The Euro and Monetary Sovereignty


A. Introduction


B. Member States and the Transfer of Sovereignty


C. Monetary Sovereignty in the Eurozone


D. Monetary Sovereignty and the European Central Bank


E. Monetary Sovereignty and the Union


F. Monetary Sovereignty and External Relations


G. Monetary Sovereignty and the United Kingdom


H. Other Opt-outs


Future opt-outs


I. Monetary Sovereignty and the Federal State


J. Monetary Sovereignty and Exchange Controls


A. Introduction


The process of monetary union has, without question, resulted in the transfer of national monetary sovereignty from Member States to entities subsisting within the framework of the EC Treaties. Indeed, for a number of years, the perceived desire to preserve sovereignty in this area lay at the heart of the continuing political debate about the United Kingdom’s (non-)membership of the eurozone.1 It has, however, been shown that monetary sovereignty is not a single and indivisible concept; apart from any other classifications which might be adopted, monetary sovereignty comprises both certain internal and certain external aspects.2 Given that monetary sovereignty is divisible in this way, it follows that it may be partly retained and partly transferred; or different aspects of monetary sovereignty may be transferred to different recipients. Equally, a State may retain its monetary sovereignty and yet enter into arrangements which may limit or restrict the extent to which such sovereignty may be exercised in particular circumstances.


The treaty arrangements for the introduction of the single currency exhibit all of the features just described. With this in mind, the present chapter will consider the following matters:

(a) the transfer of monetary sovereignty by the eurozone Member States;

(b) the exercise of monetary sovereignty within the eurozone;

(c) monetary sovereignty and the European Central Bank (ECB);

(d) monetary sovereignty and the Union;

(e) monetary sovereignty and external relations;

(f) the position of the United Kingdom and its own monetary sovereignty;

(g) monetary sovereignty and the federal State; and

(h) monetary sovereignty and exchange controls.

B. Member States and the Transfer of Sovereignty


It is easy to assume that the transfer of monetary sovereignty by the eurozone Member States occurred on 1 January 1999, when the single currency came into being. This is in many ways a natural conclusion, but it overlooks the point that monetary sovereignty is divisible and that, in fact, the Member States had been accepting limitations to that sovereignty over a period of years. A few examples may serve to illustrate this point.


First of all, the operation of the Exchange Rate Mechanism (ERM) within the European Monetary System (EMS) has previously been noted, and it has been shown that this involved an effective obligation on Member States to ensure that their national currencies remained within certain permitted margins of fluctuation.3 This, in turn, inevitably placed limits upon a Member State’s ability to devalue its currency and to adopt particular interest rates as part of its national monetary policy.4


Secondly, it has been noted that—subject to various exceptions—Article 63 of the TFEU required Member States to abolish all restrictions on the free movement of capital and payments; this provision was found to have direct effect in Member States.5 It might perhaps be anticipated that a requirement to liberalize capital movements and the making of payments would of itself have the effect of limiting the national monetary sovereignty of the individual Member States and indeed this has been borne out by experience in a variety of ways. It has been seen that Member States could no longer apply any system of exchange control; indeed, the very existence of a monetary union implies the abolition of all forms of such control, at the very least, as between the constituent territories.6 This, however, was not the limit of the matter. The concept of national monetary sovereignty would, in general terms, allow a State to require that transactions occurring within its borders should be settled exclusively by payment in the national currency.7 The case law of the European Court of Justice demonstrates that this feature of national monetary sovereignty was likewise being eroded by Article 63, TFEU and by earlier directives which sought to establish the free movement of capital as a general principle of EU law.


This point is perhaps best illustrated by the Court’s decision in Trummer and Mayer.8 In that case, Mayer was resident in Germany but owned a property in Austria. He sold a part share in the property to Trummer, but agreed that the price could be left outstanding for a period on the basis that it was secured by a mortgage over Trummer’s share. No doubt Mayer conducted his financial affairs by reference to the Deutsche mark, and did not wish to accept any exchange rate risks in the context of future fluctuations between that currency and the Austrian schilling. For that reason, and notwithstanding that the property was situate in Austria, the price and the amount secured by the mortgage were expressed in the German currency. The transaction between them ran into difficulty; the Austrian authorities refused to register the mortgage because (a) the document secured a debt expressed in German marks, and (b) the registration of a mortgage infringed the Austrian currency law unless the amount secured was denominated in Austrian schillings or determined by reference to the price of fine gold.9 Having held that loan transactions involving a mortgage or similar security constituted ‘movements of capital’ and thus fell within the scope of Article 63, the Court was required to consider whether the Austrian currency law had the effect of restricting such movements. In this context, the Court correctly pointed out that the effect of the currency law:

is to weaken the link between the debt to be secured, payable in the currency of another Member State, and the mortgage whose value may, as a result of subsequent currency exchange fluctuations, come to be lower than that of the debt secured. This can only reduce the effectiveness of such a security and thus its attractiveness. Consequently, those rules are liable to dissuade the parties concerned from denominating a debt in the currency of another Member State, and may thus deprive them of a right which constitutes a component element of the free movement of capital and payments.

As a result, the Austrian requirement that security arrangements had to be expressed in the national currency was incompatible with Article 63, TFEU.10 Plainly, the facts of this particular case could not arise again as between the eurozone Member States themselves. But the case serves to emphasize that the national monetary sovereignty of the individual Member States was subjected to EU law limitations even before the euro came into existence.11


Thirdly, provisions originally introduced into the EC Treaty to regulate the second stage of EMU likewise served to restrict national sovereignty in various ways.12 There are two main illustrations of this position. Article 142, TFEU requires Member States to treat their exchange rate policies ‘as a matter of common interest’. Whilst it would be possible to debate the precise scope of the obligations created by this provision, there seems to be little doubt that it operates as a restriction upon the external monetary sovereignty of the individual Member States.13 More substantive restrictions on exchange rate policy were imposed by the ‘Maastricht Criteria’ set out in Article 140, TFEU. If a Member State wished to qualify for eurozone membership, then the necessary report would assess (amongst other things) whether the national currency of that Member State had remained within the normal margins of fluctuation provided for by the ERM for a period of at least two years and without devaluing against the currency of any Member State.14 This provision is framed as a condition precedent to eurozone membership, rather than as a positive obligation on Member States. Nevertheless, it thereby indirectly placed further limitations on the conduct of exchange rate policy by those Member States which aspired to join the eurozone.


Finally, it may be observed that the conduct of monetary policy by Member States was effectively constrained (if not overtly restricted) during the second stage. Without imposing positive obligations in this regard, the Maastricht Criteria set out in Article 140, TFEU achieved this result in two ways. The reports prepared in connection with progression to the third stage had to examine the extent to which each Member State had achieved ‘a high degree of price stability’. This would effectively be evidenced by a rate of inflation comparable to that of the three best-performing Member States in this area. In addition, the reports had to assess the durability of the convergence achieved by each Member State, and this had to be reflected in long-term interest rate levels. Conditions of this kind circumscribed the freedom of aspiring eurozone Member States to reduce interest rates if the consequences were likely to be inflationary.


The transfer or limitation of national monetary sovereignty was thus something of a gradual process. But the process was taken to its furthest extreme on 1 January 1999, when the euro was created. The introduction of the single currency had many obvious consequences for the national monetary sovereignty of the participating Member States,15 in particular:

(a) the substitution of the euro for participating national currencies was stated to be irrevocable,16 and, as a result, the eurozone Member State lost the right to create, define, and reorganize a national monetary system;

(b) it necessarily followed that the right to conduct an independent monetary policy was lost, for this can only be achieved by a State or institution which controls a monetary system—the point is in any event made explicit by the TFEU, which entrusts the conduct of monetary policy to the ESCB;17

(c) the creation of the single currency also implied the loss of the sovereign right to impose exchange control or similar restrictions.18


In effect, therefore, all national powers of legislation and action in the monetary law field came to an end when the euro was introduced in the participating Member States.19 To the very minor extent to which Member States or their central banks continue to conduct monetary functions, these are effectively delegated back to them under the terms of the TFEU.20 It is, however, necessary to highlight one final area in which it may be said that the eurozone Member States have indeed retained a degree of monetary sovereignty. As noted previously, the ability to define, organize, and replace a monetary system is a key aspect of national monetary sovereignty. It has already been shown21 that the organization and definition of the eurozone monetary system is now a matter of EU law.22 But what of the power to replace the euro and to substitute therefor an entirely new monetary system? Does that aspect of monetary sovereignty now rest with the European Union, or does it remain with the individual Member States? There is no question but that this aspect of monetary sovereignty originated in the Member States; it is thus necessary to ask whether it has been transferred by them to the EU under the terms of the TFEU. It is to be noted that the Treaty states that the creation of the euro is ‘irreversible’ and ‘irrevocable’. Partly for that reason, and no doubt for reasons of high policy, the Treaty does not contemplate that the euro might be replaced by a substitute single currency.23 The ‘irrevocable’ fixing of the substitution rates between legacy currencies and the euro24 negates any suggestion that the EU has inherited the sovereign power to replace the currency system. That power must thus remain with Member States, with the result that an amendment to the Treaties would be required if it were desired to introduce a new monetary system to replace the euro itself.25 It is accepted that this view will not necessarily secure universal acceptance.

C. Monetary Sovereignty in the Eurozone


If participating Member States have largely foregone their national sovereignty in the monetary field, who may now be said to be in possession of the corresponding rights? It is tempting merely to state that monetary sovereignty has been transferred to the European Union, and yet this would be to oversimplify matters. In very broad terms, this statement is acceptable but it will be seen that monetary sovereignty has been transferred in a fragmented fashion and different monetary functions are exercisable by different bodies. It is fair to say that questions touching the external relations of the euro area and the competence of the EU and the ECB in this field have provoked a certain amount of debate.26 It is not proposed to repeat those arguments in great depth, for to do so would be to stray beyond the confines of the present work. It is, however, necessary briefly to consider the extent to which different aspects of monetary sovereignty have been attributed to different bodies under the terms of the Treaties. For these purposes, it is proposed to consider:

(a) monetary sovereignty and the ECB;

(b) monetary sovereignty and the EU;

(c) the exercise of external monetary sovereignty and the euro; and

(d) the residual monetary sovereignty of the Member States.

The first two issues are essentially issues of EU law whilst public international law has some influence on the last two issues.

D. Monetary Sovereignty and the European Central Bank


It will be recalled that the ECB has legal personality and thus exists as a separate legal entity;27 the legal personality is not unlimited or unconditional but is linked to the functions which the ECB was established to perform.28 It will be remembered that the European System of Central Banks (ESCB) comprises both the ECB itself and the national central banks of the Member States of the Union.29 The ESCB itself does not have independent legal personality; rather, it is governed by the decision-making bodies of the ECB itself.30 The national central banks within the ESCB are required to act in accordance with the guidelines and instructions of the ECB itself.31


It will be apparent from this discussion that the ESCB cannot readily be described as the recipient of any aspect of national monetary sovereignty from the eurozone Member States. The ESCB is not a legal person and the exercise of any form of right is difficult in the absence of such personality; in any event, the national central banks within the ESCB lack the decision-making power which is a necessary ingredient or incident of sovereignty, for they are required to comply with the instructions of the ECB. On this basis, it is difficult to argue that monetary sovereignty has been vested in the ESCB.


It is thus necessary to consider whether the ECB can be said to have received a transfer of any aspect of national monetary sovereignty from the eurozone Member States. It is suggested that the search for an answer to this relatively high-level line of enquiry must be limited to the Treaties themselves, partly because they constitute the primary source of EU law and partly because any assertion that national sovereignty has been transferred must ultimately derive its legitimacy from the Treaties themselves, even if some of the detailed arrangements are later completed by means of secondary legislation. It must also be remembered that the right to exercise sovereign powers as a matter of EU law is not parallel to the ownership of such rights so far as international law is concerned.32 With these general considerations in mind, it is necessary to turn to the provisions of the Treaty itself.


Article 127(1), TFEU33 states that the ‘primary objective’ of the ESCB is the maintenance of price stability, ie the preservation of a low inflation environment. Without prejudice to that core objective, the same provision establishes ancillary objectives requiring the ESCB to support the general economic policies of the Union with a view to contributing to the achievement of the overall objectives of the EU as set out in Article 3, TFEU; the ESCB is also required to act in accordance with the principles of an open-market economy with free competition, in accordance with the principles set out in Article 119, TFEU. It will thus be seen that the overriding task of the ESCB is to ensure continuing price stability. A reading of Article 127 suggests that this is an independent objective of the ESCB which stands apart from the policies of the EU itself; yet this cannot be the case, for the promotion of price stability is one of the key tasks of the EU as a whole.34 The primary objective of the ESCB is thus explicitly linked to the objectives of the Union as a whole.


Article 127, TFEU35 thereafter lists the functions (or ‘tasks’) which are to be carried out through the ESCB. These are:

(a) to define and implement the monetary policy of the Union;

(b) to conduct foreign exchange transactions consistently with Article 219, TFEU;36

(c) to hold and manage the official foreign reserves of the Member States (but without prejudice to the holding and management of foreign exchange working balances by the governments of individual Member States; and

(d) to promote the smooth operation of payment systems.


Point (a) of this list should be particularly noted in the present context. The ESCB is required both to define and to implement monetary policy but it is explicitly stated that this is the monetary policy of the Union. Thus, although the ECB, the ESCB, and the members of their decision-making bodies are required to act independently of the Union and Member States for these purposes,37

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