The European System of Central Banks: A Comprehensive Overview of its History, Role, and Functions

1. THE EUROPEAN SYSTEM OF CENTRAL BANKS INTERNATIONAL ORGANIZATIONS

2. AGENDA • Introduction • History of the economic and monetary union in Europe & Convergence Criteria • The European Central Bank • Historical background of ECBand role of the ECB in the EU • The European System of Central Banks • Historical background of ESCB • Role of the ESCB in the EU • Organization of ESCB • Governing Council and Executive Board of the ESCB • The Eurosystem • Sixpack Agreement • The European Semester • Country-specific Recommendations – Polish National Reform Programme • The European System of Central Banks Report (2012) • Sources and bibliography

3. INTRODUCTION History of the economic and monetary union in Europe • 1979 – creation of European Monetary System (EMS) by the EEC • 1986 – Single European Act, creation of single market • 1992 – Maastricht Treaty – Treaty on the European Union • 1993 – creation of Single European Market • 1998 – creation of European Monetary Institute • 1991 – funding of European Central Bank • 2002 – implementation of Euro currency • 2010 – European Semester • 2011 – Sixpack Agreement

4. INTRODUCTION Convergence Criteria • High degree of pricestability – inflationrate not higherthan 1.5 percentagepoints of threebest performing MemberStates, • Sound public finances - the ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding financial year and the ratio of gross government debt to GDP must not exceed 60%, • A stable exchange rate - the observance of the normal fluctuation margins provided for by the exchange-rate mechanism of the European Monetary System, for at least two years, without devaluing against the currency of any other Member State, • Low and stablelong-term interestrates - the nominal long-term interest rate must not exceed by more than 2 percentage points that of, at most, the three best-performing Member States in terms of price stability.

5. THE EUROPEAN CENTRAL BANK Historical background & general information • One of the core institutions of the European Union, • Signed under the Treaty on European Union (Maastricht Treaty), • Established in 1998, • Central bank for the whole Eurozone area, • Governs monetary policy of the EU member states, • Accounted for one of the most important and strongest Central Banks on the World • Owned by all 27 National Central Banks • Located in Frankfurt, Germany • Current President – Mario Draghi from Italy

6. THE EUROPEAN CENTRAL BANK Role of the European Central Bank in the EU • Primary objective is PRICE STABILITY – keeping the inflation rate at very low level and preventing it from deflation (around 2%), • Defines and implements the monetary policy strategy for the Eurozone, • Conducts foreign exchange operations, • Governs foreign reserves of the European System of Central Banks, • Promotes smooth operations of the financial markets infrastructure , • Issues euro coins and possess the exclusive right to authorize the issuance of euro banknotes, • Conducts direct financial market interventions – European sovereign debt crisis, • Responsible for the cooperation within EU and internationally with third bodies, foreign central banks and other organizations, • Claimed to be politically and financially independent (own budget).

7. THE EUROPEAN SYSTEM OF CENTRAL BANKS Historical background & general information • Established under the Maastricht Treaty and the Statue of the European System of Central Banks, • Comprises the ECB and all 27 National Central Banks of EU Member States, • In contrary to the Eurosystem, consists of the countries which have not adopted yet Euro, • Primary objective – PRICE STABILITY

8. THE EUROPEAN SYSTEM OF CENTRAL BANKS Role of the ESCB in the EU • Primary objective – PRICE STABILITY, • Supports the general economic policies in the union in a view to contribution to the achievement of the objectives of the whole European Union, • Conducts policies pursued by the competent authorities relating to the prudential supervision of credit institutions and the stability of the EU financial system, • Operates in the financial market, by for example buying and selling outright or lending and borrowing claims and marketable instruments in every EU currency as well as precious metals like gold, • conducts credit operations with credit institutions and other market participants, with lending being based on adequate collateral, • Together with ECB may offer advice to the Council and Commission and other authorities on the scope and implementation of Union legislations relating to the prudential supervision of credit institutions and the stability of the financial system of EU.

9. THE EUROPEAN SYSTEM OF CENTRAL BANKS Role of the ESCB in the EU • National central banks ought to be sole subscribers and holders of the capital of European Central bank(5000 million Euro), • Prepares regulations, in order to ensure efficient and sound clearing and payment system within the borders of EU and with other countries, • Acts in accordance with the guidelines and instructions of the ECB, • Entitled to establish relations with central banks and financial institutions in countries within borders of EU as well as institution established abroad, • Allowed to sell spot and forward all types of foreign exchange assets as well as precious metals.

10. THE EUROPEAN SYSTEM OF CENTRAL BANKS ORGANIZATION • The process of decision-making in the Eurosystem is centralized through decision-making bodies e.g. Governing Council and the Executive Board, • MS that are not members of the Eurozone are the members of the ESCB with a special status – they do not take part in the decision making concerning the single monetary policy for the Eurozone, however they are still allowed to conduct their national monetary policies, • Completely independent institution, • Can be only governed by the decision-making bodies of the ECB – Governing Council and Executive Board of ESCB.

11. THE EUROPEAN SYSTEM OF CENTRAL BANKS Governing Council • Consists of the members of the Executive Board of the ECB and the governors of the NCB’s of the Eurozone countries, • Must meet at least ten times a year, • Adopts guidelines and takes the decisions necessary to ensure the performance of the task of the ESCB, • Formulates the monetary policy of the Union (setting monetary objectives, key interest rates and the supply of reserves in the ESCB), • Adoptes Rules of Procedure which determine the internal organization of the ECB and its decision-making bodies, • Exercises the advisory functions, • Takes the most significant and impactful decisions regarding the Eurosystem.

12. THE EUROPEAN SYSTEM OF CENTRAL BANKS Executive Board • Consists of the President, Vice-President and four other members who are chosen from professionals in monetary or banking matters, • Appointed by government of the MS on the recommendation of the Council of Ministers, European Parliament and Governing Council of EC, • Prepares meetings of the Governing Council, • Implements monetary policy in the euro area in the accordance with the guidelines and decisions laid down by the GC , • Manages day-to-day business of ECB, • Collects statistical information, • Prepares the ECB’s annual reports, • Establishes necessary rules for standardizing the accounting and reporting of operations undertaken by the NCBs, • ECB’s advisory functions, • Sets conditions of employment of the members of staff of ECB

13. THE EUROPEAN SYSTEM OF CENTRAL BANKS The Eurosystem • Comprises the ECB and the National Central Banks of the EU Member States which have adopted Euro currency - sub-set of the ESCB • Carries out the central bank functions for the euro area, • ECB and the NCBs jointly contribute to attaining the common goals of the Eurosystem, • Creates access point to central baking in each participating Member State, • Grants deeper financial stability and financial integration of each Eurozone Member State, • Defines and implements the monetary policy of the euro area usually by financial market operations, has full control over the monetary base, • Conducts operations that influence foreign exchange rates and domestic liquidity conditions, • Holds and manages foreign reserves, • Promotes smooth operations of payment systems – transferring money between credit and other monetary institutions; Eurosystem contributes to the conduct of the financial supervision – it advises legislators in its fields of competence and it complies monetary and financial statistics.

14. Sixpack Agreement General information • Entered into force on 13 December 2011, • Describes a set of European legislative measures to reform the Stability and Growth Pact and to introduce new macroeconomic policies, • Was created in order to set and ensure the degree of coordination necessary to avid the accumulation of excessive imbalances and to ensure sustainable public finances, • Believed to help EU to function properly in the long run, • Applies to all 27 member states with some specific rules for the Eurozone members, especially regarding financial sanctions.

15. Sixpack Agreement General provisions • In case of any excessive deficit level, Eurozone Member states will be punished with the financial sanctions. European Court of Justice may impose financial sanction (0.1% of GDP) if a country does not properly implement the new budget rules in national law. Moreover, automatic sanctions are triggered, based on a different voting mechanism in the Council of the European Union. What is more additional sanctions will be held in an interest bearing deposit (0.1% GDP) for countries which fail to act on recommendations to rectify a macroeconomic imbalance. • New agreement will require contracting parties to ensure convergence towards the country-specific medium-term objective, as defined in the SGP, with a lower limit of a structural deficit of 0.5% of GDP; (1.0% of GDP for Member States with a debt ratio significantly below 60% of GDP). • Member States should ensure that their fiscal frameworks are in line with minimum quality standards and cover all administrative levels.

16. Sixpack Agreement General provisions • New Macroeconomic Imbalance Procedure (MIP) broadens the EU economic governance framework to include the surveillance of macroeconomic trends. The aim of the MIP is to identify potential risks early on, prevent the emergence of harmful imbalances and correct the imbalances that are already in place; • New rules of make a debt criterion (SGP) absolutely operational again, new numerical debt condition has been defined as: if the 60% reference for the debt-to-GDP ratio is not respected, the Member State concerned will be put in excessive deficit procedure; • Expenditure benchmark places a cap on the annual growth of public expenditure according to a medium-term rate of growth. For Member States that have not yet reached their medium-term budgetary objective, the rate of growth of expenditure should be below this reference rate in order to ensure adequate progress.

17. Sixpack Agreement General provisions • Ensures stricter application of the fiscal rules by defining quantitatively what a "significant deviation" from the MTO or the adjustment path towards it means in the context of the preventive arm. • Each year all EU member states are obliged to submit a SGP compliance report for the scrutiny and evaluation of the Commission and Council; • Euro Summits should be held at least twice a year. • Introduction of European semester which is an annual national budget assessment procedure by the European Commission. • Surveillance of macroeconomic imbalances including both current account deficits and surpluses. • Greater transparency on texts and discussions, involving the European Parliament and national parliaments and public hearings. • More refined indicators for macroeconomic imbalances, to ensure that spillover effects of national policies across member states are taken into account alongside macroeconomic imbalances.

18. The European Semester General information • Cycle of economic and fiscal policy coordination within the EU economic policy, • Every year since 2011, the EU member states coordinate their budgetary and growth-oriented policies over a period of around six months, • Main aim is to ensure fiscal stability and avoid severe macroeconomic imbalances in the EU, • Helps the member states seek their common growth goals under the Europe 2020 strategy more effectively, • During the European Semester the member states align their budgetary and economic policies with the objectives and rules agreed at the EU level, • Each semester begins after adoption of Annual Growth Survey, which is usually a set of EU priorities for a given year in order to boost economic growth and job creation processes.

19. The European Semester Main aims • Increase fiscal cooperation, • Promoting growth and competitiveness,  • Tackle unemployment, • Perform structural reforms in line with the Euro 2020 strategy • Ensure sound public finances, • Foster economic growth, • Prevent excessive macroeconomic imbalances in the EU,

20. The European Semester Calendar • November and December - preparations for the European Semester should start when the Commission publishes its Annual Growth Survey and Alert Mechanism Report (reviews macroeconomic developments in each EU state) already in November of the preceding year. After the Commissions review, it can decide to conduct additional in-depth review on certain matters. • January and February - The Council of the European Union debates over AGS, formulates recommendations and adopts conclusions. In addition to that, European Parliament is also allowed to discuss this survey and can publish own initiative report - opinion on the employment policy guidelines. • March - Based on AGS and the Council analysis and conclusions, the European Council provides policy orientations and simultaneously The Commission publishes in-depth reviews of macroeconomic imbalances. What is more the Spring meeting of European Council is held during which issues of the overall macroeconomic situation, progress towards the five EU - level targets and progress under the flagship initiatives are discussed.

21. The European Semester Calendar • April – All MS are required to submit their plans for sound public finances (Stability or Convergence Programmes) and reforms and measures to make progress towards smart, sustainable and inclusive growth, in areas such as employment, research, innovation, energy or social inclusion (National Reform Programmes). • May and June – evaluation of national policy plans and presentation of drafts of specific recommendations. Moreover, Council of the EU discusses them and agrees on final country-specific recommendations. Afterwards, they should be presented to the European Council for endorsement. • July - the Council formally adopts the country-specific recommendations. In addition to that, Member States take into account advised recommendations and they are initiating processes of their implementation. • November and December – cycle starts over again towards next European Semester.

22. The European Semester

23. The European Semester The most important changes • Synchronized calendars of economic and fiscal policy reporting and evaluation at the EU level, • Changed the coordination of national economic policies from ex-post to ex-ante, • Introduction of a  new component in policy coordination: surveillance of macroeconomic imbalances in the member states which is designed to identify risk of unsustainable macroeconomic developments much earlier, to help preventing their emergence and to correct them swiftly in case their occurrence.

24. Polish National Reform Programme Most important actions planned for 2013-2014 Polish National Reform Programmewas adopted by the Council of Ministers on 30 April 2013. In accordance with the European Semester scheme, each EU Member State is required to prepare such report. The main actions planned for 2013-2014 in terms of Reform Programmeare: • Reform of the labor market policy- improving quality and effectiveness of services provided to the clients by the Labor Offices, support the employment of persons over 50 years old, establish special National Training Fund, creation of the completely new instrument supporting the creation of new jobs and unemployed persons to return to work. • Development of support systemfor enterprises - creation of favorable environment for enterprises, as well as active measures increasing innovation and competitiveness by R&D grants, repayable instruments for the purchase of modern technologies, machines and equipment, venture capital funds, support for intellectual property rights, education vouchers for entrepreneurs, fostering cooperation between enterprises and higher education institutions strengthening Business Environment Institutions.

25. Polish National Reform Programme Most important actions planned for 2013-2014 • Implementation ofprogramme to support investments - supporting projects related to areas and technologies of the greatest potential for growth. • Strategy for Energy Security and the Environment - ensuring the high quality of life of the present and future generations, taking into account the issues related to the environmental protections and establishing conditions for sustainable development of modern energy sector. • Investments in renewable energy resources. • Counteracting poverty - increasing chances for employment, preparing special support programmes for people most isolated from the labor market. Another measure will be adoption of the National Programme against Poverty and Social Exclusion. • Development of social economy sector– providing social economy support mechanisms, including the establishment of friendly environment for social economy development and raising social awareness. • Deregulation of certain types of professions.

26. The European System of Central Banks Report (2012) Year 2012 in a view of EU Central Banks: • very volatile financial conditions brought about by the financial and sovereign debt, • High creditability of ECB monetary policy, • Quite weak investment and private consumption levels, • Weak economic confidence and heightened uncertainty on the market, • 2.5% of inflation rate, • Key ECB interest rates lowered by 25 basis points, • Treaty on Stability, Coordination and Governance in the Economic and Monetary Union, • Surplus of over 2.16 billion Euroin ECB budget, • Net profit – 998 million Euro - distributed to the euro area NCB’s in proportion to their paid-up shares in the European Central Bank’s capital.

27. References Written references: • European Central Bank Annual Report 2012 by European Central Bank, • Polish National Reform Programme Europe 2020 (2013/2014) Update, • Protocol (No 4) on the Statute of the European System of Central Banks and the European Central Bank, • Europejski System Banków Centralnych by Narodowy Bank Polski (2004), • The European System of Central Banks by European Central Bank, • The Role of national central banks within the European System of central banks – the example of De Nederlandsche Bank by NoutWellink.

28. References Internet sources: • http://en.wikipedia.org/wiki/European_System_of_Central_Banks • http://www.ecb.europa.eu/home/html/index.en.html • http://www.ecb.int/ecb/educational/facts/orga/html/or_001.en.html • http://www.ecb.int/home/html/index.en.html • http://www.ecb.int/pub/pdf/other/escb_en.pdf • http://www.ecb.int/ecb/legal/pdf/c_08320100330en_ecb_statute.pdf • https://www.ecb.int/ecb/orga/escb/html/index.en.html • http://europa.eu/about-eu/institutions-bodies/ecb/ • http://www.ecb.int/ecb/legal/1341/1343/html/index.en.html • http://www.nbp.pl/publikacje/esbc/esbc.pdf • http://www.ecb.int/pub/pdf/other/escb_pl.pdf • http://www.uniaeuropejska.org/europejski-system-bankow-centralnych-esbc • http://www.ecb.int/pub/annual/html/index.en.html • http://facta.junis.ni.ac.rs/eao/eao200702/eao200702-02.pdf • http://europa.eu/legislation_summaries/other/l25014_en.htm • http://www.ecb.int/pub/pdf/annrep/ar2012en.pdf • http://www.ecb.europa.eu/pub/pdf/other/ecbhistoryrolefunctions2006en.pdf

29. References Internet sources: • http://www.consilium.europa.eu/uedocs/cms_data/docs/pressdata/en/ecofin/124882.pdf • http://ec.europa.eu/economy_finance/articles/governance/2012-03-14_six_pack_en.htm • http://ec.europa.eu/economy_finance/economic_governance/ • http://www.euractiv.com/euro-finance/parliament-adopt-pack-eu-budget-news-507898 • http://www.consilium.europa.eu/special-reports/european-semester • http://ec.europa.eu/economy_finance/een/019/article_88106_en.htm • http://www.consilium.eu.int/homepage/highlights/european-semester-council-concludes-eus-economic-policy-priorities-for-2013?lang=en • http://ec.europa.eu/europe2020/making-it-happen/country-specific-recommendations/ • http://ec.europa.eu/europe2020/pdf/nd/nrp2013_poland_en.pdf • http://www.consilium.europa.eu/special-reports/european-semester/how-does-the-european-semester-work • http://europa.eu/rapid/press-release_MEMO-11-14_en.htm • http://www.consilium.europa.eu/special-reports/european-semester/what-changes-did-the-european-semester-introduce • http://ec.europa.eu/europe2020/pdf/nd/nrp2013_poland_en.pdf • http://ec.europa.eu/europe2020/making-it-happen/index_en.htm • http://en.wikipedia.org/wiki/European_System_of_Central_Banks • http://www.bis.org/review/r020620a.pdf • http://en.wikipedia.org/wiki/Sixpack_%28European_Union_law%29