Germany’s Finance Minister Wolfgang Schaeuble is reported to have stated today that Germany would not demand a permanent vote on the European Central Bank’s Governing Council. His comments received scant press coverage, buried by news reports of the dramatic unfolding events in Iraq, another flare up of violence in Ukraine, and an upcoming Federal Reserve FOMC meeting.
Schaeuble was alluding to what is however a significant overhaul of the current ECB voting system, where every Eurozone country, in addition to the Executive Board members, has a vote at the monthly rate setting meetings. That will most likely now change to a new, rotating voting system structured for Eurozone expansion when the EU was enlarged to the eastern bloc in 2005, and included in the ECB Statute.
Unless the Statute – which is a Protocol to the EU Treaty – is modified, as of January 2015 when Lithuania is expected to enter the Eurozone, swelling its ranks from 18 to 19, four member states will forego a vote at each monthly rate setting meeting under a complex, big country/small country formula.
*** This new system will concentrate more power in the hands of the Executive Board members who will always have a vote (think Fed Governors and rotating District Presidents as something of a parallel), will devolve some power from the largest five National Central bank Governors (Germany, France, Italy, Spain and Netherlands), but will impact the smaller countries the most. ***
*** It incidentally means that there will be certain months in a year, specifically once every five months, where the Bundesbank, to take probably the most relevant example of the big banks, will not have a vote. The ECB of course prides itself on being a consensus driven organization rather than one that has to make decision by formal votes, and the German Bundesbank has already been overruled by the Board and a majority of the Council on a couple of notable occasions anyway. But this system will help formalize that dynamic, especially in the public’s eyes (cueing IFO and AfD). ***
There had been some suggestions that the Bundesbank perhaps hold a permanent voting position, akin to the role of the New York Federal Reserve Bank on the Federal Reserve Open Market Committee, but that is too controversial a solution that now appears will not even be pushed by the government of German Chancellor Angela Merkel.
A European-Style Compromise System
The current version of the ECB Statute (Article 10), states that once there are more than 15 National Central Banks (NCB) on the ECB Council, the Council would move from a one-man, one-vote system to a rotating system.
This 15 country threshold was breached in January of 2009 when Slovakia joined, but in December 2008 the ECB Governing Council pre-emptively adopted a decision with a two-third majority that pushed the enforcement of this new system to a further, 18 member threshold. This one-time extension was specifically permitted in the Statute.
The ECB will next year reach that new limit of 18, and any amendment from here would entail a full scale Statute Change, which is tantamount to a Treaty change and would need the involvement of the European Council. This is unlikely to happen, and Schaeuble effectively signaled today that Germany would not push for it.
When Lithuania enters the Eurozone in 2015 (the decision is to be taken by the ECOFIN Council in July this year), the Governors will now have to be divided into two groups, basically based on GDP (and marginally on the NCB’s balance sheet).
Group one will be composed of the Central Banks of the five largest countries – Germany, France, Italy, Spain and the Netherlands.
Group two will contain all the other Central Banks.
The Treaty sets the guidelines, including:
1) The first group should never have a lower voting frequency than the second group.
2) Without prejudice to this, the first group should get 4 votes and the second group 11 votes.
That means every month 4 out of five of the big countries will vote, meaning one will sit out, and 11 (down from the current 13, and with Lithuania 14) of the smaller countries, meaning three will have to sit out.
The Rules of Procedure, amended in 2009, sets the rotation of voting rights in each group – alphabetical order of the names of Member States in the national languages, starting from a random point of the list.
The rotation takes place every month. The first group rotates 1 vote every month. That does not change, and means every five months one of the large countries will be “sitting out.”
The second group is allowed only 11 votes, so when there are 14 members three will not vote every month. Of those three one will be rotated back in every month, meaning once the system is in place each small country would face a period of three months where it does not vote (this time period would increase as the Eurozone expands, and the number of rotating countries will be increased for each additional member).
The ECB will publish a list of members with voting rights on the ECB website in advance, but it has not yet said how long before the meeting.
The system was actually created in anticipation of swift enlargement so that both groups could allow for growth and make rotation a somewhat less politically controversial issue. It was an easy vote in 2008 for the ECB to take the one time exemption and extend the limit from 15 to 18, as the rules also provide that the G5 (the big countries) can never have a smaller participation than the other countries and the 2009 Eurozone enlargement would have produced exactly this consequence (rotation for the big countries, no rotation for the other countries).
Now, any decision to postpone further would need an amendment to the Treaty by the full European Council (Eurozone governments) and can’t be taken – as far as we understand – by the Governing Council as the extension was in 2009. While today’s statement indicates Merkel may choose not to fight over this, it is hard to imagine the loss of a one man one vote system on the ECB will not be a highly charged political topic.