EP - Resolution on foreign currency reserves in the third stage of EMU

REPORT	27k  31k
25 September 1998	PE 227.129/fin. A4-0341/98
on foreign currency reserves in the third stage of EMU
Committee on Economic and Monetary Affairs and Industrial Policy Rapporteur: Mr Jean-Antoine Giansily Following a request by the Conference of Committee Chairmen, the President of Parliament announced at the sitting of 16 January 1998 that the Committee on Economic and Monetary Affairs and Industrial Policy had been authorised to draw up a report on foreign currency reserves in the third stage of EMU. The committee had appointed Mr Jean-Antoine Giansily rapporteur at its meeting of 19 June 1997 It considered the draft report at its meetings of 1, 3, 22 and 23 September 1998. At the last meeting it adopted the motion for a resolution by 50 votes to 1. The following were present for the vote: von Wogau, chairman; Katiforis and Secchi, vice-chairmen; Giansily, rapporteur; Areitio Toledo, Berès, Billingham, Camisón Asensio (for de Brémond d'Ars), Carlsson, Chichester (for Arroni), Christodoulou, Cox, Filippi (for Garosci), Friedrich, García Arias, García-Margallo y Marfil, Gasòliba i Böhm, Glase (for Mather), Harrison, Hendrick, Herman, Hoppenstedt, Ilaskivi, Imbeni, Jarzembowski (for Thyssen), Kestelijn-Sierens, Konrad, Kuckelkorn, Kuhne (for Caudron), Langen, Lindqvist (for Larive), Lukas, Lulling, Mann (for Fayot), Metten, Miller, Murphy, Paasilinna, Pérez Royo, Pomés Ruiz (for Fourçans), Porto (for Peijs), Randzio-Plath, Rapkay, Read, Ribeiro, Rübig, Sturdy (for Wibe pursuant to Rule 138(2)), Theonas (for Svensson), Väyrynen (for Watson) and Wolf (for Hautala). The report was tabled on 25 September 1998. The deadline for tabling amendments will be indicated in the draft agenda for the relevant partsession.  A MOTION FOR A RESOLUTION Resolution on foreign currency reserves in the third stage of EMU The European Parliament, - having regard to the establishment of the European System of Central Banks and stage three of EMU, - having regard to Articles 30 and 31 of the Statute of the European System of Central Banks and the European Central Bank (hereinafter referred to as 'the Statute'), - having regard to the 1997 Annual Report of the European Monetary Institute (C4-0313/98), - having regard to the decision of 8 July 1998 by the Board of Governors on foreign reserve assets, - having regard to Rule 148 of its Rules of Procedure, - having regard to the report of the Committee on Economic and Monetary Affairs and Industrial Policy (A4-0341/98), A. whereas Article 30(1) of the Statute states that the European Central Bank shall be provided by the national central banks with foreign reserve assets, other than Member States' currencies, ECUs, IMF reserve positions and SDRs, up to an amount equivalent to ECU 50 000 million, B. whereas Article 106(6) of the Treaty allows the Council, after consulting the European Parliament and the European Central Bank, to adopt provisions referred to in certain Articles of the Statute and whereas Article 30(4) of the said Statute allows the European Central Bank to effect further calls of foreign reserve assets beyond the limit set in Article 30(1), C. whereas the exact amount to be called up by the European Central Bank may therefore be lower than, equal to or in excess of an amount equivalent to ECU 50 000 million, D. whereas the term 'foreign reserve assets' is general in scope and does not in itself imply an exclusion of gold reserves for these transfers of reserves from the national central banks to the European Central Bank, E. whereas the contribution of each national central bank will be fixed in proportion to its share in the subscribed capital of the European Central Bank (in the key for subscription of the ECB's capital), F. whereas in accordance with Article 29 of the Statute the key for the subscription of the capital of the European Central Bank assigns each NCB a weighting equal to the sum of 50% of the share of the respective Member State in the population of the Community and the sum of 50% of the share of the respective Member State in the GDP at market prices in the Community, G. whereas foreign reserve assets held by the national central banks of the future European System of Central Banks are well in excess of the amount to be transferred to the European Central Bank, H. whereas Article 31(1) of the Statute allows the national central banks of the ESCB to perform transactions in their foreign reserve holdings in fulfilment of their obligations towards international organisations and whereas according to Article 31(2) and 31(3) of the Statute, the Governing Council will set a threshold beyond which all other transactions in foreign reserve assets will be subject to approval by the European Central Bank, I. whereas decisions concerning interventions on the foreign exchange markets will be the exclusive preserve of the ECB, even if these interventions are generally implemented in a decentralised manner by the national central banks, which does not exclude the possibility in some circumstances - which should be exceptional - of the ECB itself intervening on the foreign exchange markets, J. whereas a significant share of the foreign exchange reserves currently held by the national central banks that will be part of the future ESCB is denominated in Member States' currencies which will be converted into euros at the start of stage three of EMU and consequently cease to count as foreign exchange reserves, turning them into 'internal assets', K. whereas the national central banks of the ESCB have traditionally held substantial foreign reserve assets for two principal reasons, namely to carry out interventions to prevent exchange market disturbances and to cover possible balance of payments external deficits, L. whereas with the start of stage three of EMU, interventions on the foreign exchange markets among the countries adopting the single currency will neither be necessary nor possible and whereas such interventions will be limited to third countries' currencies, M. whereas with the start of stage three of EMU, much of what used to be exports and imports between Member States of the European Union will become internal trade between the members of the euro area and whereas this will further reduce the need for foreign reserve holdings, N. whereas during the transition period of the introduction of the euro large holdings of foreign reserve assets may constitute a real advantage as this raises the cost of a possible speculative attack against the single currency and may prove to be a stabilising factor especially during this crucial period, O. whereas any reduction in the holdings of foreign reserve assets in the ESCB must take into account the possible effects this may have on exchange rates, the price of gold and other financial markets, 1. Considers it necessary to address the question of foreign exchange reserves in stage three of EMU for the following reasons: - stage three of EMU will completely change the monetary policy framework for the Member States of the euro area and will therefore partially render some of the motivations for large reserve holdings obsolete, at least after the completion of the transitional period for the introduction of the euro, - in order to attain an optimal level and composition of reserves in EMU, portfolio changes and a gradual running down of reserve holdings may be required, which in turn will have effects on the exchange rate of the euro, the price of gold and other financial markets, - with the start of stage three of EMU there will be quasi-automatic portfolio changes for the national central banks as foreign exchange holdings denominated in participating Member States' currencies will be redenominated in euros and thus cease to count as foreign exchange reserves; 2. Stresses that trade within the euro zone will continue to increase, and that foreign currency reserves no longer need to be held for such trade, because much of what used to be external trade will then become internal trade; 3. Argues that the volume of external trade provides a necessary but not sufficient criterion for calculating the optimal level of foreign reserve holdings and that, in terms of their volume and their reversibility, capital flows and in particular portfolio investments are more important still; 4. Is aware of the fact that the redenomination of former foreign exchange reserves in euros will lead to a considerable reduction of the level of foreign exchange reserves in the ESCB, although this reduction will not be sufficient to offset the effects of a diminished need for reserve holdings caused by a significantly reduced volume of external trade; 5. regards the possibility of the ESCB carrying out interventions on the foreign exchange markets as another major determinant for the optimal level of reserve holdings; 6. Points out that as of 1 January 1999 such interventions within the euro area will cease to exist and that this will further reduce the necessary amount of foreign reserve assets holdings; 7. Concludes therefore that with the start of stage three of EMU the total level of reserve holdings in the ESCB will be in excess of an optimal level of foreign reserve assets; 8. Emphasises, however, that a level of reserves which constitutes a surplus by international comparison, will be highly beneficial for the transitional period for the introduction of the single currency because it will make speculation against the euro more expensive and points to the fact that the new currency will be backed by vast reserve holdings amounting to an equivalent of approximately US$ 400 bn in the ESCB, which will have a stabilising effect; 9. Is therefore not in favour of reducing the reserve holdings of the ESCB during the transitional phase of the introduction of the euro; 10. Considers a carefully planned reduction of foreign reserve assets at a later time desirable, as this will help to achieve an optimal level and portfolio of reserve holdings in the ESCB in the long term; 11. Emphasises, however, that any reduction of foreign reserve assets in the ESCB may have an effect on the exchange rate of the euro, in particular against the US dollar and may be implemented only gradually and with the utmost caution in order to avoid disruptions in the foreign exchange markets;   12. Is aware of the fact that the euro will have to establish itself as a world currency during the initial phase after its introduction and that the outcome of this process will determine the scope for future decreases in reserve holdings; 13. Considers that the euro will be a stable currency and that it will develop a high level of credibility right from the start as is to be expected from the sound foundations on which it is built; 14. Regards the likely scenario of a hard euro from the very beginning of stage three of EMU as a limiting factor for possible reductions in the foreign exchange holdings because selling off US dollar reserves would lead to a further appreciation of the euro which may not be desirable and therefore takes the view that the scope for reducing reserve holdings will also depend on the future exchange rate of the euro against the US dollar; 15. Takes into account that the scope for reducing foreign reserve holdings in the ESCB will also depend on the future role of the euro as an international reserve currency; 16. Approves the decision of 8 July 1998 by the Board of Governors of the ECB to make an initial transfer in gold of 15% of foreign reserve assets from the national central banks to the European Central Bank for the following reasons: - gold reserves are traditionally seen as an important element for the credibility of and the confidence in a majority of the participating Member States' currencies, - the 15 Member States currently hold some 31% of their reserves in gold, a fact which should be reflected in the transfer of reserves to the ECB, - the inclusion of gold in the ECB's reserves would facilitate the transfers of foreign reserve assets to the ECB for those participating Member States whose central banks hold a large proportion of their reserves in gold, - the inclusion of gold in the ECB's reserve holdings would also have a stabilising effect on the price of gold which has recently decreased; 17. Calls, in view of the high levels of the national central banks' foreign currency reserves held in gold, for a gold euro coin to be minted, a decision which might also have a stabilising effect on the gold price; 18. Calls upon the European Central Bank, as part of the decisions it has to take before the end of the year on the issue of foreign currency reserves, to issue clear guidelines which lay down rules for the division of tasks between the ECB and the national central banks and define all operating procedures concerning the administration of foreign reserve assets to provide more clarity and certainty, inter alia as regards the practical conditions for the holding of such assets by the ECB and how they are denominated (in euros or in foreign currency), particularly in the light of the effects of the allocation and distribution of gains and losses generated by these foreign currency reserves; 19. Calls, in the light of the crises and turbulence on world financial markets, for an agreement between the European Central Bank and the American Federal Reserve on the management of foreign currency holdings; 20. Instructs its President to forward this resolution to the European Central Bank, the National Central Banks of the Member States, the European Commission and the Council. B. EXPLANATORY STATEMENT INTRODUCTION Stage three of EMU will have a significant impact on the reserves held in the European System of Central Banks. Some major implications will be: - the national central banks of the euro area will have to transfer foreign reserve assets to the ECB, - reserves currently held in member currencies will cease to count as foreign exchange reserves: as of 1 January 1999 all DEM, FF, BEF etc. held by the NCBs of Member States adopting the single currency will simply be redenominated in euros - thus converting them into 'internal assets', - even after the transfer of reserves to the ECB, large reserves will remain with the national central banks, - in EMU the demand for foreign exchange reserves will be significantly lower than in the present situation; by international standards there will be a substantial surplus of reserves in the ESCB, - with the introduction of the euro, there may be portfolio shifts in the reserve holdings of central banks worldwide, - portfolio shifts in the reserve holdings and a possible reduction of excessive reserves of NCBs may affect the exchange rate of the US dollar against the euro and the price of gold, - both the ECB and the NCBs within the ESCB will hold significant reserves; it is not quite clear how the tasks of foreign exchange interventions will be divided between the ECB and the NCBs of the euro area. TRANSFER OF FOREIGN RESERVE ASSETS TO THE ECB Article 30 of the Statute states that ' ... the ECB shall be provided by the national central banks with foreign reserve assets, other than Member States' currencies, ECUs, IMF reserve positions and SDRs, up to an amount equivalent to ECU 50 000 million.' This means that the national central banks of the ESCB will have to transfer foreign exchange reserves in currencies such as US dollars, yen, Swiss francs but not in the currencies of the euro area. The term 'foreign reserve assets' leaves the decision to accept gold in these transfers at the discretion of the ECB. The Governing Council will decide on the exact amount to be called up. Article 30(1) of the Statute specifies a maximum equivalent to ECU 50 bn. Article 30(4), however, allows the ECB to effect further calls on foreign reserve assets beyond the limit of ECU 50 bn and the EMI initiated work to prepare complementary Community legislation which will enable the ECB to effect such further calls. Therefore the exact amount to be called up may be short of, equal to or in excess of the maximum of ECU 50 bn specified in Article 30(1) The NCBs forming the euro area hold vast reserves roughly equivalent to an amount of US$ 400 bn and the transfer of reserves to the ECB should in general present no problem for the concerned national central banks. RESERVES REMAINING WITH THE NCBs After the transfer of foreign reserve assets to the ECB, large foreign reserve holdings will remain with the NCBs. However, the NCBs will retain their freedom to manage their own foreign exchange holdings, particularly in order to perform transactions in fulfilment of their obligations towards international organizations. Nevertheless, in order that transactions by NCBs do not interfere with the euro zone's exchange policy, prior authorisation from the ECB will be needed for transactions involving large sums. The threshold for such transactions will be specified later. As regards the implementing rules for interventions on the foreign exchange markets, the general rule is that these will be implemented in a decentralised manner by the NCBs. This does not, however, prevent the Central Bank itself from intervening in the foreign exchange markets. EXCESS FOREIGN RESERVES IN THE ESCB The ESCB will inherit some US$ 400 bn worth of reserve assets. This is a vast amount by international standards. How can this amount be explained? There are two principal reasons for holding reserves: to carry out interventions to prevent exchange market disturbances and to cover possible balance of payments external deficits. After the start of stage three, however, there will be a single currency and interventions within this single currency zone will cease to exist. Moreover, the Member States of the euro zone will form a more closed economy in which external trade will represent a smaller share of total GDP than before. Therefore there will be a reduced need to cover balance of payment deficits. As a consequence, EMU will require smaller reserve holdings at least in the long run. Estimates of the magnitude of excess foreign reserve assets range from US$ 50 bn to US$ 200 bn. During the transitional phase to the single currency, however, these vast reserves may prove to be very useful adding to the credibility and stability of the new currency. EFFECTS OF A REDUCTION OF RESERVES An abrupt reduction of surplus reserves would be disruptive for the financial markets. If a decision is taken to diminish reserve holdings in the ESCB this may have to be done only gradually and over a number of years. A reduction of reserve holdings in US$ could have a significant impact on the euro - US$ exchange rate. The scope for such reductions will therefore depend on the strength of the euro. In case of a 'strong euro scenario', which may be expected from the strong foundations on which the single currency is built, a reduction of US$ reserve holdings will be difficult as this would lead to a further appreciation of the euro and might therefore not be a viable option. At its second meeting, the Board of Governors of the European Central Bank decided on the amount of the initial transfer of foreign currency reserves to the European Central Bank by the national central banks of the euro zone and the form it would take. This transfer, which will take effect as at 1 January 1999, will be in line with the maximum transfer rate provided for in Article 30(1) of the Statute of the ECB. In view of the Member States which are currently participating in the euro zone, the amount to be transferred will be approximately EUR 39.46 bn. The Board of Governors also decided that 15% of these transfers of foreign reserve assets would be in gold. The remaining 85% would be essentially in dollars, and to a lesser extent in yen. The exact arrangements for these transfers will be finalised before the end of the year. Also before the end of the year the Board of Governors will decide on the guidelines, in accordance with Article 31(3) of the Statute of the ECB, for the use of foreign exchange assets still held by the national central banks.

Source: http://www.europarl.europa.eu/sides/getDoc.do?type=REPORT&reference=A4-1998-0341&format=XML&language=EN

[Mrt: unfortunately I was not able to find anything more about n.17.]

Follow up:

There is a little discussion here about topics:
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