ECB vs. Banque de France

Kristin Bloomer


With the introduction of a single currency for twelve different countries came along the introduction of a new banking system in France and 11 other countries.  This system was officially put to work in January of 1999 when the euro became the currency in 11 countries in Europe; Greece became the twelve in June of 2001.  At the time of introduction the countries could still use their own currency and the exchange rate between their currency and the euro was set by the new banking system.  This system if officially named the European System of Central Banks (ESCB), and it is composed the European Central Bank, in Frankfurt, Germany and the National Central Banks (NCB) of the European Union Member States.  All 15 EU members participate but the countries which did not introduce the euro have a special status and may implement their own monetary policy and do not partake in any of the decision making by the ESCB, they basically just observe what is going on.  The ECB and the Banque de France, which is the national bank of France work together, but you may also separate their roles within the ESCB.  Even though the ECB has much control in determining the financial status of France, the national bank has ways to fine-tune the economy.  In the end the Banque de France is often held back by the ECB, and one of the main reasons is that the ECB is always torn in how to change its regulations and rates because the decision that applies to twelve countries that are never all going to be at exactly the same point economically, financially, or monetarily.

As a whole the Eurosystem has four basic tasks that it is responsible to carry through the ECB and the national banks.  The first is to define and implement the monetary policy. The second is to conduct foreign exchange operations.  The third is to hold and manage the official foreign reserves of the Member States and the fourth is to promote the smooth operation of the payment systems (Organization of the ESCB, 1).  These are just the broad goals or duties of the whole Eurosystem.  When you break it down into the responsibilities of the ECB and the Banque de France things get more critical.


Ultimately the ECB is responsible for defining the single monetary policy and making sure that the Banque de France and the other national banks implement the policies efficiently.  It is also responsible for making sure the other three goals of the ESCB are met accordingly throughout the Eurozone.  The main goal of the single monetary system is price stability and the ECB follows a  “two pillar system” to achieve this goal.  The first pillar is the supply of money as a reference value throughout the Eurozone and the second pillar is the inflation rate for all twelve countries as whole, but the ECB also looks at the inflation in each individual country, so when looking at such things as changing rates to achieve price stability they examine both the trend of money supply and inflation.  The ECB is responsible for determining interest rates and foreign exchange rates and is responsible for most open market operations, but some fine-tuning operations are left to the individual member states.  It has also set a cap on the amount of inflation and debt each country is allowed to have.  The Governing Council along with the Executive Board are the decision-making bodies of the ECB, and the Governing Council is the stronger of the two.  At the end of 1998 the Governing Council defied price stability as the “year-on-year increase in the Harmonized index of Consumer Prices (HICP) for the euro area of below 2%”(Definition of The Single Monetary Policy, 1). This basically means that there is an inflation rate of 2% that should not be exceeded by any country.  The Governing Council also sets the reference value for monetary growth and set the first reference value at 4.5%.  Another very important task is the determination of the minimum reserves for the credit institutions in the euro zone and to stabilize many market interest rates through open market operations.  Lastly the Banque de France in France or the National Bank of each individual country then carries out all market operations are initiated by the ECB.  This is only one of the many operations done by the National Bank.


The Banque de France plays a very important role, because the ECB calls for decentralized implementation of the single monetary policy throughout the Eurozone.  So each central bank remains the “natural interlocutor” of the credit institutions established in its country (The ECB Operating Principles, 1).  So the Banque de France is responsible for compiling all the needed financial statistics for all credit institutions, as well as other monetary, financial, and economic statistics to represent the credit institutions at the meetings of the ECB in Frankfurt each fortnight.  The ESCB is a completely independent entity, so it can only make decisions based on the statistics collected throughout the eurozone; the Governing Council, Executive Board, or the General Council may not take any advice from any external bodies.  Also coinciding with idea of the decentralization of operations “The Banque de France can undertake activities other than those conferred upon it by the ECB as long as these do not interfere with the objectives and tasks of the System” (The ECB Operating Principles, 1).  Although this is true the Banque de France still must comply with any rates set by the ECB.  The Banque de France must monitor the foreign exchange market and take any action that the Governing Council of the ECB decides.  It must write up France’s balance of payments in order to help compile the ECB’s balance of payments.  The ECB may be responsible for writing the Foreign Exchange policy but the Banque de France is responsible for the day-to-day observation of the market and its foreign exchange rates.  The Banque de France uses Tranferts Banque de France (TBF) to monitor the movements of bank accounts in real-time and the TBF feeds into the European payment system, which is called Target.  Target basically connects all the National Banks and ECB so that large cross-border payments may be settled quickly.  Another very important task is to print and issue the new euro notes and coins, but the ECB still has some control of the money supply for the Eurozone as whole which can easily effect the amount of money France is able to print.  Along with the responsibilities that are very closely related to the ESCB, the Banque de France has a couple of other duties.


These few other duties include the supervision of the financial and banking system and services to the government.  The Banque de France provides the Credit Institutions and Investment Firms Committee and the National Credit and Security Council to study the financial and banking systems.  The Banking Comission of France makes sure that credit establishments and investment houses comply with the laws.  It also acts as the bank for the government also manages the debt of the public sector and organizes Treasury paper tenders(The Banque de France’s Other Supervisory Responsibilities).  The Banque de France does posses all of these ways to fine-tune the economy in France, it still has been held back certain ECB regulations.

An important issue that arose in Nov 2001 had to do with the European Union’s Stability and Growth Pact, which does not allow the country to run a deficit of more than 3% of GDP.  France’s economy was hurt by the United States attacks of September 11 and by the poor results of the German economy. (The Economist Intelligence Unit)  The Banque de France along with the French government wanted to increase government expenditure to stimulate economic growth, but could not do so because of the limits set by the Eurozone.  This instance shows that the European Union even invades the area of fiscal policy indirectly, because of the 3% cap, the government is limited in what they choose to do with fiscal policy in order to stimulate economic growth. 

 An interesting issue that has been talked about since the implementation of the ESCB was the benchmark interest rate for all countries that are using the euro.  The ECB’s refinancing rate is considered the benchmark interest rate. It was first set at 4.5% in January 1999, rates did go up to 4.75%, but where then cut back down to 4.5% in May 2001.  France was looking fore a rate cut, but the Banque de France could not do anything about it; it had to implement the 4.5% interest rate set by the ECB.  ECB explained that it could not cut the rates because inflation was above the 2% mark and the Money Supply also increased, so based on their “two pillar” system the ECB felt that the Monetary Policy that they were enforcing was absolutely correct.  (Fairlamb)  With the increase in the money supply, which is considered to be M3 in the Eurozone, the ECB decided there was no need to cut the rates, because when you cut the rates you are looking to increase the money supply.  And with threats of high inflation you need high interest rates, so the ECB decided to just remain the same hoping for inflation to be offset by the increasing M3.  This idea of the “two pillar” system depending on inflation and on money supply is making the ECB become a very confused entity of the ESCB.  There will always be countries hurt by the decisions that the ECB makes.  Fairlamb also points out that countries like Spain, Ireland, and Finland need higher interest rates because of the inflation that they are encountering from their expanding economies, but at the same time countries such as France are in need of the lower interest rates to stimulate growth and build the confidence of the corporate world and financial markets.  


French business confidence was also down, and the amount of investing was decreasing because of the lack of confidence in the consumers.  Many consumers were buying the imports rather then the domestic product, so many businesses were afraid to invest in new inventory if the consumers were not going to buy their products (Fairlamb,1).  If the ECB would cut the interest rates that might turn the public to the stock market to invest rather than in bonds, which would boost the confidence of French businesses, which in turn could raise stock prices and create economic growth.  France was already coming very close to the 3% of GDP in debt, so the thought of increasing government expenditure was not the best option under the Growth Pact of the European Union.  Everybody was beginning to lose faith in this new system.  The downturn of the German economy did not help either because along with France they are the two most powerful economies in the Eurozone, so they affect each other in a very important way.  The Banque de France had no leverage in this situation once again, because it must also follow the benchmark rate set by the ECB refinancing rate. 

In May of 2002 the ECB finally cut the rates to 3.5%, which was a positive step, but there still are problems, and France along with Germany are still demanding more rate cuts and finally the ECB cut the rates back to 3.25%.  In October of this year once again France was demanding rate cuts because of the decreased confidence in the market and extremely low stock prices.  France openly admitted that they will not cut back on their deficit spending so the ECB is hesitant to cut interest rates.(Cooper and Madigen)  This was bold move for French Government and the Banque de France, because they were deliberately defying the European Union, the ESCB, and the ECB.  These actions are an example of the Banque de France using its powers to affect the French economy, but it had to break the rules to do so.  The ECB is not allowed to base its decisions on the needs of one country or even two.  At most time France and Germany are in the same boat which can sometimes effect the decision because they are the two most powerful economies, furthermore if they want opposing things it makes it even harder for the ECB to make a fair or beneficial decision.

  The Banque de France does the best job it can to fine tune the French Economy.  It can help plan fiscal policy to stimulate economic growth and has a lot of control over the Foreign Exchange Market when it comes to setting rates and day-to-day activity, but the control over this market alone is not enough to make huge differences in the French economy.  The major problem has become that the ECB is trying to make decisions using the input and ideas from too many people in too many different countries.  The idea of single monetary policy is nice but is hard to make twelve different countries with twelve different government and fiscal regimes happy by using the same strategies.  You saw this happen with the interest rates, what the ECB decides might be good for one country like Finland but be horrible for another country such as France.  The Banque de France cannot set its own interest rate and must stay in accordance with the benchmark rate of the ECB, even if it does not help the French economy.  The Banque de France uses what power it does have to make small changes, supervises the French banking system and financial markets, acts as the bank for the government, and determines the foreign exchange rate.  In conclusion the Banque de France does all it can independently while implementing the single monetary policy, but in the end the decisions, regulations, and rates made by the ECB are what seem to ultimately determine how the French economy performs as a whole.




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