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Is the Eurozone really a monetary union? (2/2)
In the United States, the regional Federal Reserve Banks (FRBs) are de facto subsidiaries of the central Federal Reserve Board. The claims and the debts between FRBs are settled through a transfer of assets which is actually a simple accounting arrangement.
By Christophe Destais
Post
>> Is the Eurozone really a monetary union? (1/2)
In her detailled study on the accumulation of claims and between the Eurozone member states’ national central banks (NCBs), the so-called "Target 2 imbalances", Ms Cour-Thimann discusses in detail the parallel which was made by numerous analysts between the Eurosystem (the NCBs and the European Central Bank, the ECB), on the one hand, and the Federal Reserve System (Fed) in the United States, which includes the twelve regional Federal Reserve Banks (FRBs) and the Board of Governors located in Washington DC, on the other hand.
As in the Eurozone, the crisis in the United States resulted in an accumulation of claims and debts of several hundred billion dollars between the FRBs. However, there are deep differences between both systems.
The main one certainly holds in their global architecture. In the United States, the FRBs are not the emanations of the states that compose their district. Actually, the limits of the latter do not always follow the States’ borders; some States are cut between two FRBs. Moreover, the FRBs transfer their profits to the Federal government. Their shareholders are the banks of their district but this shareholding structure is, to a large extent, a legacy of history. The “dividend” that is paid to the shareholders is a fixed amount, not linked to the actual income of the FRBs. In many aspects, the Board of Governors in Washington DC is exercising a quasi-hierarchical authority on the FRBs. In such context, the transfer of profits between FRBs is not an issue at all for the Federal Government. A loss in New-York is a gain in San Francisco or vice versa.
Besides, there is in the United States an accounting mechanism that allows for the annual settlement of the claims and the debts between the twelve FRBs. This complex mechanism, detailed in the FED's accounting manual, results in a decrease of the share of the debtor FRB in the common pool of securities and an increase of the creditor FRB, with no impact on the consolidated balance sheet of the Federal Reserve System. In the Eurozone, such a mechanism does not exist. In theory, the claims and the debts between NCBs can last infinitely (cf. previous post).
Some economists have suggested settling the claims and the debts between the Eurosystem NCBs by a transfer of assets between the debtor NCBs and the creditor NCBs, as it is the case in the United States, in order to avoid an endless accumulation of claims, which eventually risk to becoming irrecoverable. In their mind, the reserve assets to be transferred should be of an undisputable quality, just as it was the case between the central banks who participated in the gold standard, before the Second World War. This asset should not consist of the claims the NCBs on the commercial banks of their country.
Ms Cour-Thimann demonstrates that the American way of settling claims and debt is quite different. It is a simple accounting arrangement. The share of the common pool of securities which each FRB holds is adjusted every year in April. One of the accounts used for it bears the name “gold certificates” which can be a source of confusion.
One may wonder whether the impossibility to settle debts and claims between NCBs without any transfer of wealth between member states is the symptom of the incompleteness of the Eurosystem as it results from the implementation of the Maastricht Treaty. Rather than to mimic the gold standard, a real monetary union would find its inspiration in what is effectively the Federal Reserve System. The national central banks would be de facto transformed into subsidiaries of the ECB and their assets would be pooled. From then, it would be possible to settle the balances between the NCBs, as it is the case between the FRBs, by a simple paper transaction.
In her detailled study on the accumulation of claims and between the Eurozone member states’ national central banks (NCBs), the so-called "Target 2 imbalances", Ms Cour-Thimann discusses in detail the parallel which was made by numerous analysts between the Eurosystem (the NCBs and the European Central Bank, the ECB), on the one hand, and the Federal Reserve System (Fed) in the United States, which includes the twelve regional Federal Reserve Banks (FRBs) and the Board of Governors located in Washington DC, on the other hand.
As in the Eurozone, the crisis in the United States resulted in an accumulation of claims and debts of several hundred billion dollars between the FRBs. However, there are deep differences between both systems.
The main one certainly holds in their global architecture. In the United States, the FRBs are not the emanations of the states that compose their district. Actually, the limits of the latter do not always follow the States’ borders; some States are cut between two FRBs. Moreover, the FRBs transfer their profits to the Federal government. Their shareholders are the banks of their district but this shareholding structure is, to a large extent, a legacy of history. The “dividend” that is paid to the shareholders is a fixed amount, not linked to the actual income of the FRBs. In many aspects, the Board of Governors in Washington DC is exercising a quasi-hierarchical authority on the FRBs. In such context, the transfer of profits between FRBs is not an issue at all for the Federal Government. A loss in New-York is a gain in San Francisco or vice versa.
Besides, there is in the United States an accounting mechanism that allows for the annual settlement of the claims and the debts between the twelve FRBs. This complex mechanism, detailed in the FED's accounting manual, results in a decrease of the share of the debtor FRB in the common pool of securities and an increase of the creditor FRB, with no impact on the consolidated balance sheet of the Federal Reserve System. In the Eurozone, such a mechanism does not exist. In theory, the claims and the debts between NCBs can last infinitely (cf. previous post).
Some economists have suggested settling the claims and the debts between the Eurosystem NCBs by a transfer of assets between the debtor NCBs and the creditor NCBs, as it is the case in the United States, in order to avoid an endless accumulation of claims, which eventually risk to becoming irrecoverable. In their mind, the reserve assets to be transferred should be of an undisputable quality, just as it was the case between the central banks who participated in the gold standard, before the Second World War. This asset should not consist of the claims the NCBs on the commercial banks of their country.
Ms Cour-Thimann demonstrates that the American way of settling claims and debt is quite different. It is a simple accounting arrangement. The share of the common pool of securities which each FRB holds is adjusted every year in April. One of the accounts used for it bears the name “gold certificates” which can be a source of confusion.
One may wonder whether the impossibility to settle debts and claims between NCBs without any transfer of wealth between member states is the symptom of the incompleteness of the Eurosystem as it results from the implementation of the Maastricht Treaty. Rather than to mimic the gold standard, a real monetary union would find its inspiration in what is effectively the Federal Reserve System. The national central banks would be de facto transformed into subsidiaries of the ECB and their assets would be pooled. From then, it would be possible to settle the balances between the NCBs, as it is the case between the FRBs, by a simple paper transaction.
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