, supra note 17, at 11 n. 24.
29. See STIGLITZ, supra note 3, at 977.
30. See Miller, supra note 4, at 443. See also JOĀO LOUREIRO, MONETARY POLICY IN THE EUROPEAN MONETARY SYSTEM 69-70 (1996) (presenting a game theory model for political decisionmaking about inflation in the EU).
31. See Kenen, supra note 12, at 359.
32. See LOUREIRO, supra note 26, at 70 (stating that politicians have "the incentive to create surprise inflation"). See also HADJIEMMANUIL, supra note 17, at 11 n. 24.
33. See Miller, supra note 4 at 438 (arguing that in the absence of institutional commitments against monetary expansion, politicians will seek to implement legislation that affects the money supply solely in order to make deals with the interest groups that would bear costs from such legislation).
34. As with politically-motivated expansion, the expenditure of central bank funds must be done in an unanticipated manner. Otherwise, according to the rational expectations theory of economics, the public will either hold less real money according to inflationary risk, or build inflationary buffers into private contracts. This would produce a net overall equal effect on employment. See STIGLITZ, supra note 3, at 849-51 and 980-81.
35. See Kenen, supra note 12, at 359.
36. See Miller, supra note 4, at 439.
37. See id.
38. See id.
39. See MICHAEL EMERSON ET AL., ONE MARKET, ONE MONEY: AN EVALUATION OF THE POTENTIAL BENEFITS AND COSTS OF FORMING AN ECONOMIC AND MONETARY UNION 44 (1990).
40. For the classic text on collective action problems, see generally MANCUR OLSON, THE LOGIC OF COLLECTIVE ACTION PUBLIC GOODS AND THE THEORY OF GROUPS (1971).
41. The "tragedy of the commons" problem often occurs in intergovernmental agreements involving ocean fisheries. For example, to prevent overfishing of the Grand Banks, all fishermen have a common interest in limiting their total harvest to what the fishery will support. However, each fisherman also has an incentive to maximize his immediate gain by taking out more fish. By doing so, the fisherman gains all the benefit of overharvesting (i.e., greater short-term profits), while the long-term costs of a depleted fishery are borne in common by all fishermen. See KENT BLADES, NET DESTRUCTION: THE DEATH OF ATLANTIC CANADA'S FISHERY 4, 9-10 (1995).
42. See OLSON, supra note 36, at 40.
43. See Part I, Section B, infra; see also Ross Cranston, Banking and Investment Services: Implications of the New Financial Landscape, in EUROPEAN SECURITIES MARKETS: THE INVESTMENT SERVICES DIRECTIVE AND BEYOND 45, 59 (Guido Ferrarini, ed., 1998) (arguing localized benefits can also occur by invoking emergency grants or lump-sum transfers of money from the European Union).
44. See LUKAS MENKHOFF, MONETARY POLICY INSTRUMENTS FOR EUROPEAN MONETARY UNION 8, 20-21 (1997) (arguing that open market operations will form the backbone of monetary policy and minimum reserve policy (regulatory devices) will be more prevalent).
45. See infra notes 44-48 and accompanying text.
46. See id. See also PETER B. KENEN, ECONOMIC AND MONETARY UNION IN EUROPE: MOVING BEYOND MAASTRICHT 44, 55 (1995) (presenting an overview of the process and some potential dilemmas in open market operations under Maastricht).
47. See MENKHOFF, supra note 40, at 20.
48. See Protocol on the Statute of the European System of Central Banks and of the European Central Bank art. 18.2 [hereinafter ESCB Statute] in RALPH MEHNERT-MELAND, CENTRAL BANK TO THE EUROPEAN UNION 128 (1995). The ESCB Statute is annexed to the EC Treaty under Article 106(4). See EC Treaty, supra note 13, art. 106(4). See also KENEN, supra note 42, at 64 (presenting three models for open market operations under monetary union).
49. See JONATHAN R. MACEY & GEOFFREY P. MILLER, BANKING LAW AND REGULATION 15 (2d ed. 1997)
50. See STIGLITZ, supra note 3, at 255-56 and 901 (defining bonds and describing their use in monetary policy).
51. See ESCB Statute, supra note 44, art. 18.2. See also KENEN, supra note 42, at 38 (outlining the powers of the ECB and NCBs).
52. See RENÊ SMITS, THE EUROPEAN CENTRAL BANK: INSTITUTIONAL ASPECTS 227-28 (1997) (outlining sophisticated market instruments). Both the ECB and the NCBs can engage in repurchase agreements and spot and forward transactions (buying and selling "outright") by lending or borrowing claims and marketable instruments, whether in EU or non-EU currencies, or precious metals. See ESCB Statute, supra note 44, art. 18.1. Under repurchase (repo) agreements, a central bank can buy an asset from the market, while agreeing to sell it back after certain period. This sellback reduces the money supply, but keeps collateral to hedge possible losses in the deal. Central banks may also lend with securities as collateral, or borrow against a pledge of securities, producing similar effects. This may involve the security (or foreign exchange) being delivered immediately (spot transactions) or at a later date (forward transactions). Buy/sell back transactions, another market instrument, determine the sale and repurchase simultaneously, but from two separate agreements that function like repurchase agreements. See SMITS, supra, at 228. The repurchase expands the money supply. See also MENKHOFF, supra note 40, at 19 (highlighting the importance of repurchase transactions).
53. See MARJORIE DEANE & ROBERT PRINGLE, THE CENTRAL BANKS 216 (1995).
54. See MEHNERT-MELAND, supra note 44, at 77; Rob Dixon, BANKING IN EUROPE: THE SINGLE MARKET 113 (1993).
55. See Cranston, supra note 39, at 62.
56. See DEANE & PRINGLE, supra note 49, at 216 and 218. See also KENEN, supra note 42, at 66 (arguing that the United States employs a tightly centralized model of control of the Fed branches).
57. ESCB Statute, supra note 44, art. 18.2.
58. Id.
59. According to Maastricht statutes regulating reserve requirements, the ESCB seems to envision a limitation on open market operations by limiting the amount of reserves or access to reserves by the NCBs. This assumes that existing reserves would be insufficient for a monetary expansion and that the NCBs cannot channel non-ESCB transactions to aid this monetary expansion. See, e.g., Age F. P. Bakker & Guido F. T. Wolswijk, Some Thoughts on the Monetary Framework in EMU, in EUROPEAN MONETARY UNION: THE WAY FORWARD 86 (H.M. Scobie ed., 1998). But see MENKHOFF, supra note 40, at 20 (arguing that minimum reserve policy has been losing ground and is no longer considered a common instrument of monetary policy). If Menkhoff is correct, then the reserve policy is more of a disciplinary device on NCBs, rather than a tool for monetary policy.
60. See ESCB Statute, supra note 44, art. 18.2. See also KENEN, supra note 42, at 38 (describing ESCB transactions with credit institutions).
61. See KENEN, supra note 42, at 38.
62. See STIGLITZ, supra note 3, at 900-01 (discussing regulatory devices as monetary policy) and MENKHOFF, supra note 40, at 21 (discussing regulatory devices as applied to the ESCB).
63. See MEHNERT-MELAND, supra note 44, at 79.
64. See infra note 106.
65. See ESCB Statute, supra note 44, art. 20. This requires a two-thirds majority vote of the Governing Council. See id.
66. See infra Part III.
67. See OLIVER WILLIAMSON, ECONOMIC INSTITUTIONS OF CAPITALISM 48-49 (1985) (noting that when ex post problems are anticipated ex ante, parties devise institutions to attempt to alter incentives to generate compliance with the bargain after contracting, stating "[r]ather than reply to opportunism in kind, the wise [bargaining party] is one who seeks both to give and receive 'credible commitments.'").
68. See GEORGE A. BERMANN, ROGER J. GOEBEL, WILLIAM J. DAVEY AND ELEANOR M. Fox, CASES AND MATERIALS ON EUROPEAN COMMUNITY LAW 22-26 (1993) (describing European integration, including European Monetary Union, as a set of treaties between contracting parties).
69. See WILLIAMSON, supra note 63, at 49.
70. See Ronald Coase, The Problem of Social Cost, J. LAW & ECON. 1, 4 (1960). Professor Coase won the Nobel Prize in Economics in 1991.
71. See DOUGLASS C. NORTH, INSTITUTIONS, INSTITUTIONAL CHANGE AND ECONOMIC PERFORMANCE 4 (1990).
72. See id.; see generally DOUGLASS C. NORTH & ROBERT P. THOMAS, THE RISE OF THE WESTERN WORLD: A NEW ECONOMIC HISTORY (1973); DOUGLASS C. NORTH, STRUCTURE AND CHANGE IN ECONOMIC HISTORY (1981). Professor North won the Nobel Prize in Economics in 1993 for his contribution on economic structures.
73. See id.; see generally DOUGLASS C. NORTH & ROBERT P. THOMAS, THE RISE OF THE WESTERN WORLD: A NEW ECONOMIC HISTORY (1973); DOUGLASS C. NORTH, STRUCTURE AND CHANGE IN ECONOMIC HISTORY (1981). Professor North won the Nobel Prize in Economics in 1993 for his contribution on economic structures.
74. See NORTH, INSTITUTIONS, INSTITUTIONAL CHANGE AND ECONOMIC PERFORMANCE, supra note 65, at 4 (stating that institutions can be "formal constraints - such as rules that human beings devise - and [also] informal constraints - such as conventions and codes of behavior. Institutions may be created, as was the United States Constitution; or they may simply evolve over time, as does the common law.").
75. See id. at 5-6 (stating that "[i]nstitutions affect the performance of the economy by their effect on the costs of exchange and production. Together with the technology employed, they determine the transaction and transformation (production) costs that make up total costs."). See generally NORTH, STRUCTURE AND CHANGE IN ECONOMIC HISTORY, supra note 66.
76. Kenneth A. Shepsle, Discretion, Institutions, and the Problem of Government Commitment, in SOCIAL THEORY FOR A CHANGING SOCIETY 245, 250 (Pierre Bourdieu & James Coleman eds., 1991) ("Getting property rights right . . . involves not only . . . specifying rights and enforcing them, but it also means arranging political institutions so as to disable or render costly the exercise of discretionary authority.").
77. For purposes of this Note, a "sovereign" means a political entity that defines substantial rights within its jurisdiction. In the context of monetary union, "use" denotes a Member State's use of euros for its own benefit that effects the property value of the euro for all Member States.
78. The analysis is actually more complex. The enforcement agency must raise both (1) the costs and probability of enforcement plus (2) the benefits of keeping the agreement (times the probability that it will be kept), above the costs for (1) maintaining the agreement (times the probability that costs will occur) plus (2) the benefits of breach (times the probability of reaping these benefits). Uncertainty variables and irrationality variables could be added. To add additional layers of complexity, these calculations may not be only economic but also political. In addition, they do not involve the citizenry in the abstract but rather representative decision-makers who may have a dissimilar set of cost and benefit preferences than their constituents. The preferences of the gatekeepers to these decision-makers are particularly decisive because they decide when, under what circumstances, and with what options the decision makers will decide. See ERIC RASMUSEN, GAMES AND INFORMATION: AN INTRODUCTION TO GAME THEORY 67-121 (1994) (discussing parallel decision frameworks with complete and incomplete information). In this Note, I assume that the former end of the equation will not exceed the later end of the equation, at some point in time for some sovereign (Member State). Consequently, a Member State will desire change or wish to withdraw or seek amelioration for its plight.
79. See generally Weingast, supra note 15, at 2 (stating "the central component of a credible committment to a limited government is that these limits be self-enforcing").
80. See, e.g., HILTON ROOT, THE FOUNTAIN OF PRIVILEGE: INSTITUTIONAL INNOVATION AND SOCIAL CHANGE IN OLD REGIME FRANCE AND ENGLAND (1994) (comparing credible commitments in old regime France and England); see also Douglass C. North & Barry R. Weingast, Constitutions and Commitment: Evolution of Institutions Governing Public Choice in 17th Cent. England, 49 J. ECON. HIST. 803, 817 (1989) (arguing that after England's Glorious Revolution of 1688 laws of Parliament and other circumstances forced the Crown to keep its agreements, and prevented Parliament from breaking agreements like the Crown did, allowing the government to uphold property rights, as verified by evidence from capital markets); Avner Greif et al., Coordination, Commitment, and Enforcement: The Case of the Merchant Guild, 102 J. POL. ECON. 745 (1994) (arguing that in the absence of an effective international legal system of contract enforcement, certain merchant guilds forced governments to perform their contracts by credibly threatening merchant embargos).
81. See, e.g., HILTON ROOT, THE FOUNTAIN OF PRIVILEGE: INSTITUTIONAL INNOVATION AND SOCIAL CHANGE IN OLD REGIME FRANCE AND ENGLAND (1994) (comparing credible commitments in old regime France and England); see also Douglass C. North & Barry R. Weingast, Constitutions and Commitment: Evolution of Institutions Governing Public Choice in 17th Cent. England, 49 J. ECON. HIST. 803, 817 (1989) (arguing that after England's Glorious Revolution of 1688 laws of Parliament and other circumstances forced the Crown to keep its agreements, and prevented Parliament from breaking agreements like the Crown did, allowing the government to uphold property rights, as verified by evidence from capital markets); Avner Greif et al., Coordination, Commitment, and Enforcement: The Case of the Merchant Guild, 102 J. POL. ECON. 745 (1994) (arguing that in the absence of an effective international legal system of contract enforcement, certain merchant guilds forced governments to perform their contracts by credibly threatening merchant embargos).
82. See, e.g., HILTON ROOT, THE FOUNTAIN OF PRIVILEGE: INSTITUTIONAL INNOVATION AND SOCIAL CHANGE IN OLD REGIME FRANCE AND ENGLAND (1994) (comparing credible commitments in old regime France and England); see also Douglass C. North & Barry R. Weingast, Constitutions and Commitment: Evolution of Institutions Governing Public Choice in 17th Cent. England, 49 J. ECON. HIST. 803, 817 (1989) (arguing that after England's Glorious Revolution of 1688 laws of Parliament and other circumstances forced the Crown to keep its agreements, and prevented Parliament from breaking agreements like the Crown did, allowing the government to uphold property rights, as verified by evidence from capital markets); Avner Greif et al., Coordination, Commitment, and Enforcement: The Case of the Merchant Guild, 102 J. POL. ECON. 745 (1994) (arguing that in the absence of an effective international legal system of contract enforcement, certain merchant guilds forced governments to perform their contracts by credibly threatening merchant embargos).
83. See F.W. MAITLAND, CONSTITUTIONAL HISTORY OF ENGLAND 298-301 (1908) (stating that the Star Chamber's equity rulings were considered an egregious exercise of arbitrary power); see also NORTH & WEINGAST, supra note 75, at 813 (arguing that such rulings reduced credible commitments). The firing of Chief Justice Coke (1616-17) and Crew (1627) and the Chief Baron of the Exchequer, Walter, also illustrate the erosion of credible commitments. See id.
84. The French monarchy commonly employed currency reform to cancel its debts. Coinage (louis) was denominated in livre, the unit of account. By allowing the value of the livre to decline, the Crown reduced some of its debt. See JOHN RILEY, THE SEVEN YEARS WAR AND THE OLD REGIME OF FRANCE 167 (1986); see also Hilton L. Root, Tying the King's Hand: Credible Commitments and Royal Fiscal Policy During the Old Regime, in 9 RATIONALITY AND SOCIETY 240, 246 (1989) (noting that "between 1689 and 1726 the equivalent of the livre in grams of silver declined from 8.33 grams to under 4.45 grams").
85. The French monarchy commonly employed currency reform to cancel its debts. Coinage (louis) was denominated in livre, the unit of account. By allowing the value of the livre to decline, the Crown reduced some of its debt. See JOHN RILEY, THE SEVEN YEARS WAR AND THE OLD REGIME OF FRANCE 167 (1986); see also Hilton L. Root, Tying the King's Hand: Credible Commitments and Royal Fiscal Policy During the Old Regime, in 9 RATIONALITY AND SOCIETY 240, 246 (1989) (noting that "between 1689 and 1726 the equivalent of the livre in grams of silver declined from 8.33 grams to under 4.45 grams").
86. Lenders adopted several protective measures, including concealing assets from the king; refraining from transparent business ventures or obtaining crown approval; attempting to create credibility by person relationships with the king; and obtaining compensation through non-cash benefits. See ROOT, supra note 75, at 47-48.
87. These post-Revolutionary reforms stripped the Crown of its unilateral authority to disband Parliament and gave Parliament exclusive authority to raise new taxes, audit government expenditures, veto expenditures, and monitor placement of funds. See NORTH & WEINGAST, supra note 75, at 829-31 (also noting that post-Revolutionary political reforms limited the King's ability to cancel debt).
88. Lenders became more willing to finance enterprises in the wake of these reforms because they experienced lower risk that a demonstration of wealth would induce the sovereign to force loans. See id. at 817.
89. See ROOT, supra note 75, at 248.
90. Those who bought a secrétaire were paid salaries (gages) and had privileges. However, these benefits could be revoked if office-holders failed to meet the Crown's requests for capital. See ROOT, supra note 75, at 29.
91. See id. at 247-49.
92. See id. at 251-52.
93. See id.
94. See JEAN-FRANÇOIS SOLNON, LA COUR DE FRANCE 523 (1987) (quoting Talleyrand "France seemed to be made up of a certain number of societies with which the government bargained. In this way, it kept each one under control using the credit that it had. Then the government turned to another, dealing with it in the same way. How could such a state of things continue?"). Root suggests that the difficulty in arranging negotiations among corporate groups led to the Crown's inability to negotiate out of its dilemma in 1789 Revolution. See ROOT, supra note 75, at 229.
95. See DEANE & PRINGLE, supra note 49, at 50-52 and 217-18.
96. The powers of the Federal Reserve Board originated in the Federal Reserve Act of 1913. See Federal Reserve Act of 1913, 12 U.S.C. §§ 221-503 (1994) and 12 U.S.C. §§ 1841-1850 (1994 & Supp. II 1997). This act created bank clearinghouses. See MACEY & MILLER, supra note 45, at 16. The present structure of the Fed and the responsibilities of the Board of Governors of the Fed were firmly fixed in the Banking Act of 1935. See DEANE & PRINGLE, supra note 49, at 215. Banking Act of 1935, 12 U.S.C. § 24 (Seventh) (1994 & Supp. II 1997) (originally in 12 U.S.C. ch. 614, 49 Stat. 709). See also JOINT ECONOMIC COMM., 99TH CONG., MONETARISM, INFLATION AND THE FEDERAL RESERVE 42 (Comm. Print 1985) (stating, in an essay by Benjamin M. Friedman, that the independence of the U.S. central bank is "always strictly limited" but varies over time, and such independent exercise of monetary policy is "not independent of the existing [sic] structure of policymaking institutions, of course [because] the basic reality in this case is the implicit threat of wholesale change by simple amendment of the Federal Reserve Act, should the Administration and Congress agree on the need").
97. See DEANE & PRINGLE, supra note 49, at 218-19.
98. See Edward Meese III, Putting the Federal Judiciary Back on the Constitutional Track, 14 GA. ST. U. L. REV. 781, 790 (1998) ("Andrew Jackson disputed the [U.S. Supreme] Court's decision, withdrew the federal treasury from [the Second Bank of the United States], deposited it in state banks instead, and vetoed Congress's bill renewing its charter.").
99. At the time, the Democratic populist constituents distrusted the Northeastern financiers and the Second Bank of the United States, which was associated with the Whig Party. See JAMES L. PIERCE, THE FUTURE OF BANKING 36 (1991) (stating that Jackson vetoed the bank in 1832 because "Jackson's belief in states' rights, his concern for agrarian issues, and his distrust of banks in general and the economically and politically powerful Bank of the United States in particular had predisposed him to oppose the bank").
100. See id.
101. These methods included Jackson usurping the role of the judicial branch and declaring the central bank to be unconstitutional. See Meese, supra note 90, at 790 (stating that although the constitutionality of the Second Bank of the United States was affirmed by the Supreme Court in McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819), Jackson disputed this decision as grounds for his veto). See also quotation in supra note 90.
102. In other countries, similar problems continue to exist today. For example, when Argentina passed the Central Bank Reform Act of 1992, the act intended to give Argentina's central bank autonomy from all powers of the state. The act stated that among the central bank's essential functions were commitments to preserve the value of the peso and eliminate temporary self-advances and self-purchases of government securities. Initial success in attracting international capital made this bank reform law appear credible, because the government would seemingly not want to threaten the new inflow of capital into the economy. Later debt-spending by the Menem administration, however, cast financial doubts over whether the central bank was allowing expansion of the money supply at the behest of the government. See Geoffrey P. Miller, Constitutional Moments, Precommitment, and Fundamental Reform: The Case of Argentina, 71 WASH. U. L.Q. 1061 (1993).
103. See DIXON, supra note 50, at 113.
104. See JOSEPHINE SHAW, LAW OF THE EUROPEAN UNION 133 (1996).
105. See EC TREATY, supra note 13, art. 105a(1). Issuing money is a considered the heart of traditional state functions. See J.A. USHER, THE LAW OF MONEY AND FINANCIAL SERVICES IN THE EUROPEAN COMMUNITY 177 (1994).
106. See EC TREATY, supra note 13, art. 106(1).
107. See id. art. 105(1) (Without prejudice to the primary objective of price stability, the ESCB "shall support the general economic policies of the Community with a view to contributing to the achievement of the objective of the Community . . . ."); see also Bakker & Wolswijk, supra note 55, at 80.
108. See EC TREATY, supra note 13, art. 105(2), first indent and fourth indent. The other two tasks of the ESCB are to conduct foreign exchange operations consistent with the provisions of Article 109 of the EC Treaty and to hold and manage the official foreign reserves of the Member States. See id. art. 105(2), second and third indents. The term payment systems refers to the intermediate stages of money transfer from one party to another. Defining such systems is complex. The economic definition is "every item suitable for use as a means of payment - such as cash, cheques and credit cards - and every network" through which money is transferred from one party to another - such as a bank-to- customer network, bank-to-bank network, or postal service. But the legal definition, which involves passing of liability, is "the correct and complete fulfillment of a pecuniary obligation that consists of the final transfer of the absolute availability of money due to the creditor." MARIA CHIARA MALAGUTI, THE PAYMENT SYSTEM IN THE EUROPEAN UNION 11, 22 (1997).
109. See EC TREATY, supra note 13, art. 104b; see also MEHNERT-MELAND, supra note 44, at 81.
110. See MEHNERT-MELAND, supra note 44, at 81.
111. See EC TREATY, supra note 13, art. 104c(2)(b); see also Protocol on the Excessive Deficit Procedure in MEHNERT-MELAND, supra note 44, at 164. Excessive government deficit is defined, in part, as a ratio of 60% of government debt to gross domestic product at market prices. See id.
112. See supra notes 49-53.
113. See EC Treaty, supra note 14, art. 106. The Governing Council consists of all the governors of the NCBs. Governing Council members may only vote if present (unless teleconferencing exists under art. 12.3); each has one vote and actions are by simple majority. A quorum of two-thirds of the members is required for voting, but the President may convene an extraordinary meeting without regard to quorum. See ESCB Statute, supra note 44, arts. 10.1 and 10.2.
114. The Executive Board includes the President, the Vice-President, and four other members of professional standing and recognized experience. See ESCB Statute, supra note 44, art. 11.1; EC TREATY, supra note 13, art. 109a(2)(a). The current members of the Executive Board are President Wim Duisenberg, from Holland; Otmar Issing, chief economist (and former chief economist of the Bundesbank), from Germany; Tommaso Padoa-Schioppa, in charge of banking supervision and international relations, from Italy; Eugenio Domingo Solans, in charge of payment systems, from Spain; Sirrka Hämäläinen, chief comptroller of the currency, from Finland; and Christian Noyer, in charge of internal administration, from France. See Wolfgang Münchau, Who Are Those Masked Men?, THE INTERNATIONAL ECONOMY, Sept./Oct. 1998, at 20-23.
115. Decision-making organizatins include the Governing Council, the Executive Board, and - as long as some Member States derogate from monetary union - the General Council. See EC TREATY, supra note 13, art. 106(3); see also supra note 1 (listing current derogation states). A third organization, governing coordination with non-participating Member States, occurs in the General Council, which includes the members of the Governing Council and representatives from non-participating Member States. See EC TREATY, supra note 13, art. 1091(3); ESCB Statute, supra note 44, art. 53. Members of the Executive Board other than the President and Vice-President do not have the right to vote in the General Council. The General Council's tasks are to take over the exchange rate functions of the European Monetary Institute in art. 1091(5) - which coordinated exchange rates before monetary union - and to help include the nonparticipating states in monetary union under the process of Article 109k. See USHER, supra note 96, at 176. Otherwise, the General Council is somewhat separated from direct decision-making because under Article 47.4 of the ESCB Statute, "the General Council shall be informed by the President of the ECB of decisions of the Governing Council." Id. See also Rules of Procedure of the General Council of the European Central Bank, 1999 O.J. (L 075) (1998) (giving the rules of procedure of the General Council).
116. See TOMMASO PADOA-SCHIOPPA, THE ROAD TO MONETARY UNION IN EUROPE: THE EMPEROR, THE KINGS, AND THE GENIES 232 (1994) (noting that decentralization within the ESCB has sometimes been confused with retention of strong national jurisdiction in supervision and that confusion may exist whether (in carrying out supervisory responsibilities) a NCB is acting under national powers or as part of the ESCB). ESCB Statute art. 14.4 grants to the NCBs the power to perform functions on their own responsibility and liabilities; these functions "shall not be regarded as part of the functions of the ESCB." ESCB Statute, supra note 44, art. 14.4; see also infra note 111 for the text of 14.4 The Governing Council can limit these functions only if it finds, by a two-thirds majority, that they interfere with objectives and tasks of the ESCB. See id. 109. See MALAGUTI, supra note 101, at 282. The Executive Board's implements these decisions. See id. See also KENEN, supra note 42, at 66 (stating that "governors of the national central banks will have more influence in the ECB than presidents of the Federal Reserve Banks . . . [because] they will all be voting members of the Governing Council, where they will outnumber the members of the Executive Board . . ."). Kenen further argues that NCB governors are likely to oppose any method of monetary management that benefits one Member State over another. See id.
117. See MALAGUTI, supra note 101, at 283 and ESCB Statute, supra note 44, art. 14.3. NCBs can be compelled to disclose necessary information. See ESCB Statute, supra note 44, art. 14.3.
118. See Niall Lenihan, The Role and Framework of the European System of Central Banks, 1090 PLI/Corp 463, 467 (1999) (stating "a crucial operational feature of the [ESCB] is that, while monetary policy will be established by the ECB Governing Council meeting in Frankfurt, monetary policy will be implemented on a decentralized basis through the 11 national central banks. Open market operations pumping liquidity into the financial system, or withdrawing liquidity, will be conducted through the dealing rooms in the 11 national central banks."). See also ESCB Statute, supra note 44, art. 10.3. These include decisions taken under Article 28 (capital reserves of the ECB), Article 29 (key for subscription of the ECBs capital), Article 30 (transfer of foreign reserve assets to the ECB), Article 32 (allocation of income produced by NCBs), Article 33 (allocation of net profits and losses of ECB) and Article 51 (derogations from Article 32 if large relative differences exist in NCB's income). On these issues, voting is weighted according to the NCB's share of subscribed capital in the ECB; governors who cannot be present for the vote may appoint a proxy. A decision by a qualified majority passes by two-thirds of the subscribed capital of the ECB and one-half of the NCB shareholders. See id.
119. See ESCB Statute, supra note 44, arts. 28-33, 51.
120. See id. art. 14.4 ("[N]ational central banks may perform functions other than those specified in this Statute, unless the Governing Council finds, by a two-thirds majority of votes cast, that these interfere with the objectives and tasks of the ESCB. Such functions shall be performed on the responsibility and liability of national central banks and shall not be regarded as being part of the functions of the ESCB.").
121. See id. art. 14.4; see also MATTHIAS BRUECKNER, VOTING AND DECISIONS IN THE ECB, ECO No. 97/29 (1997) (arguing that the statutory rule leads to inefficient outcomes and that sidepayments increase the efficiency of voting decisions in the ECB).
122. The Statute states merely that "national central banks may perform functions . . . unless the Governing Council finds . . . ." ESCB Statute, supra note 44, art. 14.4; Lenihan, supra note 109, at 467 (stating that monetary policy will be implemented on a decentralized basis). The Governing Council can also compel an NCB to disclose necessary information. See ESCB Statute, supra note 44, art. 14.3.
123. See supra Part III.
124. See Lenihan, supra note 109, at 466; see also EC TREATY, supra note 13, art. 108a(1).
125. See EC TREATY, supra note 13, art. 108a(1) (limiting ECB regulations to tasks defined in ESCB Statute Article 3.1, first indent, Articles 19.1, 22, 25.2, and in acts of the Council under 106(6)). The ECB can issue regulations that define and implement the monetary policy of the Community (ESCB Statute art. 3.1, first indent), set minimum reserves for "credit institutions" (ESCB Statute art. 19.1), regulate clearing and payment systems (ESCB Statute art. 22), perform tasks to supervise "credit institutions" and other financial institutions except insurance (ESCB Statute art. 25.2), or under the acts of the Council in Article 106(6). However, sanctions do not apply to these topics unless adopted by the Council as provided in ESCB Statute art. 42 and EC Treaty art. 106(6).
126. See EC TREATY, supra note 13, art. 108a(1) and (2); ESCB Statute, supra note 44, 34.2, first and third indent. The ECB can also issue recommendations and opinions with no binding force. See id. See also HADJIEMMANUIL, supra note 17, at 36.
127. See EC TREATY, supra note 13, art. 108a(3); ESCB Statute, supra note 44, art. 34.3 and MEHNERT-MELAND, supra note 44, at 87. The ECB can impose a maximum fine of 500,000 euros, together with a maximum penalty payment of 10,000 euros per day for no longer than six months (resulting in a maximum sum of about 1,800,000 euros). See Council Regulation 2532/98, art. 1(a) and (b), 1998 O.J. (L 318) (1998) (promulgating the exclusive regulation that allows the ECB to impose an infringement procedure on a national central bank performing tasks of the ESCB).
128. See EC TREATY, supra note 13, art. 108a(1).
129. See id. art. 108a(3) ("[W]ithin the limits and under the conditions adopted by the Council under the procedure laid down in Article 106(6), the ECB shall be entitled to impose fines or periodic penalty payments on undertakings for failure to comply with obligations under its regulations and decisions"); see also ESCB Statute, supra note 44, art. 34.3; SMITS, supra note 48, at 494 (listing ECB sanctions and stating that no specific sanctions apply if not referenced in EC Treaty Article 106(6) or ESCB Statute Article 42). The European Council is specially composed of Member States' Economic and Finance Ministers for decisions on areas of capital payments and economic and monetary policy. See EC TREATY, supra note 13, Declaration (No. 3) on Part Three, Title III, Chapter 4 and Title VI.
130. See infra section C.
131. Article 22 of the ESCB Statute refers to payment systems; Article 25.2 refers to prudential supervision of credit institutions and financial institutions. See SMITS, supra note 48, at 494.
132. See ESCB Statute, supra note 44, art. 3.1 and HADJIEMMANUIL, supra note 17, at 32 (describing these strictly advisory functions).
133. See ESCB Statute, supra note 44, art. 3.1 (the equivalent of EC Treaty Article 108a(1) is not listed among the enforcement provisions of EC Treaty Article 106(6)). Article 106(b) gives the ECB power to enforce regulations for ESCB Statute Articles 4, 5.4, 19.2, 20, 28.1, 29.2, 30.4, and 34.3; these are discussed herein.
134. See ESCB Statute, supra note 44, art. 34.3; MEHNERT-MELAND, supra note 44, at 87.
135. See ESCB Statute, supra note 44, art. 5.4. In contrast to fines and penalty interest, the sanctions granted to the ECB for failures in collecting statistical information is "appropriate provisions for enforcement."
136. Id. art. 20, first and second paragraphs; MEHNERT-MELAND, supra note 44, at 80.
137. See ESCB Statute, supra note 44, art. 19.1. ESCB Statute art. 19.2 also gives the ECB power to impose "appropriate sanctions in cases of noncompliance" with minimum reserve requirements of credit institutions, if the European Council passes applicable secondary legislation. Hence, in the case of minimum reserves, the Treaty is more stringent. See Lenihan, supra note 109, at 468. See also European Central Bank Regulation 2818/98, 1998 O.J. (L 356) (1998) (promulgating specifics for regulation of the reserve requirements of credit institutions and credit institution branches within participating Member States).
138. The Community monitors Member States economic programs for consistency with these guidelines. See EC TREATY, supra note 13, art. 103(3). The European Commission submits reports on Member States' economic developments and their consistence with the broad guidelines to the European Council. See id.
139. Community institutions formulate broad guidelines for the economic policies of Member States under Article 103. Such guidelines are passed by qualified majority vote of the Council, upon recommendation by the Commission and with consultation of the European Council. See id. art. 103(2); see also HADJIEMMANUIL, supra note 17, at 35 ("[T]he ECB is not intended to replace the competent authorities, but only to assist in the performance of their functions.").
140. Community institutions formulate broad guidelines for the economic policies of Member States under Article 103. Such guidelines are passed by qualified majority vote of the Council, upon recommendation by the Commission and with consultation of the European Council. See id. art. 103(2); see also HADJIEMMANUIL, supra note 17, at 35 ("[T]he ECB is not intended to replace the competent authorities, but only to assist in the performance of their functions.").
141. See EC TREATY, supra note 13, art. 103(4).
142. See id. art. 103(4).
143. See id. art. 104c(11) (stating "fines of appropriate size" but not specifying quantities) and MEHNERT-MELAND, supra note 44, at 80.
144. See id. art. 104c(11) (stating "fines of appropriate size" but not specifying quantities) and MEHNERT-MELAND, supra note 44, at 80.
145. See EC TREATY, supra note 13, art. 104c(11), third indent. The European Investment Bank, governed by provisions of EC Treaty Article 198d-e, was established by the Treaty of Rome and provides investment loans to assist the funding of regional development projects in the EU, and to assist development projects by two or more Member States. Its revenue is derived from money subscriptions by Member States and from its own investments. See SHAW, supra note 96, at 132-33.
146. See EC TREATY, supra note 13, art. 104c(11), third indent. The European Investment Bank, governed by provisions of EC Treaty Article 198d-e, was established by the Treaty of Rome and provides investment loans to assist the funding of regional development projects in the EU, and to assist development projects by two or more Member States. Its revenue is derived from money subscriptions by Member States and from its own investments. See SHAW, supra note 96, at 132-33.
147. See EC TREATY, supra note 13, art. 104c(13). The voting is weighted by qualified majority numbers under Article 148; the breaching Member State's votes are excluded. See id.
148. See supra note 9.
149. See supra Part III.
150. See EC TREATY, supra note 13, art.104b; MEHNERT-MELAND, supra note 44, at 81.
151. See EC TREATY, supra note 13, art.104b; MEHNERT-MELAND, supra note 44, at 81.
152. See EC TREATY, supra note 13, art. 104(1).
153. See id.
154. See Council Regulation 3603/93, art. 2(2), 1993 O.J. (L 332). Terminating on January 1, 1999, the NCBs of participating Member States could purchase "debt instruments" of another Member State's public sector, if these purchases were for the sole purpose of managing foreign exchange reserves. See id. art 2(1). The Regulation contains definitions (and restrictions) on the terms "overdraft facilities," "debt instruments," "public sector," "credit facilities" and "public undertaking."
155. See EC TREATY, supra note 13, art. 104(1). In Council Regulation 3603/93, 1993 O.J. (L 332) (1993), the EU Council does not define "direct purchases" but does indicate conditions that were not "direct purchases" and types of credits that were not "credit facilities." These are safe harbors, but do not prohibit other interpretations of "direct purchases." See also MEHNERT-MELAND, supra note 44, at 24 (transactions that are not "direct purchases" are in NCB transactions in derogating states and participating states or the ECB); KENEN, supra note 42, at 70 (Article 104 exempts open-market purchases).
156. See EC TREATY, supra note 13, art. 104(1). In Council Regulation 3603/93, 1993 O.J. (L 332) (1993), the EU Council does not define "direct purchases" but does indicate conditions that were not "direct purchases" and types of credits that were not "credit facilities." These are safe harbors, but do not prohibit other interpretations of "direct purchases." See also MEHNERT-MELAND, supra note 44, at 24 (transactions that are not "direct purchases" are in NCB transactions in derogating states and participating states or the ECB); KENEN, supra note 42, at 70 (Article 104 exempts open-market purchases).
157. See EC TREATY, supra note 13, art. 104(1). In Council Regulation 3603/93, 1993 O.J. (L 332) (1993), the EU Council does not define "direct purchases" but does indicate conditions that were not "direct purchases" and types of credits that were not "credit facilities." These are safe harbors, but do not prohibit other interpretations of "direct purchases." See also MEHNERT-MELAND, supra note 44, at 24 (transactions that are not "direct purchases" are in NCB transactions in derogating states and participating states or the ECB); KENEN, supra note 42, at 70 (Article 104 exempts open-market purchases).
158. See ESCB Statute, supra note 44, art. 21.2 ("The ECB and national central banks may act as fiscal agents for the entities referred to in Article 21.1," [i.e., "Community institutions or bodies, central governments, regional, or local or other public authorities, other bodies governed by public law, or public undertakings of Member States"].).
159. See ESCB Statute, supra note 44, art. 14.4. The statute provides that these functions are performed at the responsibility and liability of the NCBs and are not regarded as part of the functions of the ESCB. See also PADOA-SCHIOPPA, supra note 106, at 232.
160. See ESCB Statute, supra note 44, art. 14.4. The statute provides that these functions are performed at the responsibility and liability of the NCBs and are not regarded as part of the functions of the ESCB. See also PADOA-SCHIOPPA, supra note 106, at 232.
161. The ECB promulgates "general principles" for credit operations and open-market operations carried out by itself or by the NCBs. See HADJIEMMANUIL, supra note 17, at 32-34.
162. The primary objective of the ESCB is price stability. See EC TREATY, supra note 13, art. 105(1). See also DANIEL GROS, TOWARDS ECONOMIC AND MONETARY UNION: PROBLEMS AND PROSPECTS 32-34 (Center for European Policy Studies Paper No. 65, 1996)
163. The primary objective of the ESCB is price stability. See EC TREATY, supra note 13, art. 105(1). See also DANIEL GROS, TOWARDS ECONOMIC AND MONETARY UNION: PROBLEMS AND PROSPECTS 32-34 (Center for European Policy Studies Paper No. 65, 1996)
164. See ESCB Statute, supra note 44, art. 18.2 ("the ECB shall establish general principles for open market and credit operations carried out by itself or the national central banks, including for the announcement of conditions under which they stand ready to enter into such transactions").
165. See id. art. 12.1, third paragraph, requiring the ECB to devolve to the NCBs to carry out ESCB operations "to the extent deemed possible and appropriate and without prejudice to this Article." See also SMITS, supra note 48, at 243.
166. See id. art. 12.1, third paragraph, requiring the ECB to devolve to the NCBs to carry out ESCB operations "to the extent deemed possible and appropriate and without prejudice to this Article." See also SMITS, supra note 48, at 243.
167. This type of legal instrument is prohibited as "any measure establishing privileged access" under EC Treaty Article 104a(1). Council Regulation 3603/93, Article 2(2), 1993 O.J. (L 332), lists measures which are not privileged access under section 1(2), but does not stipulate that this list is conclusive.
168. See EC TREATY, supra note 13, art. 104a(1). Prudential considerations are defined as considerations that underlie national (Member State) law consistent with Community law, and "promote the soundness of financial institutions with the goal to strengthening the stability of the financial system as a whole and the protection of the customers of those institutions." Council Regulation 3603/93, art. 2, 1993 O.J. (L 332). Financial institutions are defined in art. 4 of this regulation. A simple argument is that such extensions of credit for monetary expansion strengthen the stability of the financial system as a whole (the text does not stipulate "strengthen price stability") and promote the soundness of these financial institutions.
169. See ESCB Statute, supra note 44, art. 14.4. The voting scheme is not one vote per member; rather, each voting member may cast a certain number of votes based on the capital contribution of his or her Member State.
170. See id. art. 17.
171. Id. art. 18.1. The ESCB can also conduct credit operations with "other market participants." See Lenihan, supra note 109, at 468.
172. Id. art. 18.1. The ESCB can also conduct credit operations with "other market participants." See Lenihan, supra note 109, at 468.
173. See EC TREATY, supra note 13, art. 104(2). All restrictions on the use of credit and overdraft facilities, described in the last section, do not apply to public credit institutions. See ESCB Statute, supra note 44, art. 21.3. Thus, public credit institutions probably can directly extend credit to Member States' public entities, subject to a reserve requirement. The provision probably intends to make public credit institutions equally competitive with private institutions in the market for government financing.
174. See ESCB Statute, supra note 44, arts. 21.3, 19.2. The ECB can impose reserve requirements on credit institutions with accounts from the ECB and NCBs. The reserve requirements are determined by the Governing Council of the ECB. See id art. 19.1. If credit institutions violate their reserve requirements, the ECB can impose penalty interest or other sanctions. See id. The bases for reserves and the ratio between reserves and bases and other sanctions for non-compliance can be decided by the Governing Council. See Article 42 of the ESCB Statute art. 19.2; MEHNERT-MELAND, supra note 44, at 79.
175. See ESCB Statute, supra note 44, arts. 21.3, 19.2. The ECB can impose reserve requirements on credit institutions with accounts from the ECB and NCBs. The reserve requirements are determined by the Governing Council of the ECB. See id art. 19.1. If credit institutions violate their reserve requirements, the ECB can impose penalty interest or other sanctions. See id. The bases for reserves and the ratio between reserves and bases and other sanctions for non-compliance can be decided by the Governing Council. See Article 42 of the ESCB Statute art. 19.2; MEHNERT-MELAND, supra note 44, at 79.
176. See ESCB Statute, supra note 44, arts. 21.3, 19.2. The ECB can impose reserve requirements on credit institutions with accounts from the ECB and NCBs. The reserve requirements are determined by the Governing Council of the ECB. See id art. 19.1. If credit institutions violate their reserve requirements, the ECB can impose penalty interest or other sanctions. See id. The bases for reserves and the ratio between reserves and bases and other sanctions for non-compliance can be decided by the Governing Council. See Article 42 of the ESCB Statute art. 19.2; MEHNERT-MELAND, supra note 44, at 79.
177. See ESCB Statute, supra note 44, arts. 21.3, 19.2. The ECB can impose reserve requirements on credit institutions with accounts from the ECB and NCBs. The reserve requirements are determined by the Governing Council of the ECB. See id art. 19.1. If credit institutions violate their reserve requirements, the ECB can impose penalty interest or other sanctions. See id. The bases for reserves and the ratio between reserves and bases and other sanctions for non-compliance can be decided by the Governing Council. See Article 42 of the ESCB Statute art. 19.2; MEHNERT-MELAND, supra note 44, at 79.
178. See ESCB Statute, supra note 44, arts. 21.3, 19.2. The ECB can impose reserve requirements on credit institutions with accounts from the ECB and NCBs. The reserve requirements are determined by the Governing Council of the ECB. See id art. 19.1. If credit institutions violate their reserve requirements, the ECB can impose penalty interest or other sanctions. See id. The bases for reserves and the ratio between reserves and bases and other sanctions for non-compliance can be decided by the Governing Council. See Article 42 of the ESCB Statute art. 19.2; MEHNERT-MELAND, supra note 44, at 79.
179. See ESCB Statute, supra note 44, art. 25.1. ESCB Statute art. 3.3 also provides that the ESCB can "contribute to the smooth conduct of policies" of entities regulated. See also HADJIEMMANUIL, supra note 17, at 32.
180. See ESCB Statute, supra note 44, art. 25.1. ESCB Statute art. 3.3 also provides that the ESCB can "contribute to the smooth conduct of policies" of entities regulated. See also HADJIEMMANUIL, supra note 17, at 32.
181. ESCB Statute, supra note 44, art. 25.2. The ECB and NCBs may also perform specific tasks on "financial institutions." Id. This term is also not defined in the Treaty. See Smits, supra, note 48, at 236. The term "financial institutions" also is used in Article 23 of the ESCB Statute, which says that the ECB and national central banks may establish relations with central banks and financial institutions in other countries. See ESCB Statute, supra note 44, art. 23; MEHNERT-MELAND, supra note 44, at 81.
182. ESCB Statute, supra note 44, art. 25.2. The ECB and NCBs may also perform specific tasks on "financial institutions." Id. This term is also not defined in the Treaty. See Smits, supra, note 48, at 236. The term "financial institutions" also is used in Article 23 of the ESCB Statute, which says that the ECB and national central banks may establish relations with central banks and financial institutions in other countries. See ESCB Statute, supra note 44, art. 23; MEHNERT-MELAND, supra note 44, at 81.
183. ESCB Statute, supra note 44, art. 25.2. The ECB and NCBs may also perform specific tasks on "financial institutions." Id. This term is also not defined in the Treaty. See Smits, supra, note 48, at 236. The term "financial institutions" also is used in Article 23 of the ESCB Statute, which says that the ECB and national central banks may establish relations with central banks and financial institutions in other countries. See ESCB Statute, supra note 44, art. 23; MEHNERT-MELAND, supra note 44, at 81.
184. ESCB Statute, supra note 44, art. 25.2. The ECB and NCBs may also perform specific tasks on "financial institutions." Id. This term is also not defined in the Treaty. See Smits, supra, note 48, at 236. The term "financial institutions" also is used in Article 23 of the ESCB Statute, which says that the ECB and national central banks may establish relations with central banks and financial institutions in other countries. See ESCB Statute, supra note 44, art. 23; MEHNERT-MELAND, supra note 44, at 81.
185. See ESCB Statute, supra note 44, art. 3.3; EC TREATY, supra note 13, art. 105(5). ESCB Statute art. 3.3 provides that the ESCB shall "contribute to the smooth conduct of policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the financial system."
186. See supra section C.1.
187. See EC TREATY, supra note 13, art. 104(2); ESCB Statute, supra note 44, art. 21.3.
188. See Rose Maria Lastra, The Independence of the European System of Central Banks, 33 HARV. INT'L L.J. 512 (1992) (stating that "disruptive effects" can result from the lack of a clearly defined banking supervisory role for the ESCB); see also SMITS, supra note 48, at 236 ("[T]he absence of clear language on the meaning of the term 'credit institution' seems to reveal that the issue of application of monetary policy to the subjects of prudential supervision has not received adequate reflection by [the] authors.").
189. See Rose Maria Lastra, The Independence of the European System of Central Banks, 33 HARV. INT'L L.J. 512 (1992) (stating that "disruptive effects" can result from the lack of a clearly defined banking supervisory role for the ESCB); see also SMITS, supra note 48, at 236 ("[T]he absence of clear language on the meaning of the term 'credit institution' seems to reveal that the issue of application of monetary policy to the subjects of prudential supervision has not received adequate reflection by [the] authors.").
190. See SMITS, supra note 48, at 236.
191. See Lastra, supra note 163, at 513. See also SMITS, supra note 48, at 236.
192. See Lastra, supra note 163, at 513. See also SMITS, supra note 48, at 236.
193. First Banking Directive, First Council Directive of 12 December 1977 (77/780/ EEC), 1977 O.J. (L 322) 30, as amended.
194. See ESCB Draft Statute, Agence Eur., Europe, Document No. 1669/1670, Dec. 8, 1990, at 24. See also SMITS, supra note 48, at 237 (arguing that the central concern of the First Banking Directive was to protect creditors rather than considerations of monetary policy).
195. See ESCB Draft Statute, Agence Eur., Europe, Document No. 1669/1670, Dec. 8, 1990, at 24. See also SMITS, supra note 48, at 237 (arguing that the central concern of the First Banking Directive was to protect creditors rather than considerations of monetary policy).
196. For an analysis of the U.S. approach to defining banks, see MACEY & MILLER, supra note 45, at 350 (examining parallel overinclusivity and underinclusivity in the definition of bank, in the context of the Bank Holding Company Act of 1956).
197. For an analysis of changes in the policies for public procurement in the EU, see CHRISTOPHER BOVIS, THE LIBERALIZATION OF PUBLIC PROCUREMENT AND ITS EFFECT ON THE COMMON MARKET 26 (1998).
198. See EC TREATY, supra note 13, art. 104(2).
199. The ESCB can open accounts with and regulate "credit institutions." See HADJIEMMANUIL, supra note 17, at 12-19 (analyzing regulation and prudential supervision of credit institutions).
200. See SMITS, supra note 48, at 238. In regard to amendments by Community institutions, a directive by the European Council would be require only a qualified majority under Article 57(2), pursuant to the procedure of Article 189b. As to amendments of the Treaty itself, amendment to the ESCB Statute, if proposed by the Commission, would require unanimity in the European Council, and an amendment recommended by the ECB would require unanimity in the ECB's Governing Council. See EC TREATY, supra note 13, art. 106(5); ESCB Statute, supra note 44, art. 41.
201. See SMITS, supra note 48, at 238. In regard to amendments by Community institutions, a directive by the European Council would be require only a qualified majority under Article 57(2), pursuant to the procedure of Article 189b. As to amendments of the Treaty itself, amendment to the ESCB Statute, if proposed by the Commission, would require unanimity in the European Council, and an amendment recommended by the ECB would require unanimity in the ECB's Governing Council. See EC TREATY, supra note 13, art. 106(5); ESCB Statute, supra note 44, art. 41.
202. See SMITS, supra note 48, at 238. In regard to amendments by Community institutions, a directive by the European Council would be require only a qualified majority under Article 57(2), pursuant to the procedure of Article 189b. As to amendments of the Treaty itself, amendment to the ESCB Statute, if proposed by the Commission, would require unanimity in the European Council, and an amendment recommended by the ECB would require unanimity in the ECB's Governing Council. See EC TREATY, supra note 13, art. 106(5); ESCB Statute, supra note 44, art. 41.
203. The term "payment systems" refers to the intermediate stages of money transfer from one party to another. The term's definition depends on whether it is being used in an economic or legal sense. The economic definition is "every item suitable for use as a means of payment - such as cash, cheques and credit cards - and every network" through which money is transferred from one party to another (e.g., a bank-to- customer network, bank-to-bank network, or postal service). The legal definition, which relates to the passing of liability, is "the correct and complete fulfillment of a pecuniary obligation that consists of the final transfer of the absolute availability of money due to the creditor." See MALAGUTI, supra note 101, at 22.
204. See Lastra, supra note 163, at 514; EC TREATY, supra note 13, art. 105(2), fourth indent.
205. See Lastra, supra note 163, at 514; EC TREATY, supra note 13, art. 105(2), fourth indent.
206. See ESCB Statute, supra note 44, arts. 2, 9 and 22. Hadjiemmanuil notes that because most Member States run payment systems by the NCBs in their capacity as national authorities, rather than as members of the ESCB, it is questionable whether the EC Treaty means that the ESCB can manage the payment systems directly. See HADJIEMMANUIL, supra note 17, at 41.
207. See ESCB Statute, supra note 44, arts. 2, 9 and 22. Hadjiemmanuil notes that because most Member States run payment systems by the NCBs in their capacity as national authorities, rather than as members of the ESCB, it is questionable whether the EC Treaty means that the ESCB can manage the payment systems directly. See HADJIEMMANUIL, supra note 17, at 41.
208. See ICC PUBLISHING S.A., ICC WORLD PAYMENT SYSTEMS HANDBOOK 72 (1996) (defining payment systems generally as "a set of instruments, banking procedures and, typically, interbank funds transfer systems that ensure the circulation of money").
209. See MALAGUTI, supra note 101, at 334.
210. See HADJIEMMANUIL, supra note 17, at 41 n. 148 (discussing the TARGET system); see also infra note 190 and accompanying text.
211. See id. See also Lastra, supra note 161, at 514.
212. See ESCB Statute, supra note 44, art. 22.
213. See id.
214. See id. art. 25.2.
215. See Lastra, supra note 163, at 514. See also MALAGUTI, supra note 101, at 297 and HADJIEMMANUIL, supra note 17, at 41.
216. See SMITS, supra note 48, at 301 and MALAGUTI, supra note 101, at 298.
217. See HADJIEMMANUIL, supra note 17, at 41 n. 148 (stating that payment systems and infrastructures will be maintained at the level of NCBs, rather than the ECB) and MALAGUTI, supra note 101, at 327.
218. See MALAGUTI, supra note 101, at 318. See also HADJIEMMANUIL, supra note 17, at 42 (noting that prior to monetary union, NCBs were cooperating on oversight of payment systems and minimum common features of payment systems).
219. See Working Group on E.U. Payment Systems, REPORT TO THE COUNCIL OF THE EUROPEAN MONETARY INSTITUTE ON THE TARGET SYSTEM (TRANS-EUROPEAN AUTOMATED REAL-TIME GROSS SETTLEMENT EXPRESS TRANSFER SYSTEM), A PAYMENT SYSTEM ARRANGEMENT FOR STAGE III OF EMU, (May 1995) (stating decentralized arrangements are to be preferred to centralization and the EU TARGET system would be used for monetary policy).
220. See MALAGUTI, supra note 101, at 334.
221. See KENEN, supra note 42, at 60 and HADJIEMMANUIL, supra note 17, at 41 n. 148 (stating that Member States have adopted a strategy based on minimum harmonization of national systems and a common infrastructure, the TARGET system, that implements payment arrangements based on principles of efficiency, market orientation and decentralization).
222. See supra note 185; see also SMITS, supra note 48, at 301.
223. SMITS, supra note 48, at 303-04.
224. See MEHNERT-MELAND, supra note 44, at 54.
225. SMITS, supra note 48, at 303. Smits recommends access restrictions on the NCBs of Member States with a derogation. See id. at 303-04. The rule-of-reason test applies (e.g. the ECJ ruling in Cassis du Dijon and Keck v. Mithouard), and Smits argues there are objective reasons to limit the access of non-participating NCBs (required by the test) because of a close connection between TARGET access and monetary policy. However, the burden is on EMU banks to argue that use of the system for monetary policy purposes necessitates a deviation from the fundamental freedoms of the common market. See id. at. 304.
226. See DEANE & PRINGLE, supra note 49, at 227-28 (commenting on Greenspan's use of a hands-on supervisory role for the Fed).
227. Cf. KENEN, supra note 42, at 66 (arguing that the ECB is likely to adopt a distributive model rather than a tightly centralized model (as in the United States) because a centralized model requires (1) a large ECB funds market for commercial banking and lending, (2) a well integrated euro-dominated security market, and (3) large holdings of such securities by commercial banks, and these conditions do not exist).
228. See MEHNERT-MELAND, supra note 44, at 87-88 (outlining the role of the European Court of Justice in European monetary Union).
229. See EC TREATY, supra note 13, arts. 173 and 175, fourth paragraph (stating the Court of Justice has jurisdiction over all proceedings by or against the ECB that fall within the ECB's field of competence).
230. See id. art. 180(d); MEHNERT-MELAND, supra note 44, at 50-51. See also SHAW, supra note 96, at 245-246 (discussing the authority and effects of rulings of the Court of Justice).
231. See EC TREATY, supra note 13, art. 180(d) (citing Article 169, which provides that the Commission can bring reasoned opinion and also suit against a member failing to perform).
232. Id. art. 173, third paragraph; see also SHAW, supra note 96, at 246. The Treaty does not define these "prerogatives." See EC Treaty, supra note 13, art. 173.
233. See MEHNERT-MELAND, supra note 44, at 77-78; ESCB Statute, supra note 44, art. 14.2.
234. See EC TREATY, supra note 13, art. 173, fourth paragraph.
235. See id. art. 184; see also SMITS, supra note 48, at 347-48.
236. See EC TREATY, supra note 13, art. 173, second paragraph.
237. See id. art. 175, first paragraph.
238. See id. art. 173, second paragraph. But see MIGUEL POIARES MADURO, WE THE COURT: THE EUROPEAN COURT OF JUSTICE AND THE EUROPEAN ECONOMIC CONSTITUTION 15-16 (1998) (arguing that the legal discourse between the Court and other institutions depends on the bargaining power of institutions and their management of contingent conflicts).
239. See EC TREATY, supra note 13, art. 176.
240. See id. art. 215, second and third paragraphs.
241. See id. art. 107. The non-influence principle seeks ambitiously to insulate the ESCB from political pressure. In comparison to the legal independent-status language of the Bundesbank, the ECB statute is considerably stricter. The Bundesbank Act, § 12, second sentence states "in exercising the powers conferred on it by this Act, the Bank is independent of instruction from the Federal Cabinet." In contrast, the language in Article 107 states "neither the ECB, nor a national central bank, nor any member of their decision making bodies shall seek or take instructions from Community institutions or bodies, from any government of a Member State or from any other body." Id.; see also SMITS, supra note 48, at 172, n. 116. This applies to any and all tasks of the ESCB and ECB, not just monetary policy functions. See Lastra, supra note 161, at 489. Theoretically, influence can occur on the ESCB and the ECB. Through politicized appointment of the Executive Board and NCB governors, absence of prescribed long terms of office, presence of representatives from the Council and Commission in Governing Council meetings, accountability to European Parliament art. 109b(3), and informal and formal contacts with national governments. In practice, the line dividing arguments and pressure is thin. Difficulties in proving pressure are also tremendous, requiring real evidence and systemic monitoring by the Community. Government representatives have much more opportunity for exchange of information and consultation in the EMU than in some Member States. Exchange of information and consultation is envisaged between the Ecofin Council, the Commission, and the ECB. The President of the Council and a member of the Commission may participate (but not vote) in the meetings of the Governing Council of the ECB (pursuant to EC Treaty art. 109b(1)) and the General Council (pursuant to ESCB Statute art. 46.2). Heads of State or the Commission President may be present during part of the proceedings when visiting the ECB. See SMITS, supra note 48, at 173, n.123. This contrasts with the Netherlands and Sweden, for example, where economic meetings do not include the Royal Commissioner or the Crown's agent, respectively. See id. n. 119-20. According to this thesis, a Court of Justice decision is necessary to better define the scope of Article 107.
242. However, only Community and Member State political entities are prohibited from endeavoring to influence the ESCB. See id. at 161, n.56. Therefore, private organizations and entities are not statutorily prohibited from seeking to influence the ESCB, although the ESCB may not receive instructions.
243. Article 107 may be drafted in overly strict language. Several commentators have argued that Article 107's prohibition on receiving instruction should not be strictly construed. For example, Smits argues that the ECB's obligation (pursuant to EC Treaty art. 109b) to present its policy to the European Parliament clashes with Article 107's prohibition on receiving instructions "from any other body." See id. at 179. For instance, Article 109b(3) provides for a "general debate" in the European Parliament on the ECB annual report, which contains yearly projections for monetary policy. In addition to Maastricht provisions that clash with this legal duty, such rules of statutory construction would call into question why Maastricht contains consultative provisions, if no influence can be exerted on ECB officials.
244. See EC TREATY, supra note 13, art. 103(2); see also HADJIEMMANUIL, supra note 17, at 32-34.
245. EC TREATY, supra note 13, art. 102a; see also BERMANN ET AL., supra note 69, at 1201.
246. EC TREATY, supra note 13, art. 2.
247. See id. art. 3a, as referenced by Article 102a; see also BERMANN ET AL., supra note 69, at 1201.