The Evolution of the European Central Bank

Fordham International Law Journal, Dec 2012

Rosa M. Lastra

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The Evolution of the European Central Bank

1264 FORDHAM INTER\ATION\AL LAIWJOURNAL [Vol. 35:1260 Fordham International Law Journal M. Lastra 0 0 Queen Mary University of London Copyright c 2017 by the authors. Fordham International Law Journal is produced by The Berkeley Electronic Press (bepress). - 2017 Article 4 Rosa Rosa 1l. Lastra INTRODUCTION I. OBJECTIVES AND FUNCTIONS OF THE ECB A. ECB Objectives and Their Evolution B. ECB Functions and Their Evolution II. A NOTE ON SUPERVISION AND FINANCIAL STABILITY 11. ORGANIZATIONAL COMPLEXITY IV. STATUS, INDEPENDENCE, AND ACCOUNTABILITY CONCLUSION The European Central Bank ("ECB") is a central bank whose array of functions and jurisdictional domain are determined by a treaty instrument, the Maastricht Treaty.' Following the adoption of the Treaty of Lisbon,2 the Treaty on the Functioning of the European Union ("TFEU") governs the ECB.3 This distinctive feature makes the ECB a unique institution amongst central banks. * Professor of International Financial and Monetary Law, Centre for Cominercial Law Studies, Queen Mary University of London. The Author thanks Antonio Sainz de Vicuna, General Counsel of the European Central Bank ("ECB"), for helpful comments. Errors are the Author's alone. Email: ulk. 1. Treaty on European Union (Maastricht text),July 29, 1992, 1992 O.J. C 191/ 1. 2. Treaty of Lisbon Amending the Treaty on European Union and the Treaty Establishing the European Community, 2007 O.J C 306/ 1. 3. Consolidated Version of the Treaty on the Functioning of the European Union art. 127. 2010 0. ( 83 47, at 102-03 [hereinafter TFEU]. The complex and intricate structure of the European Union sometimes makes it difficult for legislators and commentators to make the correct distinctions. The Treaty of Lisbon was signed on December 13, 2007. Itcame into force on December 1, 2009, with some provisions taking elfect at a later date. It amends, but does not replace, both the Treaty on European Union (formerly known as the Maastricht Treaty) and the Treaty Establishing the European Community (formerly known as the EC Treaty or Treay of 20121 EVOLUTION OFTHE EUROPEAN CENTRACL BANX\K The ECB is the monetary authority in those Member States of the European Union that have adopted the euro as their single currency. 4 The euro area or Eurozone comprises the EU Member States whose currency is the euro and in which a single monetarv policy is conducted by the ECB. 5 The current members are: Austria, Belgium, Cyprus, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Malta, the Netherlands, Portugal, Slovakia, Slovenia, and Spain.b The ECB is the centerpiece of the European System of Central Banks ("ESCB"). The ESCB has a dual structure, with the ECB at the center, headquartered in Frankfurt, Germany, and the National Central Banks ("NCBs") at the periphery. 7 Since not all Member States have adopted the euro as their single currency, a distinction is made between the "ins" and the "outs" (the Member States that have adopted the euro are the "ins," and the Member States with a derogation, according to Article 139 of the TFEU are the "outs"). According to Article 3 (4) of the Treaty on European Union ("TEU"), "[tihe Union shall establish an economic and monetary union whose currency is the euro."8 The European Union's monetar y policy is the monetar y policy of the Member States whose currency is the euro. Article 282(1) of the TFEU is clear in this regard: "The European Central Bank, together with the national central banks of the Member States whose currency is the euro, which constitute the Eurosystem, shall conduct the monetary policy of the Union," While the ECB website defines the ESCB as "the central banking system of the European Union," ' the Eurosystem is defined as "the central banking system of the euro area.,'" This differential jurisdictional domain is the source of tensions and Rome, and now known as the Treaty on the Functioning of the Furopean Union ("TFEU")). 4. Id. arts. 136-38, at 106-07. 5. See All Glossary Entries: E, EUR. CENT. BANK, http:/ glossary/html/glosse.en.hutnl#8 (last visited May 25, 2012). 6. See id. 7. See id. 8. Consolidated Version of the Treaty on European Union art. 3 (4), 2010 O.J. C. 83/13, at 17 [hereinafter TEU post-lisbon]. 9. TFEU, supranote 3, art. 282(1), 2010 O.. C 83, at 167. 10. All Glossary Etries:E. supra note 5. 11. Id. conflicts that this Essay explores. Only the ECB and the NCBs have legal personality; that is, the power to sue and be sued. This Essay first surveys the functions and objectives of the ECB and pays special attention to the increasing emphasis given to the goal of financial stability, a goal that was somewhat neglected when the ECB was created. The Essay also considers the complex structure of the ESCB, the status of independence and accountability, and the challenges the institution currently faces in the light of the sovereign debt problems in Greece and other Eurozone Member States. Like all EU institutions, the ECB has evolved since its inception and continues to evolve. I. OBJECTIVES AND FUNCTIOJNS OF THE ECB In order to understand the functions and objectives of the ECB, which are enshrined in Article 127 of the TFEU, it is useful to review the evolving nature of central banking generally.12 Central banking has evolved throughout its relatively short history, from the time in which the Swedish Riksbank (the first central bank in the world, created in 1668) and the Bank of England (established in 1694) started operations, to central banks in contemporary times, with the Federal Reserve System ("Fed") established in 1913 and the ECB in 1999.' 3 While the original raison d'etre for the establishment of the first central banks was note issue and government finance, this rationale has changed over time.14 Following the banking crisis of 1907, the Fed was founded, inter alia, "[t] o provide for the establishment of Federal reserve banks, to furnish an elastic currency, to afford means of rediscounting commercial paper, to establish a more effective supervision of banking in the United States." 15 The main rationale for the creation of the Bundesbank in 1957, a 20121 ElOLUTION OF THE EUROPEAN CENTRAL BANK country that had suffered from hyperinflation during the interwar period, was price stability; this rationale was "inherited" by the Vera Smith (a student of Friedrich August Hayek) explained in her excellent 1936 book The Rationale of Central Banking that the twin mandate of central banks was stable money and sound banking. 17 The emphasis on stable money as the primary objective of monetary policy in the late 1980s and in the 1990s often accompanied a move away from the supervisor tasks that are integral instruments to achieve sound banking and finance. A crucial aspect of current reform proposals in response to the 2007-2009 financial crisis has been the closer involvement of monetary authorities in financial supervision and a return to the financial stability mandate. The twin mandate of central banking to which Vera Smith referred is, in modern terminology, monetary stability and financial stability. The list of central bank functions is open-ended and dynamic, including, inter alia, note issue, government finance, monetary policy, banking supervision and regulation, banker's bank and lender of last resort, smooth operations of the payment systems, management of gold and foreign reserves, conduct of foreign exchange operations, debt management, exchange controls, and development and promotional tasks. The scope of powers and the relative importance of the functions of central banks have changed over time and across countries. Indeed, the ECB's key function is monetary policy, although it has other functions as further discussed below. One notable feature in central banking history is that there has always been a strong connection between the central bank and the government. They have built a special relationship: the central bank has been consciously awarded privileges by the government, and in exchange it has been expected to provide certain services and functions for the government.'I However, this special relationship has not always been easy; indeed, at times it has been rather confrontational. The nickname given to 16. RosA MARLA LASTRA. LEGAL FOUNDATIONS 01F INTELRNATIONAL MONETARY STABnnirY 56-57, 212, 215 (2006). 17. VERA, G SMITH, THE RATIONALE OF CENTRAL BANMNG AND THE FREE BANIAKNG ALTERNATIVE (Liberty Press, photo. reprint 1990) (1936). 18. LASTRA, CENTRAL BANKING, supra note 12, at 272. the Bank of England, the Old Lady of Threadneedle Street, is a reminder of this special relationship. 19 It is this strong relationship that today colors the debate about the role of the ECB during the financial and sovereign debt crisis and the instruments it has established to combat both crises. A. ECB Objectives and Their Evolution The objectives of the ESCB are spelled out in Article 127(1) of the TFEU.The primary objective of the ECB is price stability, i.e., the control of inflation.2° The ECB is heir to the stability culture of the Bundesbank and a creature of its time: economic theory and evidence supported the case for a price-stabilityoriented, independent central bank since 1989, when the Reserve Bank of New Zealand Act was introduced.21 This historical rationale-institutions of creatures of their time-is important to understand the limits of what the ECB can do in response to the crisis. If the Maastricht Treaty had been signed in 2010, the enumeration and prioritization of objectives would have been different. But treaties are difficult to amend, and an expanded European Union has made treaty reform ever more difficult (not to mention the opening of Pandora's Box that the negotiation of certain provisions would entail). Treaties enumerate the obligations of the Member States. In this respect, it is worth pointing out that a degree of flexibility is embedded in the relevant treaty provision through the ensuing language: the primary objective-the pursuit of the internal aspect of monetary stability-is to be pursued without prejudice to the secondary objective-the support of general EU economic policies with a view to contributing to the achievement of the 19. The nickname comes rom a Thomas Gillray cartoon published in May 1797, foIllowing a speech that a Member of Parliament, Richard Brinsley, had made in the House of Commons alluding to the Bank as an "elderly lady in the City of grCat credit and long standing, who had unfortunately, fallen into bad company." See, e.g.B,ANK OF ENGLAND, http://ww (follow "Education" hyperlink; then follow "Museum" hyperlink; then tolow "Walk Through Time" hyperlink; then folow "Did You Know?" hyperlink). This " bad company" was that of Prime Minister Pitt. who had required the Bank to make large loans to the government to finance a war against France. 20. TFEU, supra note 3,art. 127(l), 2010 O4. C 83,at 102-03. 21. IASTRA,CENTRAL BANKING, supra note 12, at 65-68. EU objectives as laid down in Article 3 of the TEU 2 2 The wording of this provision is heavily influenced by Article 12 of the 1957 Bundesbank Law.23 In addition to price stability and support of the general economic policies of the European Union, financial stability (mentioned in Article 127(5) of the TFEU) must be added to the enumeration of objectives. Financial stability has become an overriding policy objective in the aftermath of the financial crisis. The other condition mentioned in Article 127(1) of the TFEU is to act in accordance with the principle of an open market economy with free competition, favouring an efficient allocation of resources, and in compliance with the principles set out in Aiticle 119.24 B. ECB Functionsand Their Evolution The functions of the ESCB are divided into "basic tasks" (defined in Article 127(2) of the TFEU and reproduced in Article 3(1) of the ESCB Statute) 25 and other functions "nonbasic tasks" that are scattered throughout other provisions. Although this distinction is not always clear (e.g., why is the issue of banknotes not included in the enumeration of basic tasks?), it is enshrined in the TFEU. While the language applicable in Article 127(2) refers to the "basic tasks to be carried out through the ESCB" (the ESCB being construed as the compound of its constituent parts, i.e., 22. TEU post-LIsbon, supra note 8, art. 3,2010 O:J. . 83,at 17. 23. TFEU, supra note 3,art. 127(5), 201(0 OJ.C 83,at 103 ("The [European System of Cenu al Banks ("ESCB")] shall conuibute 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."): see Gesetz fiber die Deutsche Bundesbank [BBankG] [Bundesbank Act] ,July 26,1957, BUNDLSGLSLTZBLATT I [BGBL I] at 1782, last amended by Gestez [G], Dec.22, 2011, BGBi. I at 2959, art. 9 (Ger.). 24. TFEU, supra note 3, art. 127(1), 2010 O:4. C 83, at 102; see 119, at 96-97 (requiring Member States to adopt, "[f1or the purposes set out in Article 3 of the Treaty on European Union... an economic policy which is based on the close coordination of Member States' economic policies, on the internal market and on the definition of common objectives, and conducted in accordance with the principle of an open market economy with free competition") 25. 127(2), at 102; TFEU Protocol No.4 on the Statutc of the European System of Cenral Banks and of tireEuropean Cenrual Bank art. 3.1, 2010 OJ. C 83/230, at 231 [hereinalter ESCB Statute]. both the ECB and the NCBs),26 the language applicable to nonbasic tasks typically mentions the ECB and the NCBs separately (with the one significant exception of Article 127(5) of the TFEU, which refers to the ESCB). The ESCB's four basic tasks are: "[(1)] to define and implement the monetary policy of the Union, [ (2)] to conduct foreign-exchange operation consistent with the provisions of Article 219, [(3)] to hold and manage the official foreign resenes of the Member States, [and (4) ] to promote the smooth operation of payment systems." 27 There are four other "nonbasic" tasks (i.e., not included under the umbrella of "basic tasks"): (1) issue of banknotes, (2) contribution to financial stability, (3) advisory functions and collection of statistical information, and (4) international cooperation and "external operations."28 The key function of the ECB is monetary policy. The formulation and implementation of monetary policy is the first and most important basic function to be "carried out through ' 2the ESCB. Responsibility for monetary policy has been clearly transferred from the national arena to the supranational arena. In this sense, it isboth accurate and entirely appropriate to talk about a "single monetary policy" 30 for the Member States whose currency is the euro. Article 14.3 of the ESCB Statute states that "[tihe NCBs are an integral part of the ESCB and shall act in accordance with the guidelines and instructions of the ECB.'" - I Accordingly, in implementing ESCB tasks, i.e., monetary policy and other responsibilities resulting from the TFEU and the ESCB Statute, the NCBs act in their capacity as constituent parts of the ESCB, and not as national agencies. Monetary policy is a public function. A central bank conducts monetary-policy operations and other central banking 26. TFEU,supra note 3,art. 127(2), 2010 O.J. C 83,at 102. 27. Id.E;SCB Statute, supra note 25, art. 3.1, 2010 OJ.C 83,at 231. 28. SeeLASTRA, supranote 16. 29. TFEU, supra note 3,art. 127(2), 2010 O.J. C 83, at 102; ESCB Statute, supra note 25. art. 3.1, 2010 OJ. C 83, at 231. 30. TFEU. supa note 3,art. 119(2), 2010 OJ.C 83,at 97. 31. ESCB Statute, wapranote 25, art. 14.3, 2010 O. C 83,at 237. functions in the pursuit of the public interest. , 2 The transfer of monetary policy powers from the national to the supranational arena signifies the surrender of one of the classic attributes of sovereignty of the nation-state. 33 The Greek debt crisis has magnified the inconsistency between a centralized monetary policy and a decentralized fiscal policy, which characterizes the Economic and Monetary Union ("EMU") project. Monetary policy also is a key attribute of monetary sovereignty. The adoption of a single currency-the euro-and the creation of the ESCB signify the voluntary surrender of monetary sovereignty by those Member States that have agreed to transfer sovereign rights to the European Union.A This is a 32. Central banks act in a dual capacity: on the one hand they can perform central banking functions (a- re imperii), and on the other they can perform corporate functions (actajure gestios). Actajure imperii are activities of a governmental or public nature carried out by a forecign state or one of its subdivisions, which quali) for state immunity under the modern doctrine of restrictive foreign sovereign immunity. 'When they perform central banking functions, central banks enjoy sovereign immunity. Acta jure gestionis are activities of a commercial nature carried out by a foreign state or one of its subdivisions or agencies. These acts are not immune from the jurisdiction and process of local courts under the modern doctrine of resuictive foreign sovereign immunity. The United States Court of Appeals for thre Second Circuit recently provided a ringing endorsement of central bank immunity. See NMI, Capital Ltd. v. Banco (ent. de la Republica Argentina, 652 F.3d 172, 188 (2d Cir. 2011) (treating central banks as more than "generic 'agencies and instrumentalities' by entitling them to "'special protections' befitting the particular sovereign interest[s]" at stake (quoting EM Ltd. v. Republic of Aigentina, 473 F.3d 463, 485 (2d (ir. 2007))). According to tire Second Circuit. thie central bank enjoys sovereign immunity when it exercises central banking functions. See id. at 190, 194. The United States as amicus curiae offered its understanding of central bank functions as follows: Central banking activities include, among other things, issuance of a country's currency; holding of the country's currency reserves or precious metal reserves; maintenance of domestic reserves of depositol institutions; regulation of depositol) institutions; engaging in open market operations; setting monetary policy; settlement of clearing balances in the payments system; administration of credit controls; serving as a banker's bank to private sector banks and as lender of last resort; and providing general banking services to the parent government. Brief fbr the United States of America as Amicus Curiae in Support of Reversal at I 112, NI Capital. 652 F.3d 172 (No. 10-1487). The court had invited the United States to address two questions: "(1) whether the Banco Central de ]a Republica Argentina (BCRA) [was] thre 'alter ego' of the Republic of Argentina ... and (2) if so, whether the BCRA's assets at the Federal Reserve Bank of New York (FRBNY) [were] immune from post-judgment attachment." Id. at 1-2. 33. See LASTRA, supa note 16, at 26. 34. See Costa v. Ente Nazionale per I'Energia Electtrica (ENEL), Case 6/64, [1964] E.C.R. 585, at 593 ("By creating a Community of unlimited duration, limited surrender, a nonexclusive transfer of sovereign powers. The members of the Eurozone retain their national sovereignty in those domains where no other consensual limitation has been agreed upon. 35 The holder of monetary sovereignty for those Member States whose currency is the euro is not the ECB but the European Union, in the composition of the seventeen member states that have pooled monetary sovereignty and formed the Eurosystem. , 6 The ESCB and ECB exercise the Union's "exclusive competence" in monetary policy, and since only the ECB has legal personality (the ESCB and the Eurosystem do not), the ECB holds the rights and obligations. The ECB has used standard and nonstandard measures of monetary policy in response to the crisis to ensure the proper working of monetary transmission and the provision of liquidity to the euro area banking system. Standard measures include open market and credit operations (Article 18 of the ECSB Statute) and minimum reserves (Article 19 of the ECSB Statute). , 7 Following standard measures, the ECB lowered interest rates by twenty-five basis points in November 2011 and by another twenty-five basis points in December 2011. Since then, the rate on the main refinancing operations has been at the historically low one percent. - 8 Article 20 of the ECSB Statute allows for other instruments of monetary control. , ' An example of nonstandard measures-aimed at preserving the proper transmission of monetary policy-is the Securities having its own institutions, its own personality, its own legal capacity and capacity of representation on the international plane and, more particularly, real powers stemming from a limitation ol sovereignty or a transfer olfpowers from the States to the Conmunity, the Member States have limited their sovereign rights and have thus created a body of law which binds their nationals and thcinselves."). 35. TEUI post-ILisbon, supra note 8, art. 5(2), 2010 O.J. . 83, at 18 ("Competences not conirred upon the Union in the Treaties remain with the Member States."); See Costa, [1964] E.C.R. 585, at 593 (describing the "transfer of powers" as occurring within limited fields"). 36. See LASTRA, supra note 16, at 28. "This isin line with the established doctrine of monetary sovereignty, where the state, as representative of the will of the people, is the holder of such sovereignty, even ifthe exercise of some of its prerogatives-such as the monopoly of note issue-is the responsibility of the central bank." 28 n.87. 37. See ESCB Statute, sup a note 25, arts. 18-19.2010 OJ. C 83, at 238. 38. See Peter Praet, ECB Exec. Bd. Member, Lecture at the International (enter for Monetary and Banking Studies: Monetar) Policy at Crisis Times (Feb. 20, 2012), availableat IIp:// I20220.en html. 39. ESCB Statute, spra note 25, art. 20, 2010 O.J. C 83, at 239. Markets Programme, which was established in May 2010 as an instrument of monetary policy in response to the emerging debt crisis in the Eurozone. 40 According to the preamble of the Decision of the European Central Bank of May 14, 2010, establishing a Securities Markets Programme: (1) Pursuant to Article 18.1 of the Statute of the ESCB, national central banks of Member States whose currency is the euro (hereinafter the "euro area NCBs") and the European Central Bank (ECB) (hereinafter collectively referred to as the "Eurosystem central banks") may operate in the financial markets by, among other things, buying and selling outright marketable instruments. (2) On 9 May 2010 the Governing Council decided and publicly announced that, in view of the current exceptional circumstances in financial markets, characterised by severe tensions in certain market segments which are hampering the monetary policy transmission mechanism and thereby the effective conduct of monetary policy oriented towards price stability in the medium term, a temporary securities markets programme (hereinafter the "programme") should be initiated. Under the programme, the euro area NCBs, according to their percentage shares in the key for subscription of the ECB's capital, and the ECB, in direct contact with counterparties, may conduct outright interventions in the euro area public and private debt securities markets. (3) The programme forms part of the Eurosystem's single monetary policy and will apply temporarily. The programme's objective is to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism. (4) The Governing Council will decide on the scope of the interventions. The Governing Council has taken note of the statement of the euro area Member State governments that they "will take all measures needed to meet their fiscal targets this year and the years ahead in line with excessive deficit procedures" and the precise additional commitments taken by some euro area Member State governments to accelerate fiscal consolidation and ensure the sustainability of their public finances. (5) As part of the Eurosystem's single monetax policy, the outright purchase of eligible marketable debt instruments by Eurosystem central banks under the programme should be implemented in accordance with the terms of this 41 Decision. Another nonstandard measure is that which gives Eurosystem counterparties (European banks) US dollars that the ECB has obtained via the dollar swap lines offered to it by the Federal Reserxe Bank of New York.42 Article 127(2) of the TFEU and Article 18 of the ECSB Statute grants the ECB with competence to provide market liquidity.4 The ECB has indeed provided hugely expanded liquidity operations during the twin crises (financial and sovereign debt crises) and has made ample use of the considerable set of operational tools at its disposal to handle a liquidity crisis. However, what constitutes "ordinary" liquidity assistance as opposed to "emergency"/lender of last resort ("LOLR") liquidity assistance blurs during a crisis, since the dring of the interbank market gives the central bank a primary role in the provision of liquidity.44 Although the ECB is 41. 8. 42. See European Central Bank Guideline No. ECB/2000/17 on Monetry Policy Instruments and Procedures of the Eurosystemn, 2000 O.J. L 310/1, Annex 1. at 2: see also Tender Procedure fir the Provision ojf S Dollarsto Erosystent Counterparties,FUR. CENT. BANK (Dec. 6, 2011), http:/ tenderprocedure.pdt. Since December 2007, the US Federal Open Market Committee has authorized dollar liquidity swap lines with the ECB and other central banks to provide liquidity in US dollars to overseas markets, in accordance with Section 14 of the Federal Reserve Act and in compliance with athorizaions, policies, and procedures established bi the Federal Open Market Committee. The Eorosystem's most recent neasures, taken in December 2011, have helped to nainrain the credit flow to the real econony. See Federal Reserve Act of 1913, § 14, Pub. L. No. 63-43, 38 Stat. 251. 264-65: Credit ard Liquidity Prograns and the Balance Sheet, BOARD GOVERNORS FED. REs. Sys., http: //www.tde oinetarypolicy/bsL liq(uidiryswaps.ln (last updated Nov.30, 2011) (describing recent authorization of foreign currency liquidity swap lines with various central banks, including the E-C). 43. TFEU, supra note 3,art. 127(2), 2010 OJ. C 83. at 102; ESCB Statute, supra note 25. art. 18, 2010 J.C 83, at 238. 44. See ILastra, Central Barking, supra note 12, at 262-68; see also Rosa I.astra & Andrew Campbell, Revisiting the Lender of Last Resort, 24 BANKiNG & FIN. L. REV. 453 (2009); Rosa Maria Lastra, Leader of Last Resort: An InternationalPerspective, 48 INT'L & CoNp.I.Q.340 (1999). competent to provide liquidity assistance to "financially sound" banks, 45 the classic LOLR assistance (collateralized loans to troubled illiquid but solvent banks) remains a national competence unless the problems originate in the payment system. 46 In 2000, the ESCB adopted a restrictive reading of the ECB competences, concluding that the provision of LOLR assistance to specific illiquid individual institutions was a national task of the NCBs in line with Aiticle 14.4 of the ESCB Statute, a provision that allows NCBs to perform non-ESCB tasks on their own responsibility and liability.47 In December 2011, the Governing Council of the ECB announced additional enhanced credit support measures to 45. EUROPEAN CENT. BANK [ECB]. THE IMPLEMENTATION OF MONLTARY POLICY IN THE EURO AREA: GENERAI )OCUMENTATION ON EUROSYSTEM MONETARY POLIcy INSTRUMENTS AND PROCEDURES 11 (2008), available at http://ww.ecb.europa.eui pub/pdf/other/gendoc2008cn.pd 46. SeeTFEU, sup anote 3, art. 127(2), 2010 0.J. C 83, at 102. 47. ECB, ANNUAL REPORT 1999, at 98 (2000); see ESCB Statute, supranote 25, art. 14.4. 2010 O:J. C 83, at 237 ("National central banks may perform functions other than those specified in this Statute unless the Governing Council finds, by a majority of two thirds of the votes cast, that these intcrfere with tihe objecives and tasks of the ES(B. Such functions shall be peltornmed on tihe responsibility and liability of national central banks and shall not be regarded as being part of the functions of the ESCB."). The ECB can assess whether a given lender of last resort operation by a National Central Bank ("NCB") intrcires with monetary policy and, if so, either prohibit it or subject it to certain conditions. To this elfect, the ECB has some internal rules requiring ex ante notification to the Governing Council of such lender of last resort operations. ESCB Statute, supra note 25, art. 14.4, 2010 04. C 83, at 237. The ECB described this system in its 1999 Annual Report: The institutional finamework foi financial stability in the EU and in tie euro area is based on national competence and international cooperation.... Coordination mechanisms are primarily called for within the Eurosystem. This is the case foi entergenc liquidih, assistance (ELA), which embraces the support given by central banks in exceptional circumstances and on a case-by-case basis to temporarily illiquid institutions and markets.... [I]f and when appropriate, the necessary mechanisms to tackle a financial crisis are in place. The main guiding principle is that thre competent NCB takes the decision concerning the provision of EIA to an institution operating in itsjurisdiction. This would take place under the responsibility and at the Cost of the NCB in question.... The agreement on ELA is internal to the Eurosysteil and therefore does not alfect the existing arrangements between central banks and supervisors at the national level or bilateral and multilateral co-operation among supervisors and between the laier and tlie EurosystL. ECB, supra, at 98. support bank lending and liquidity in the euro area money market.48 In particular, the Governing Council decided: To conduct two longer-term refinancing operations (LTROs) with a maturity of [thirty-six] months and the option of early repayment after one year.... [and] [t]o increase collateral availability by (i) reducing the rating threshold for certain asset-backed securities (ABS) and (ii) allowing [NCBs], as a temporary solution, to accept as collateral additional performing credit claims (i.e. bank loans) that satisfy specific eligibility criteria.49 Long-term refinancing operations ("LTRO") are nonstandard measures designed to alleviate severe credit conditions among the countries of the Eurozone. 5°1Two LTRO tranches have been announced so far, one that took place in December 2011, and a second to occur in February 2012.51 The EMU rests upon a relatively strong "M" and a weak "E."52 The weak economic pillar of EMU provides the background to understanding the December 2011 adoption of the Treaty on Stability, Coordination and Governance in the Economic and Monetary Union ("Fiscal Compact") by the Heads of State or Government of Member States in the Eurozone. 53 This is intended to move the Eurozone towards a stronger economic union, including a new fiscal compact and strengthened economic policy coordination to be implemented through an international agreement. 4 The architecture to deal with sovereign debt crises in the Eurozone will become more permanent once the seventeen Eurozone Member States ratify the Treaty Establishing the European Stability Mechanism ("ESM"),55 signed on February 2, 2012 and expected to become operational in July 2012.5 The ESM will be an international financial institution based in Luxembourg and designed to provide financial assistance to Eurozone Member States who are experiencing or being threatened by severe financing problems, when ESM action is indispensable for safeguarding financial stability in the Eurozone area as a whole. 57 As a permanent mechanism, the ESM will take over the tasks currently fulfilled by the European Financial Stability Facility and the European Financial Stabilisation Mechanism. 58 must only be approved by twelve of the seventeen Eurozone Member Sttes. See Ireland Votes in Favour of EU Fiscal Pact. BBC NEWS (June 1. 2012, 12:18 AM), http:/ The Fiscal Compact was signed on March 2, 2012, but it has yet to be ratified by twelve Eurozone stats. See Agreerment Details. COUNCIL EUR. UNION, st00tscg26en12.pdf (last visited May 25, 2012). 54. See Ireland Votes in Favourof EUFiscalPact,supranote 53. 55. Treat, Establishing the European Stability Mechanism, Feb. 1, 2012 (not yet ratified), aile at enl2.pdf. 56. See (OUNCIL OF THE EUROPEAN UNION, FACTSHTLL: TREATY ESTABLISHING THE Et ROPEAN STABJI ITY MECHANISM 1 (2012), available at http://wvw 127788.pdf. 57. Id."The original version of the treaty was signed on 1 july 2011, but it has been modified to incorporate decisions taken by the heads of state and government of the curo area on 21 july and 9 December 2011, ainied at improving the effectiveness of the mechanism." Id.()ne ratified by the seventeen Eurozone Member Sttes, the trca "will enter into force and the [European Stability Mechanisn will] becomre operational as soon as possible: tihe target date is July 2012, a year earlier than originally planned." Id. 58. Id. "With the accelerated entry into force, the [European Stability Mcchanism] will now operate alongside the [European Financial Stability Facility] for [twelve] months. Their joint lending capacity is currenty set at C500 billion, subject to reassessment in March 2012. With tihe subscribed capital of C700 billion (C8(0 billion as paid in capital, tilerest as callable), the initial iLaxiLitun lending capacit of the [European Stability"Mechanism] isset at C500 billion." Id. These measures notwithstanding, the Eurozone still falls short of a fiscal union with a centralized system of fiscal transfers. That will in principle require a treaty revision. The tension inherent in the differences in jurisdictional domain was further evidenced by the UK veto of the ESM in December 2011.59 II. A NOTE ON SUPERVISIOA\ AND FINANCIAL STABILITY The consistency between one instrument (monetary policy) and one goal (price stability) that is present in the pursuit of monetary stability contrasts with the multiplicity of instruments and goals that exist with regard to the pursuit of financial stability. This makes the pursuit of financial stability a difficult endeavor, and this difficulty is further compounded by the problems of jurisdictional domain, since financial stability is a goal that transcends national boundaries. Like a tsunami that does not respect national boundaries, episodes of financial instability have a transnational dimension, thus requiring a transnational solution. Financial stability also is a goal that transcends institutional mandates. The Draft Statute of the ESCB-released by the Committee of Governors of the European Community ("EC") Central Banks in November 1990-included prudential supervision amongst the basic tasks of the ESCB.1 0 However, the opposition of some countries (notably Germany) to such an inclusion means that the final version of the ESCB Statute and of the EC Treaty (as revised by the Maastricht Treaty) only referred to supervision in a limited way, as a nonbasic task.6' 59. See Gavin Hewitt, David Cameron Blocks EL- Wide Deal to Tackle Earn Crisis, BIC NFWs (Dec. 9, 2011, 10:14 AM), http:/ 6104275. 60. Rosa M. Lastra, The Independence of the European S)sten of Central Banks. 33 HARV. INT' L. 475, 507-09 (1992). 61. TFEU, supranote 3, art. 127(4)-(6), 2010 O4. C 83. at 102-03; ESCB Statute, supra note 25. art. 25. 2010 O.J. C 83, at 240. However. Article 127(6) of the TFEU left the door open for a possible expansion of supervisor responsibilities foIllowing a simplified procedure (simplified in the sense that it does not require the formnal arnendnent of the TFEU, but not likely to be exercised lightly due to thc requirement of unanimity in the Council plus the assent by the European Parliament). Although the TFEU refeirs to to prudential supeivision of credit institutions and othier financial institutions wi Lthe exception of insurance undertakings," it is an anachronism to do so. TFEU, supra note 3, art. 127(6), 2010 O.J. C. 83, at 103. Financial developments in It is now widely accepted that the neglect of financial stability prior to the crisis was an important contributing factor62 Financial stability should be the ultimate goal of supervision, regulation, and crisis management. It is a national, European, and international goal, but a commonly accepted definition is still lacking, complicating its pursuit. A distinction is now made between macro-prudential supervision and micro-prudential supervision. According to the House of Lords Report on the Future of EU Supervision and Regulation: Macro-prudential supervision is the analysis of trends and imbalances in the financial system and the detection of systemic risks that these trends may pose to financial institutions and the economy. The focus of macroprudential supervision is the safety of the financial and economic system as a whole, the prevention of systemic risk. [] Micro-prudential supervision is the day-to-day supervision of individual financial institutions. The focus of microprudential supervision is the safety and soundness of individual institutions as well as consumer protection. The same or a separate supervisor can carry out these two functions. If different supervisors carry out these functions they must work together to provide mechanisms to counteract macro-prudential risks at a micro-prudential level.6,3 While micro-prudential supervision remains a national competence, it is subject to increasing centralization since the establishment of the European Supervisory Authorities-the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority. Macro-prudential supervision, on the other hand, is a task entrusted to the European Systemic Risk the last decades have rendered this exception meaningless, since nowadays financial conglomerates encompass banking, securities, and insurance undertakings. 62. See gernerall, e.g., HOWA RD )AVITS, THE FINANCIAL CRISIS: WHO IS TO BILAMF? (2010); Rosa M. Lastra & Geoftrey Wood, The Crisis of 2007-2009: Nature, Causes and Reactions, 13.J. INT'L EcON. L. 531 (2010). 63. See EUROPEAN UNION COMMITTEE, HOUSE OF IORDS, THE FUTURE OF EU F1NANCIAL REGULATION AND SUPLRVISION VOLUML I, RLPORT, 2008-9. H.L. 106-1, 1[ 2728 (U.K.), available at littp:// N"w.publications.parliainiuuk/pa/ld2OO809/ldselect/ Ideucomi 106/ 106i.pdf. Board' 4 although the ECB and NCBs also are competent to contribute to prudential supervision and issues of financial stability. This can pose problems or tensions, particularly with regard to non-Eurozone NCBs. A common trend in response to the crisis is to give the central bank responsibility for macro-prudential supervision.65 The reinforcement of the role of the central bank now coexists with greater political intelerence and reduced independence for central banks and supervisory agencies because of the fiscal costs of the bailout or rescue packages. This latter trend is in stark contrast with the movement towards independence that characterized the framework of central banks prior to the crisis. Of course, the ECB is better shielded from political pressure than other central banks with jurisdictional domain in the national arena. But it is not exempt from such pressure. 64. TFEU, supra note 3, art. 114, 2010 O.J. C. 83, at 94 (providing the legal basis for the regulations); id. art. 127(5), at 103 (providing the legal basis of the decision granting certain tasks to the ECB). In October 2009, the European Commission proposed a directive amending a number of directives regarding the European Banking Authority, the European Insurance and Occupational Pensions Authority, and the European Securities and Markets Authority. See Commission of the European Communities, Directive of the European Parliament and of the Council Amending Directives 1998/26/EC, 2002/87,/E(, 2003/6/E(, 2003/41/E( , 2003/71/E(, 2004/39/EC, 2004/109iEC, 20)5/60/E(, 2006/48/E(, 2006/49/EC and 2009/65/EC in Respect of the Powers of the European Banking Authority, the European Insurance and Occupational Pensions Authority and the European Securities and Markets Authority: Proposal f-omn the Commission, COM (2009) 576 Final (Oct. 2009). The Economic and Financial Aflairs Council reached a broad consensus regarding the main features of the European Systemic Risk Board at its meeting on October 20, 2009. See Council Press Release, 14601/09 (Oct. 20 2009). available at http: //ww.consilium.europa.euiuedocsicms-dat/ docs/ pressdataien/ ecolin/ 10622.pdf. The Economic and Financial Afairs Council, on December 2, 2009, approved the creation of the three new European Supervisory Authorities, which together with the European System Risk Board ("ESR V) (for which broad political agreement wvas reached on October 20, 2009) formn the new EU supervisory structure. See Council Press Release, 16838/09 (Dec. 2, 2009), available at http:/ / /ucdocs/ cmsI)ataidocsi pressdat / en iecofin,/ 1111706.pdl. The new authorities and the ESRB took up their duties at the beginning of 2011. 65. For a review of this argument, see Luis Garicano & Rosa M. Lastra, Towards a New Archie'trefor Financial Stabiliy: Seven Principles. 13 j. INTL ECON. L. 597, 609-13 (2010). The Financial Services Bill published in the United Kingdom on January 27, 2012, substantially expands the mandate of the Bank of England in terms of macroprudential supervision and the pursuit of financial stability. See Press Release, HM Treasury, Government Publishes Financial Services Bill (Jan. 27, 2012), available at 08 12.htm. I1. ORGANIZATIONAL COMPLEXITY,' As I have discussed in earlier writings, the European System of Central Banks is a complex central banking system. This complexity is multi-layered. While the structural complexityECB and NCBs-is a permanent feature of the system, the other layers of complexity can have a dynamic or transitory nature (the division between "ins" and "outs" and the dual nature of NCBs as operational arms of the ESCB and as national agencies). In terms of the ECB's internal organizational structure, the Eurosystem is governed by the Governing Council and the Executive Board, the two main decisionmaking bodies of the ECB. The NCBs of the countries that do not participate in the EMU ("Member States with a derogation"), either because they have opted out ([Denmark and the United Kingdom]), rejected membership through a referendum (Sweden), or have not qualified yet still participate in the third governing body of the ESCB, the General Council6 7 The tasks of the General Council can be classified into coordinating functions (between the monetary policies of the "outs" and that of the Eurozone) and preparatory functions (helping the "outs" prepare for eventual Eurozone membership). IV. STATUS, INDEPENDENCE,AND ACCOUNVTABILITY The structural and functional duality of the ESCB, its organizational complexity, and the noveltv of a truly "independent institution" within the Community's institutional structure triggered a heated legal debate with regard to the constitutional position of the ECB. 8 The ECJ clarified the legal position of the ECB in saying that "the ECB, pursuant to the EC Treaty, falls squarely within the Community framework. "6 The Treaty of Lisbon confirmed 1278 FORDHAM INTEI'vA TIOXAL LA J14OURNAL [Vol. 35:1260 the position of the ECB as a core institution of the European Union. 7 The Court ofJustice for the European Union ("Court") has clarified the extent of the independence of the ECB in the European Anti-Fraud Office (OLA-F) case. 71 The Court held that the ECB "should be in a position to carry out independently the tasks conferred upon it by the Treaty." 72 The Court further stated that: Article 108 [EC] seeks, in essence, to shield the ECB from all political pressure in order to enable it effectively to pursue the objectives attributed to its tasks, through the independent exercise of the specific powers conferred on it for that purpose by the EC Treaty and the ESCB statute.73 The Court is clearly- in favor of a limited notion of independence, confined by the functions, tasks, and powers specifically conferred upon the ECB. The Court upheld a concept of "independence within the Community structure" (not independence from the Community) that is reminiscent of the notion of "independence within government." 74 The "recognition that the ECB has such independence does not have the consequence of separating it entirely from the European Community and exempting it from everv rule of Community law.'"75 The ECB is independent "organically," "functionally," and "financially. ' 76TThe "organic independence" is evidenced by a number of safeguards or guarantees such as the appointment and removal procedures of the members of its governing bodies (e.g., Articles 11(2) and 11 (4) of the ESCB Statute with regard to the Executive Board and Article 10 of the ESCB Statute with regard to the Governing Council). The "functional" independence is enshrined in EC Treatv Article 108 (as recognized by the ECJ in the OLAF case) and also is safeguarded by other provisions, such as those dealing with the prohibition to finance public sector deficits via central bank 70. TEU post-Lisbon, supranote 8, art. 13, 2010 O.J. C 83, at 22. 71. ECB, [2003] E.C.R. 1-7147, 1[[ 130-35. 72. Id. [ 130. 73. Id. [ 134. 74. See IM. OF (OVERNORS OF THE FED. RESERVE Sys.. THE FLDLRAL RESERVE SYSTEM PURPOSES AND FUNCTIONS 2 (1984). 75. ECB, [2003] E.C.R. 1-7147, 135. 80. LA1STRA, supra note 16, at 47-49. 224-26. 20121 EVOLUTION OFTHE EUROPEAN CENTRA L BANK credit (e.g., Article 21 (1) of the ESCB Statute) or those dealing wvith the regulatory powers of the ECB. The ECB is independent within the limits of the powers expressly conferred upon it by the Treaty and the ESCB Statute. The "controls" to which the ECB is subject constitute another limit. The European Court of Justice in OLAF specifically mentioned the review by the Court of Justice and the control by the Court of Auditors. 7 These are, in fact, important mechanisms of accountability. 8 Since 1992, I have advocated the need for "accountable independence." 79 This notion of independence is the one that Geoffrey Miller and I have developed8. s1An independent central bank is "a particular kind of institution that is independent in some respects, but highly constrained in others," constrained by the goal, by the statutory objective, and by the demands of democratic legitimacy and accountability.,' Although a consensus has been reached on the definition and adequate quantum of independence, a debate is still going on regarding the definition and the adequate quantum of accountability. The ECB has often been criticized for its alleged lack of accountability and transparency. But what do we mean by accountability and transparency? There are several paradigms and forms of accountability. 82 Depending on which paradigm one judges the institution (the ECB), one reaches different results. Fabian Amtenbrink argued that the existing democratic deficit of the European Central Bank is an expression of the democratic deficit of the European Community at large, rather than a "particular deficiency" of the institution8 3 Chiara Zilioli argued that the ECB is accountable if we use a new "economic notion of accountability" rather than the traditional "formalistic" notion of accountability based on the theory of the division of powers and the existing system of checks and balances.84 The economic notion of accountability (i.e., performance accountability) "is based on the assessment of the results achieved" in relation to the specified statutory objective, namely price stability*85 In my opinion, the new paradigm also is based on participation (i.e., consultation) and transparency (i.e., disclosure). Accountability can only be judged through the life of the institution. Accountability cannot be guaranteed by the fact that at the initial stage of its creation, it is legitimate democratically. It is in its continuing operations and policies that the institution must be subject to appropriate mechanisms of accountability. And if the ECB gives proper account, explains and justifies tle actions or decisions taken (or omitted) in the exercise of its responsibilities, is subject to judicial review and audit control, and responds to Parliament through reports and testimonies, it can bejudged to be sufficiently accountable. CON\CLUSION The ECB has played a key role during the twin financial and sovereign debt crises in Europe. It has been an institution that has proved to be adept at evolving, stretching the mandate granted to it by the TFEU to the limits of the law while remaining within the law's bounds. Ordinary times are not the same as extraordinary times. The success of institutions is to tread carefully on what is extraordinary and try to channel the instruments at their disposal towards a return to ordinary times. Central banks often act as a last resort: purchasers of last resort, lenders of last resort, liquidity of last resort, and investors of last resort. These last resort considerations are suited for extraordinary times. It is the immediacy of the availability of central bank liquidity that makes such liquidity essential when other sources either dry out or become prohibitively expensive. 84. See Chiara Zilioli. Accoantability and ldepedence: 1rrecocilable Values or Complermentay Instrumetsfr Democra~ y?:The 5peutTc Case ,f he E #oe',. Certra Bank, in 11 MILANGES EN HOMNLN(E .JANAVIC-TOR LOuIS 395, 402-05 (Gcorgcs Vandcisandcn et al. eds., 2003). 85. Id. at 402-04. Financial stability is a goal that transcends institutional mandates and geographic boundaries. The relative simplicity of one goal (price stability)-one instrument (monetary policy) that characterizes the monetary responsibilities of central banks contrasts with the multiplicity of instruments (supervision, regulation, crisis management, LOLR, and others) that characterize the pursuit of financial stability. Since supervision and regulation also are aimed at other goals (e.g., consumer protection), the mandate of central banks in the pursuit of financial stability and the design of central bank independence in such pursuit are more complex than the mandate of monetary stability and the design of monetary independence. In the light of the Eurozone crisis, the time is ripe to give the ECB an adequate mandate in the pursuit of financial stability and to entrust it with appropriate supervisory responsibilities, activating the enabling clause, i.e., Article 127(6) of the TFEU.s If the ECB is going to continue to provide assistance "in a rainy day" it needs to know what is going on "in a sunny day." Financial supervision in the single market can be organized according to the Champions League model, with some institutions competing in the European context and others only in the national arena. The former could be supervised by the ECB. 12. For an analysis of the evolution of central banking tuncions, see, for example, ROSA MARiA IASTRA, CENTRAL BANKING AND BANKING RFi(UI ATION 249- 86 ( 1996 ) [hereinafter LASTRA,CENTRAL BANKING] and Rosa M. Iastra , CertralBark lnrdeperdence and FinancialStabilit,. 18 BANCO DE ESPA:A ESTABILIDAD FINANciILR . A 49 , 51 - 52 ( 2010 ) [hereinafter Lastra, Central Bark Irdependence] . See also Patricia S.Pollard, A Look Jn1,id Two CentralBaoks: The uiropean CentralBank and the FederalReserve, 85 FED.RES. BANK ST . LoLis REV . 11 , 16 , 18 - 19 ( 2003 ). 13. See Iastra , Centra Bahnk Jrdeende e, supra note 12 , at 51. 14. See general3 (HARLES GOOD-JART, THE EVOLUTION OF CENTRAL BANKS ( 1988 ). 15. Federal Reserve Act of 1913 , Pub. L. No. 63 - 43 , 38 Star. 251 , 251 (codified as amended in scattered sections of 12 U .S.C.). 40. See European Central Bank Decision No. ECB/2010/5 Establishing a Securities Markets Programme, 2010 () . J. 1 124 /8. 48. See Press Release, ECB, ECI Announces Measures to Support Bank Lending and Money Market Activity (Dec. 8 , 2011 ), available at http://," date/2011 /html/prl 11208_ 1 .en.hiil [hereinafter ECB Press Release]. 49. Id . "After one year counterparties wvill have the option to repay any part of the arnounts they are allotted in the operations, on any day that coincides with the settlemCnt (lay of a main refinancing operation. Countlerparties must inforim their respective NCB, iving one wveek's notice, of the amount they wvish to repay." Id. 50. Id . 51. See id.; see also Summary of Ad Hoc Comunication Related to Voneta) , Policy Impleme ntation Issvued b the ECB Since 1 Ja 2200a7y FE0UiR . CENT . BANK, http://ww. /mopo/implement L/oo/html/cominunication.enh. tnl (last visited May 25 , 2012 ). 52. See Mark Milner, Europe's FinancialArhitect,GUARDIAN (U.K.) , Aug. 15 , 2003 ,'business/2003/aug/16/3. According to Alexandre Lamfalussy, "The greatest weakness in ... [ecconomic and monetary union]is the E. The M Part is institutionally wvell organised. We have a solid... framework. We don't have that tor economic policy." Id. 53. Treaty on Stability, Coordination and Governance in the Economic and Monetary Union art . 111 ( 1 ) (e), Mar. 2 , 2012 (not yet ratified). The Treaty on Stability, Coordination and Governance in the Economic and Monetar) Union, also known as the Fiscal Compact, is an intergovernmental agreement,which isseparate froi an EUwide treaty that must be ratified by twenty-seven member states . Instead, this agreement 66. This Section draws on Rosa Maria Iastra, The Division ofResponibiitiesBe ween the European CentralBank and the National Central Banks Within the European Sstern of CentralBanks, 6 (OLUN . J. EUR . L., 167 . 167 - 80 ( 2000 ), and on LASTRA, supra note 16 , at 210-14. 67. Id .arts. 44 - 46 , at 248-49. 72. See generall LASTRA , sup a note 16 . 69. Commission v.ECB, Case C -I 1 /00, [2003] E.C. R.1- 7147 , 1 92 . 77. ECB, [2003] E.C. R. 1- 7147 , [ 135 78. See I TRA , supranote 16 , at 224-26. 79. Id . at 481-82. 80. See Rosa M. Lastra & Geoftrey P. Miller , CentralBank Independence in Ordintacl and Extraordinary Times, in CENTRAI BANK INDEPENDENCE: THE ECONOMIIC FO NDATIONS, THE CONSTITUTIONAL IMPI ICATIONS AND DEMOCRATIC ACCOUNTABIIITY 31 , 31 - 50 (Jan lKkincinan ed., 2001 ). 81. Id . at 32. 82. See Rosa M. Lastra , How Much Accountabilift for CentralBanks and Scpeqwisor? 12 CENT . BANKING 69 ( 2001 ) ; see alsoRosa M. Lasura & Heba Shams, PublicAccoantabdity in t'e Fi- , n , .L' Sector, in REGU I ATING FINANCIAI SERVICES AND MARKETS IN THE 2ST CENTURY 165, 188 (Eilfs Ferran & Charles A . E. Goodhart eds., 2001 ). 83. See FA ~ nAN AMTENBRINK . THE DLMOCATic ACCOUNTA ILITY OF CENTRAL BANKS: A COMPARATIVT STUDY OF THE EUROPEAN CENTRAL BANK 9 ( 1999 ).

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Rosa M. Lastra. The Evolution of the European Central Bank, Fordham International Law Journal, 2012,