14 March 2015

Apportionment in the European federal parliament

In my previous posts I described the principal part of my idea how a constitution of the European federation should look and now only closing and transitory provisions remain. However before I get to them I aim my attention at the federal parliament that I discussed already some time ago.

In the article dealing with the European federal parliament I determined only its total maximal size but not a concrete method of apportionment of seats to the member states. It naturally relates only to the House of People because in the House of States, a certain equal number of deputies should be allotted to each member state (or a federal territory). I determined only the maximum size of the House of People of the European federal parliament (567 deputies) and a principle that no member state should be represented by less than three deputies and the federal territories should be represented by one deputy; I determined also a principle of degressive proportionality which is used in the present European Union. I determined however not the concrete apportionment in the constitution's text and left it to a special law. Therefore I would not have to deal with it now because I do not have an intention to discuss these law expanding the constitution but I want to make exception in this case.

The present system of apportionment of seats to the member states of the present European Union cannot be, in my opinion, an example for a future European federation. Because there is not an exact mathematical method for all future changes (that naturally occur with population changes and changes of a member states' number) which only can be a just guideline: instead, final numbers are a result of complicated ad hoc negotiations in which diplomatic power plays a part. Basically this means that a mathematical formula must be invented that will neutrally stay above the interests of individual member states.

To fix a mind on a method of apportionment of seats in the lower house of the parliament of the United States of America seems to me most advantageous. The constitution of the United States determines that the number of seats apportioned among the member states should conform to their population with respect to the principle that every state must have at least one deputy. So, it demands not degressive proportionality and the number of seats allotted to each state corresponds only to its population.

Apportionment of the seats among the member states used in the United States now follows a method called a method of equal proportions which ensures in the end that the number of seats is allotted to each of fifty member states that accurately corresponds to its population. This method is applied in a series of many steps. In the first step one seat is allotted to each state because the states have the right to it according to the constitution and because without this first step further calculations would be mathematically impossible (there cannot be zero in the calculations). These fifty seats allocated this way are subtracted from the total number of seats in the house (435 now) and each of the remaining seats (385) is allotted in every following step to the state which has the greatest claim to it according to its population and a number of seats that it has obtained in previous steps. The following mathematical formula expresses it:
In it, P is population of the respective state and n is a number of seats that the state has obtained so far. After one seat is allocated to each state, a value of Sn is counted for all states and the state obtains its second seat which has the highest value of this Sn. By doing it its value Sn falls and the other seat is allocated in the following step to a state which has the highest value Sn now. One proceeds this way till all seats of the house are allocated. Applying the calculations as described the populous states have the highest value Sn in more steps than the less populous states and so they obtain more seats as a result.

Whether this method can be applied to Europe one can say only when tries it to calculate for European conditions. I did that and the following table and graph show numbers of seats for each state of the present European Union if this American method was used also in the European parliament.

statepopulationshare of population (%)seatsshare of deputies (%)
United Kingdom6318177512.539412.52
Czech Republic104365602.07162.13

The attached graph in particular illustratively shows that the method of equal proportions as used in the USA grants representation to each state exactly corresponding to its population. In this form however the method is inapplicable in Europe and the reason is great difference in population between several greatest states and other states. The following graph shows that there are more balanced differences among population of the states in the USA than in Europe.
Whereas in the United States, the most populous state has 53 times more deputies (seats) than the smallest state(s), if the same method was used in the present EU, the most populous state would have even 120 times more seats than the least populous state(s). Besides, four greatest states would dominate the present EU because they would have jointly more deputies than other 24 states together (in the USA nine states have the majority). On the grounds of these great differences, it is suitable that representation of the most populous European states by seats is undervalued to some extent in the federal parliament. How this principle is applied in the present EU (where no mathematical formula is used) the following graph shows.
The apportionment represented by this graph is not due to any general mathematical formula, as I mentioned earlier, but to diplomatic agreements. My aim therefore is to find such mathematical formula that allots the seats in the European federal parliament to the member states according to their population with respect to the principle of degressive proportionality (= undervaluation of the greatest states), in other words similarly to present practice in the European parliament of today.

I took the method used in the USA the formula of which is above as a basis. To achieve that a modified formula undervalues the most populous states and overvalues the less populous ones I multiplied the original formula by the multiplicative inverse of square root of the respective state's population. It is mathematically expressed with the formula
which is in a different way

The modified formula has the outcome that the coefficient Sn for the greatest states will descend more fast after each allocation of a seat which induces that the less populous states obtain a seat more often. The following table and graph show application of this modified formula to the present European Union (with respect to the present principle that each state should have at least six seats).

statepopulationshare of population (%)seatsshare of deputies (%)
United Kingdom6318177512.53607.99
Czech Republic104365602.07253.33
 As is evident chiefly from the graph this new formula relatively much underestimates the greatest states (the greatest of them, Germany, would obtain only 57% of seats that it would have a claim to according to the original formula which takes only population itself into consideration) and relatively much overvalues the smaller states. The difference with the present apportionment in the European parliament is great and so the original formula can further be modified in order that a share of seats for each state in the European parliament comes nearer to their share of population of the whole EU.

To this end I multiplied the original formula by multiplicative inverse of not the second but the third root of the respective state's population. The second new formula looks as follows
 which is in a different way
 I applied this formula to the present European Union (to the European parliament) again and also kept the principle that no state should have less than six seats. The following table and graph show an outcome of the calculation.

statepopulationshare of population (%)seatsshare of deputies (%)
United Kingdom6318177512.53729.95
Czech Republic104365602.07222.93

This result much more resembles what is used in the present practice so one could say that just this second modified formula is what should be applied to apportionment in the future European federal parliament. On the other hand, nobody is able to say whether the second of them would be chosen if a choice between the first and the second modified formula really was taken. I base this hesitation on that in the Council of the European Union which, unlike the European Parliament, is the decisive body of “everyday” operation of the EU (the present European Union is not a federation but an international organization, so representatives of the member states' governments logically must have the last word), allocation of votes among the states was in force till November 2014 (and still can be used on request up to 2017) which is represented by the following graph and one sees in it that the most populous states were willing to reduce their influence at voting in the Council in favour of smaller states even more than in the European parliament and that this resembles application of rather my second then the first modified formula.
For that reason I am not able to decide which of the above mentioned modified formulas I should recommend for apportionment in the European federal parliament. In any case, an advantage of both of them is that they comply with the principle of degressive proportionality and that they are neutral in the sense not to allow backstairs diplomatic bargaining.

In the end, I submit two tables and two graphs in which I apply both modified formulas to the parliament of a federation comprising whole Europe because (with the size of 567 seats) as I told in my earlier posts the constitution of the European federation should be written in the way to capable of securing operation of a federal state of such maximal size (regardless of its very small feasibility) and so not have to be rewritten every time a new state becomes a member which is the case of international treaties governing the present European community. A few remarks must be added to the subjacent tables and graphs. I left the states in their present form though one can presuppose that changes will occur in the future (as very probable secession of Scotland from the United Kingdom or division of the Ukraine) in order that certain comparison with tables and graphs above is possible. I counted also the present size of the population because I am not a seer and do not know how populous states will be in the future although it is clear that many of them will have smaller population than now. In accord with my previous posts, I assign three deputies to each state as a minimum because the number of six which is used today is too great for a federation with a great number of member states. Then, I assign one seat to federal territories (what in fact overseas territories of the European states are) because they are almost all entities with very small population. I classed several miniscule European states as federal territories too – the fact that they are not fully sovereign states today entitles me to do so.

statepopulationshare of population (%)seatsshare of deputies (%)
United Kingdom6318177510.60346.00
Czech Republic104365601.75142.47
Bosnia and Herzegovina38716430.6581.41
New Caledonia2687670.0510.18
French Polynesia2682700.0510.18
Cayman Islands567320.0110.18
Faroe Islands483510.0110.18
Sint Maarten374290.0110.18
Saint Martin362860.0110.18
Turks and Caicos Islands314580.0110.18
British Virgin Islands280540.0010.18
Wallis and Futuna121970.0010.18
Saint Barthélemy90350.0010.18
Saint Helena, Ascension and Tristan da Cunha77290.0010.18
Saint Pierre and Miquelon60800.0010.18
Sint Eustatius38970.0010.18
Falkland Islands29320.0010.18
Pitcairn Islands450.0010.18

statepopulationshare of population (%)seatsshare of deputies (%)
United Kingdom6318177510.60427.41
Czech Republic104365601.75132.29
Bosnia and Herzegovina38716430.6571.23
New Caledonia2687670.0510.18
French Polynesia2682700.0510.18
Cayman Islands567320.0110.18
Faroe Islands483510.0110.18
Sint Maarten374290.0110.18
Saint Martin362860.0110.18
Turks and Caicos Islands314580.0110.18
British Virgin Islands280540.0010.18
Wallis and Futuna121970.0010.18
Saint Barthélemy90350.0010.18
Saint Helena, Ascension and Tristan da Cunha77290.0010.18
Saint Pierre and Miquelon60800.0010.18
Sint Eustatius38970.0010.18
Falkland Islands29320.0010.18
Pitcairn Islands450.0010.18

09 November 2014

Federal Central Bank - Constitutional text

Federal Central Bank

Article 61 – Central bank
The Federal Central Bank is the central bank of the European Union.

Article 62 – Composition of the bank
1. The President and six members of the Executive Board lead the Federal Central Bank.
2. Every citizen of the Union who completed the age of 37 years and is a person of acknowledged professional experience in monetary or financial matters can be the President or the member of the Executive Board.
3. The term of service of the President and the members of the Executive Board is eight years. Nobody can be the President or the member of the Executive Board more then once.
5. The law stipulates details.

Article 63 – Election and appointment of members of the Federal Central Bank
1. The President of the Federal Central Bank is elected by the citizens of the Union according to the provisions of the article 47 of this constitution.
2. The members of the Executive Board are appointed by the President of the bank. At most two members of the Executive Board can be citizens of the same member state as the President of the bank.
3. The law stipulates details.

Article 64 – Rights and duties of the members of the Federal Central Bank
1. The President and the members of the Executive Board decide independently and shall not take instructions from other representatives of the Union or any member state.
2. The President and the members of the Executive Board are not allowed to hold any constitutional or other salaried office of the European Union, of any member state or its autonomous entity, to engage in other paid occupation, to receive any remunerations and to give unpaid consultancy.
3. The members of the Federal Central Bank may not be prosecuted, restricted in his free movement or arrested unless caught while committing a criminal act.
4. The members of the Federal Central Bank receive a salary paid from means of the Union.
5. The mandate of the President becomes effective by his election. The mandate of the members of the Executive Board becomes effective by their appointment.
6. The President and the members of the Executive Board take the oath in the beginning of their mandate. The oath reads: “I, … (name of a person), solemnly pledge now to protect stable value of the currency of the Union in order that it serves to the welfare of all citizens of the Union.”
7. The mandate of the President and the members of the Executive Board expires by
(a) expiration of the term of mandate,
(b) resignation,
(c) recall,
(d) death,
(e) exercise of an incompatible function,
(f) sentence for a deliberate offence.
7. Details are stipulated by the law.

Article 65 – Objectives
1. The Federal Central Bank
a) is an exclusive issuer of the currency of the Union,
b) puts the currency of the Union into circulation,
c) guarantees stable value of the currency of the Union,
d) manages reserves of foreign currencies, securities and precious metals,
d) provides bank services to the Union,
e) supervises orderly functioning of financial institutions and determines their obligations,
f) secures smooth and secure monetary circulation in the territory of the Union.
2. The Federal Central Bank is a public institution in complete ownership of the Union and comes under democratic supervision.
3. The law stipulates details.

Article 66 – President of the Bank
1. The President of the Federal Central Bank
(a) administers the Bank and represents it externally,
(b) decides on amount of the currency of the Union in circulation,
(c) determines transactions and other activities of the Bank related to stability of the currency of the Union,
(d) approves the budget of the Bank,
(e) defines the types, amounts and uses of the funds of the Bank,
(f) decides on reserves of the Bank.
2. Decisions of the President of the Bank are published in the Official Journal of the European Union.

Article 67 – Executive Board
1. The Executive Board
(a) implements the policy defined by the President of the Bank,
(b) supervises financial institutions,
(c) secures smoothness and security of clearings and money circulation,
(d) carries out other functions coming under the power of the Bank that are not reserved for the President of the Bank.
2. The Executive Board is called and chaired by the President of the Bank.
3. Decisions of the Executive Board are passed by majority of votes. The President of the Bank has one vote.
4. A form of publishing decisions of the Executive Board is stipulated by the law.

Article 68 – Information and statistics
1. The Federal Central Bank is entitled to require necessary information and documents from natural persons and corporate bodies acting in the financial sphere as well as from public institutions for the purpose of performing tasks assigned to itself by the constitution and the laws.
2. Requisite components of the required information and time limits are determined by the Federal Central Bank.
3. The Federal Central Bank compiles and periodically publishes statistics related to the currency of the Union and the financial system of the Union.
4. Details are stipulated by the law.

Article 69 – Reports
1. The Federal Central Bank submits a report on condition of the currency of the Union and the financial system of the Union as well as its strategy to secure stability of the currency of the Union to the Assembly of the Union at least twice a year.
2. The Assembly of the Union can request an extraordinary report on activities of the Federal Central Bank at any time.

Article 70 – Giving information
The Federal Central Bank, the Assembly of the Union and the Council of Chancellors inform each other on their measures concerning the currency and the financial matters.

30 September 2014

Central bank - composition

In previous two posts about the central bank of the European federation I discussed its functions and powers, its personnel questions and decision-making mechanism are to be discussed now.

In the beginning of my consideration about the central bank I started with a quotation and I can do the same in this part. For this once, the quotation is: “Democracy stops outside this enterprise's gates.” This quotation comes from the same time as the one that I used previously but it is not important by whom and under what circumstances it was pronounced,  significant is what it articulates. It personifies a generally widespread opinion that economic activity is something different than administration of public affairs. Also others than I noticed that people are allowed to have a feeling that they are the citizens only at the time of elections but as soon as they cross thresholds of their workplaces they turn into disciplined executors of others will with limited possibility of own decision-making. If we take into consideration how much time one passes in the job (if he/she is lucky to have one) it proceeds from it that democracy actually is restricted to only small scope of human life (and provided that what is called democracy really is democracy).

A talk about the central bank should there however be here. From the point of democratic administration of affairs the central bank stands in a borderland. On the one hand it is (in most European states) a public institution staffing and decision-making process of which is a matter regulated by laws, on the other hand the central bank's policy itself is believed to be a part of capitalist economy and has an “exception to democracy” in this respect. The laws that regulate activity of central banks put the accent to their independence what is without doubt right. But the opposite pole is wholly missing – responsibility. The central bank has its duties and objectives prescribed by the law that it should accomplish but nobody usually is entitled to evaluate whether the central bank accomplishes the objectives in a proper way. There is no defence and no appeal against the central bank's activity. Because the central bank is considered to be a “player” in the capitalist economy it is self-evident in common opinion that it acts as any other economic “player” according to its own deliberation and is responsible to nobody. In other words, because it is expected that that it acts according to rationality and demands of the market which should be unregulated according to the present economic doctrine it is not demanded that the bank renders accounts in a democratic way which means above all to the citizens. Simply, in a system of dominance of economy over (democratic) politics the central banks are responsible rather to the markets than to the citizens.

It would be inconsistent with what I wrote about other parts of the European federal constitution if I wanted to copy provisions about central banks' officials from the laws of the European states now. It is not possible to react to the trend of decline of democracy and of shift of the power outside of politics by mere emphasis on maintaining the (manifestly not working) present model of democratic politics but by strengthening its democratic attributes. In the case of the central bank introduction of the principle of its responsibility to the citizens and so direct election (and recall) of its officials meet this demand. Some objections can be made against it, some of them would certainly be only pretexts, I will mention only one here – so called exhaustion from elections. So far I assigned election of the federal parliament deputies, of the Council of Chancellors, of the President of the Supreme Court and of the President of the Supreme Audit Office to the people, so this is the fifth proposed federal election. I do not intend to suggest another election but the list is rather long despite that and the “exhaustion of elections” can be feared to some extent. Some people really can feel bothered by greater number of elections but let us not forget that polls are not always heavy also where elections are from time to time. Some people does not go to the polls because they are not interested in politics, the paramount is however a feeling that something can be influenced through voting. I admit that the objection of exhaustion of elections is not entirely unfounded but if we want as democratic European federation as possible we hardly are enough with one election (parliamentary).

Now I finally get to who should be elected in the central bank of the European federation and what should be a decision-making structure of the bank. In fact, I am faced with the same problem as at election of the executive power representatives or judges of the Supreme Court here and therefore the conclusion will be very similar. The primary decision-making power in the central banks is usually held by a council with several members (in most central banks) or is divided among more councils each of them with its sphere of competencies (for example in the National Bank of Poland, Hungarian National Bank, European Central Bank). From the point of view of electing representatives of the central bank the second variant is more favourable which I am to explain immediately.

A choice among several clearly defined personalities is more comprehensible for citizens-voters than among lists of more “anonymous” candidates and therefore only one representative should be elected in my opinion which is not meant naturally that only one man should make all decisions in the central bank. This directly elected representative (president of the bank) would have the right to decide about the most significant affairs on the basis of his direct mandate from the citizens, above all about amount of circulating money and instruments related to it (for example interest rates level), in other words about currency stability. Implementation of these measures then should be entrusted to an executive board that would so carry out day-to-day management of the central bank including the powers that the elected president would not carry out, for example commercial financial institutions supervision or securing fluent flow of payments and clearing.

Members of the executive board could – as is a custom – be appointed by other constitutional institutions but it is better in my opinion if they are appointed by the president of the central bank himself which even more emphasizes importance of his election. For the purpose of decision-making in the central bank, it is not necessary that the executive board members are holders of different opinions than the bank's president; on the contrary, it is transparent for citizens that who they elected implements policy of the central bank without necessity of compromises. Maybe somebody remembers what I wrote about position of the directly elected president of the Supreme Court. I made him not the only member of the decision-making board of the court but only one of more although a privileged one because it is not possible that decision-making belongs only to one person in the highest court instance. But I believe that it is possible in the case of the central bank, at least as far as the most important decisions related to currency stability are concerned. It must not be presupposed that the president of the bank will be overburdened with all work that in other respects the whole board performs; the executive board should act as a consultative body in questions entrusted to the president's decision-making in my suggestion. This arrangement can be compared with situation in some (extra-European) states – one person (typically a president) holds the executive power there but there are ministerial cabinets besides which execute decisions of the president and have also consultative function.

I propose not to complicate the question of election of the central bank's president. I introduced a method of electing one person to a European federation's institution already earlier – that was a case of the Supreme Court's president and the president of the Supreme Audit Office. I take over this method also for the purpose of the central bank president's election. To remind, these are the conditions and circumstances: candidates must be at least 40 years old and meet certain professionals preconditions, necessity of 50000 citizens accepting candidature and election through double majority (majority of citizens and majority of states).

A question to be discussed is a length of the mandate of the president of the central bank and whether it should be renewable. Because this question can be answered more or less in whatever way I will follow the conditions valid for the members of the executive board of the European Central Bank which is a mandate of eight years without possibility of reelection. I believe that one longer mandate with potential removal (by the citizens) is better than a shorter renewable mandate. Because the members of the executive board are appointed by the bank's president in my proposal the length of their mandate must be equal, that is also eight years and they should not hold it more than once too because their mandate is derived from the one of the (current) president.

In addition that the central bank's president and the executive board members should have relevant education and are expected to be experts on monetary questions also provisions about incompatibility of functions (among others prohibition of any gainful occupation and non-paid financial consultancy) are necessary in the constitution as well as provision about the beginning and the end of the mandate of the central bank's officials. I intend to take over these provisions from the previous parts of my proposal because it is unnecessary to invent anything new.

19 July 2014

Powers of the central bank 2

I wrote in the previous post that one of the fundamental functions of the European federation's central bank should be to have monopoly on issuing  the currency of the European federation which means that the commercial banks should be prevented from creating new money through so called multiplication in the European federation. This measure logically proceeds from what I wrote in the section of basic rights – the economic power must be subordinated to the democratic political power and should be regulated to benefit of all citizens of the European federation. But it is not sufficient to entrust the central bank as a public institution with monopoly on issuing money; it is also necessary to bind the central bank by some rules in order that its activity can be democratically supervised.

The main question associated with issuing money is a question of their amount in circulation or in other words of inflation. The present central banks mostly have price stability as their principal objective. That should mean zero inflation but central banks pursue more or less 2% inflation policy which however in strict sense of the words is not price stability but growth of prices though very low and only little differing from price stability.

A question of zero inflation is dependent on what function we expect from money. The fundamental definition of money is that money is a good purpose of which is to determine value of all other goods. But if it is necessary constantly to spend more money, though not radically, for the same amount of goods it meets its purpose not well. At a given moment of time or in short periods, depreciation of money is not obvious but it is obvious in longer periods of time that greater amount of money has to be spent for the same changeless goods in the moderner time than earlier. One piece of information can show how inflation degrades role of money as an indicator of value in long-term range: in Germany in period 1950-2000, GDP rose approximately seven times but amount of money supply rose 32 times. Then a question should be asked what amount of money in circulation represents if it so diverges from amount of produced goods and services. This disconnection pronounces in favour of zero inflation as well as another purpose of money: it holds value. It is unnecessary to justify why inflation is harmful in this case.

In search why small rate of inflation is advantageous one encounters an argument sooner or later that issuing new money cannot be limited too much because economy needs continual inflow of money and central banks consider inflation slightly under 2% to be an indication of sufficient amount of money in economy. Economist who are at the helm (so in central banks too) are convinced that easy availability of money for firms is a paramount and almost only condition for well working economy. Unfortunately they do not realize that economy will not work only due to abundant money. In the present time, many central banks pursue policy of so called quantitative easing which is in fact pouring money in economy with the hope that firms will so have enough money to grow; but this presumption proves not true. European Central Bank provides commercial banks with cheap money yet they grant loans to firms only unwillingly and use the money rather in so called financial casino where profits are higher than in real economy. In the year 2007 allegedly only 1,7% of worldwide money was used for real economy transactions, the residual 98,8% were used for various forms of financial speculations. Simply, the commercial banks are convinced that their investments in firms in real economy (through loans) are not able to secure sufficient profit to them – action of commercial banks is logical from their point of view. Let us assume that firms really get - in the form of loans - money that central banks so generously pour through quantitative easing in economy. Firms would use it probably to their “expansion” or in other words to expansion of their production. But then the cardinal question is: who would consume such increased production if incomes of middle and lower classes fall in the long term, already decades? Perhaps great firms and the most wealthy individuals incomes of which precipitously grow on the contrary? Such question is probably not asked by economists. The real problem of present (European) economy is not at all lack of credits but undue and constantly increasing unevenness of what has been produced in economy. If economy is set to primarily secure increase of profits for the greatest firms (and the wealthiest individuals) even however big flood of cheap and available credits will not create healthy economy fulfilling needs of people. Economy should first of all be taken as sum of activities to secure needs of people, instead of it, it is taken by economists and politicians rather as a machine for securing prosperity of firms (and their owners) and when stock values growth in the stock markets it is regarded as a evidence of growing economy (“recovery”) even if living condition of most population worsened (the equation “prosperity of firms = prosperity of people” is not valid more in the world of today). In addition of that, the mainstream economists and most politicians still propagate necessity of constant growth although it cannot be a basis of wealthy economy and although the growth cannot last forever (inability to change this self-destructive course is one of the greatest defects of present capitalism and its financial system). Generally, it can be said that classical theorems about relation between quantity of money and wealth of economy (from the point of view of its ability to fulfill needs of people) fail today. Because policy of providing commercial banks with multitude of money does not satisfy the role of securing needs of people through economy I do not see also now a reason why the central bank of the European federation should not pursue the objective of zero inflation policy.

Apart from the mentioned function to exclusively issue the currency of the federation and to preserve zero inflation, the central bank of the European federation has to have other more functions that more or less correspond to that ones of the present central banks. I mention supervision over the financial market in the first place, in other words supervision over banks, insurance companies, stock markets, credit companies and other financial institutions. Rules regulating formation and functioning of these institutions has to be determined by the law, the central bank however should oversee discharging the law in order that only the institutions (firms) can operate in the financial market that meets the conditions prescribed by the law.

Another function is associated with the previous one, administration of money circulation and of system of payment which above all includes handling physical currency and organizing bank-to-bank payments. The role of the central bank should be that money flow is smooth as well as secure and economical.

The supervisory and controlling function of the central bank of the European federation should on at least one ground be broader by one item. If the central bank should obtain money issue monopoly in all its forms the commercial banks will be forced to get additional money for their business by purchasing them at the central bank instead of their (almost) effortless creation in their computers. It can be expected that commercial banks might try to get around this necessity by creation of various derived bank products and so creation of new money by them would continue as today. The central bank of the European federation must therefore have the possibility to safeguard its money issue monopoly by supervision over bank products created by commercial banks including supervision over treating the fundamental financial instruments like investment accounts that could be used to get around issue monopoly of the central bank first of all. This power of the central bank is however important also on another ground. An ideology of the market bound by nothing rules in the present time, every “player” in it has the right to achieve the profit in almost whatever way, especially without regard to societal consequences. The banks and other financial institutions take advantage of it in a large extent and create various exotic bank products that usually comprehends almost nobody and although these products are called modernization of the financial system they serve often only to immoral enrichment, for example to the sale of inferior credits and the like. Therefore it is desirable that the central bank has the competence to determine rules according to which individual categories of financial products should be traded in. It is true that such matter should be regulated by the law but beside that also the central bank should have the same competence in cases not envisaged by the law to be able to promptly react to development in the financial sphere. Of course, it is obvious that all supporters of the “free market” or in other words as least as possible or preferably no regulations would energetically denounce this provision but it is in accord with the already here discussed provision about basic rights saying that the economic power should be subordinated to the democratic political power. And if it is obvious that some economic activity is harmful to the society it has to be regulated or even fully made impossible without regard that it allows to ineffably get rich to some small minority and it therefore wishes its preservation.

The last function of the central bank of the European federation mentioned by me here is to be the bank of the Union, in other words to conduct accounts of the constitutional and other institutions of the European Union. The reason is that it should be more advantageous for the Union and it is also a question of transparency of managing public financial resources because to place finances necessary for functioning of the Union's institutions in account of commercial banks would arouse suspicions about interconnection of the said banks and politicians who decided about that placement. The principle is also important that a public, not private institution handles public resources.

In the end, I make remark about a way of issuing new money and its putting into circulation by no more than few words. A demand could arise that the currency of the European federation is backed by some material good as it was so by precious metals earlier. The present currencies are backed by nothing except by trust of their users that they can buy something for it. The same was actually true in the past too, the trust was given by contents of the precious metal. Today, the precious metal in the role of trust giver was replaced with the policy of the central bank. Dependence on the precious metal was however disadvantageous in the past because new money could not be put into circulation in the case of precious metals lack though economy needed more money. So I believe that the currency of the European federation should not be backed by some material good, that everything should stay unchanged in this respect and that no respective provision is necessary in the federal constitution.

The central bank puts new money into circulation through the commercial banks. It actually sells (lends) the money to them in various ways (“free market transactions”). The central bank is dependent on the commercial banks in this respect because the commercial banks are not willing to acquire money from it under any conditions. If the commercial banks are not willing to take money from the central bank under the current conditions the central bank must cut interest rates for which it grants new money to the commercial banks in order that they are more willing to borrow new money and so to put it into circulation. Many central banks (including ECB) conduct this policy of cheap money now but the commercial banks do not release money obtained this way into circulation. So even although the commercial banks have the right to extensively multiply money obtained from the central bank the central bank can in certain circumstances have a problem to up amount of money in circulation. I believe therefore that the central bank of the European federation should have a possibility to put new money into circulation also in other way than through commercial banks though it should not necessary use it often. The most logic answer to such necessity is to provide the Union (or the member states) with a required amount of money because it will put it into circulation absolutely certainly and will not retain it or play them in financial casino (speculations) unlike the commercial banks.

These were the most important powers of the central bank of the European federation that should be enumerated in the European constitution's text, it is sufficient that other less important competencies will be treated in a separate specialized law.

30 April 2014

The Central bank of the Union - objectives

I begin this post with a quote of a saying “Money is always only on the first place”. Its author was somebody from a circle of Václav Klaus, the first post-communist minister of finance of Czechoslovakia then, shortly after the year 1989 when Czechoslovakia began under his management creating flourishing capitalist society with an intention “to catch up with Europe”. That saying that became popular soon was a cynical expression of an attitude that Václav Klaus held: we (at least somebody) must get rich by any possible means, must not have regards for anything and not let be restricted, in particular not with morality or even laws. It can therefore appear that validity of that saying is limited with place and time to wild transition of central-eastern and eastern Europe to capitalism but it has more general validity. Paradoxically those who only learned what capitalism is exactly articulated its most significant feature – worshiping money. But I want not to moralize about influence of money on the human society in this place, I used the saying because it excellently puts its finger on the most significant feature of human doing in Europe today. But it is surprising all the more so that what everything bows to in reality gets only small attention in documents the function of which is to determine principal rules governing functioning of states.

Supervision over money or currency is entrusted to a central bank in every European state because reality demands it. But if we should judge only by constitutions of the European states we would reach the conclusion that central banks are anything but equal with parliaments, governments and courts by their importance – in the society where central banks (at least some of them) can take measures of more significant implication than parliaments, governments and courts together really strange thing. From 28 constitutions of the present EU states, there is not a mention about existence of a central bank in the respective state in 15 of them – it is absolutely unbelievable thing in capitalism but it would not be less surprising even if there was not capitalism in Europe. In remaining 13 constitutions usually one or few sentences are that mention existence of a central bank, give a definition of its function and refer the rest to a separate law; in some constitutions existence of a central bank is mentioned only by the way and its functions are not defined. If matters referring to, for example, the parliament were prescribed in the same way it would be written only: “For the purpose of exercising the legislative power, there is a parliament. Its functions and powers are stipulated by the law.” The contrary is however true; a contrast between detailed regulations about a form, composition, election, powers and work procedures of parliaments in the European constitutions and almost complete absence of similar regulations referring to central banks could be justified only in the case that central banks would be little important institutions equivalent to meteorologic institutes. It is however possible that the mentioned absence of regulations in the constitutions is maybe unintentional expression of that regulating money comes not under the main duties of the state. One would say – no wonder in neoliberal capitalism; but duties of a central bank are with at least a few sentences described in the constitutions of east-European states that were created in the era of neoliberal capitalism in which the markets have dominance over democratic politics whereas the constitutions of the western states created before neoliberal era conceal existence of central banks.

In every case, the present practice of the European constitutions is wholly untenable in the constitution of the European federation. It is out of the question that functioning of an institution performing such important function for the society, namely regulating money, is not regulated with more detailed provisions in the constitution than is usual now. These provisions have to regulate chiefly two most important things – the aim and duties of the central bank and a method of decision-making including its staffing. Now, I will deal with the first one.

From the very beginning when I started describing my idea of the constitution of the European federation here I subordinated everything to a fundamental categorical imperative that all public politics exercised by the institutions of the federation must be democratic, that they must proceed from the will of the European federation's people and must serve to interests of the federation's people. Also the central bank of the European federation must naturally be subjected to this categorical imperative because such important thing as the currency of the state must equally as other public matters be under democratic control of the citizens who are fundamentally affected by the currency. Thinking about democratic character of the European federation's central bank and in particular about democratic control of the currency of this state (utopian for now) I came to the conclusion that the bank cannot be a mere copy of central banks of the present European states (or of the European Central Bank). However, I reached also the conclusion that to subject the currency of the European federation to the democratic control is not possible without a radical change of at least some aspects of the financial system as such. “Money governs the world.” But who governs money?

The primary aim of the European Central Bank is to maintain price stability (article 127 of the Treaty on the Functioning of the European Union); the same applies also to the central banks of the state where euro is not the currency. But in my opinion the main duty of the central bank of the European federation should be something else, namely to issue the currency of the federation. The objective to maintain price stability loses not its importance by it but in the method of issuing the currency of the European federation that I am to write about discharging that objective becomes a component of issuing the currency and those aspects cannot be separated from each other.

In earlier times, a monarch issued money (it was a sovereign's privilege) although he temporarily conceded it to some aristocrats or (especially in a time of a crisis) to some cunning businessmen (who promised to fulfill the empty treasury). In the modern time, monarchs were replaced by parliaments and governments and the right to issue money passed to a specialized state organ – a central bank. But the central banks of today do not the same as the monarchs earlier although it can look so at first sight. Any central bank in Europe (including the European Central Bank) has the exclusive right to issue banknotes and coins of the respective state currency (the ECB with its unique attributes). But it is by no means the privilege to issue the money in its whole because money has not only the form of banknotes and coins today – banknotes and coins from the times of monarchs were supplemented with electronic money in the 20th century and it is not completely issued by central banks; on the contrary, it predominantly originates in private commercial banks. In other words – the present state has not the privilege to issue its currency.

The main function of commercial banks is to grant credits, in other words to lend out money. They lend however not the money of savers because value of balances of savers' accounts is not affected by credit activity of the banks. In fact banks set a value of a credit in their computers and it grant to an applicant then; what is important, the applicant then can pay with the credit obtained this way as with “real” money, namely as with banknotes and coins. Because balances of savers' accounts remain unchanged new money that was not issued by the central bank come into circulation this way. The commercial banks are – mildly – limited in this action but credit money (or debt money) issued in circulation by one bank other banks can multiplicate and so the amount of money issued by the commercial banks is considerable in the end – the central bank is one, commercial banks are thousands. The outcome is that about 90% of all money are issued by private commercial banks and only about 10% of circulating money are issued by the central bank (I found this ratio equally for the Swiss franc and US dollar, I suppose however that this ratio is similar for other currencies). We got back with this to the times when monarchs conceded their currency privilege to private persons but we even surpassed them because no monarch relinquished his right to issue money to such large degree.

The present system has two implications for me: it is immoral and nondemocratic. If I make an imitation of a banknote in my house printer and try to pay with it I will be (severely) punished; if a bank makes money from nothing in its computers and grants it as a credit it will not be punished for it, to the contrary, it will be praised that it sets wheels of capitalist economy in motion. But there is no difference between me and the bank – I extend the amount of the money supply to achieve my private benefit, the bank extends the amount of the money supply to achieve its private benefit (the commercial banks are capitalist enterprises existing for achieving private profit). So why I should not have the right to issue new money into circulation for my enrichment whereas the owner of the bank should have the right? In addition, it is absurd in this situation that banknotes have a lot of security measures in order that they could not be imitated, on the other hand there is no security measure against imitating tangible money by pressing a key in the keyboard. And a practice caps it all that the present states borrow (instead of levying firm taxes) just the money created from nothing by the private banks in the financial markets and then they guarantee the loan with working of their citizens – almost effortless profit for the bankers secured. Who would not want to be a banker?

The second consequence follows from the character of money – money serves to all citizens, it is something like air or water in a way, therefore it should be considered a public property. But a public property should be under the democratic control in a democratic society and handling it should not be transferred to a private subject. Whereas issuing money by the central bank can be regulated through laws and the central bank is or should be this (or other that I will write about later) way responsible to the citizens, the commercial banks are responsible to nobody apart from the pocket of its owner. Massive creation of new money by commercial banks leads to devaluation of the currency or inflation to which then the central bank must react with its measures to curb it. It is paradoxical that it is wrong according to economists that issuing money is under the control of the government because it would have temptation to print money without limits to cover its expenditures and so cause inflation but the same economists do not mind that the private banks have almost that power today. It has to be admitted that the central banks have certain tools to react to inflation caused by issuing money through the commercial banks but it is only reaction to action of private subjects.

These two conclusions cause that I believe that issuing whatever form of money in circulation in the European federation can be entrusted only to the central bank under democratic laws and democratic control. I must however add to this that I am not completely sure how to properly formulate the mentioned requirement in the constitution's text. The best is in my view the reading “The Central Bank of the Union is a exclusive issuer of coins, banknotes and any other units of the currency of the Union.” But the text of the Polish constitution causes some dilemma to me; it says (article 227) that the Polish national bank “shall have the exclusive right to issue money“ (original wording is: “Centralnym bankiem państwa jest Narodowy Bank Polski. Przysługuje mu wyłączne prawo emisji pieniądza oraz ustalania i realizowania polityki pieniężnej.”) It should follow from this wording that expanding the money supply through credit activity of the commercial banks should be unconstitutional in Poland, in practice however there is the common capitalist bank industry with all common appurtenance in Poland. It can be probably concluded from it that money created through credit by the private banks in the territory of Poland is not considered money by Polish public authorities (the Polish central bank states in its web pages only issuing banknotes and coins as its competence) and it therefore comes not under the competence of the central bank which is absurd because one can pay with credit-created money just as with money issued by the central bank. It is unconstitutional after all in my view if wording of the Polish constitution should be taken seriously and it is at least an absurd situation but where is a plaintiff absent there is a judge absent as a proverb says. Hence my doubt whether my wording mentioned above will be interpreted correctly as a prohibition to issue money through credit in the commercial banks.

I read several popularizing books about economy and it is strange that the authors criticised existence of the central banks and advocated free enterprise in the economic field. It is obvious that the mentioned books are biased, they were written from the view of one economic theory (that all enterprise should be unregulated in capitalism) yet their criticising the central banks touches a certain possible problem. In the present system, if there is not a crisis, probably the main source of inflation is multiplying money through credit activity of the commercial banks. But it follows not that the central banks have no possibilities of inducing inflation. They do it for example through purchase of government bonds and other open market operations; all such tools have as their object to pour money in economy (first of all in the commercial banks) which increases inflation. If there should be a system of exclusive issuing the currency of the federation by its central bank in the future European federation and if the commercial banks should be forbidden from creating new money through credit activity the central bank becomes the only institution capable of inducing inflation (I simplify, I know, inflation is a bit more complicated matter). In that case it is necessary to insert such provision in the European federation's constitution that prevents its central bank from inducing inflation. Should I not write “unchecked inflation” instead just “inflation”? Laws determine to maintain price stability as a primary objective to the central banks which is another way how to say that they should fight inflation. But the said laws do not specify what exactly the central banks should achieve and in what way; it is left to their deliberation. A dilettante would say that price stability is zero inflation, but economists express their opinion that moderate inflation is beneficial. There are various substantiations for this. One of them says that the central banks do not know exactly the inflation rate but they assume that it is lower than the measured one and therefore they keep it slightly above zero (around 2%). Another substantiation says that moderate inflation is a security measure in order that the central bank has a manoeuvring space for the case of a potential crisis, yet another that it stimulates economy because consumers do not delay their consumption because they expect that prices will be higher due to inflation in the future. These all and other substantiations may be true but also need not to; however if inflation is defined as devaluation of the currency I am for zero inflation as a primary objective of the federal bank of the European federation (by the words that is should preserve stable value of the currency of the Union – inflation is by contrast constant devaluation). The matter of inflation and its role in action of the central bank of the European federation is complex so I leave some other remarks of this thing to the next post.

30 March 2014

Federal plebiscite - constitutional text

I still owe a constitutional text to the previous article dealing with the subject of the federal plebiscite, so it is here.

Federal plebiscite

Article 55 – Direct exercise of the state power
1. The citizens of the European Union exercise the direct state power by means of the federal plebiscite. The decision is made in the form of the law or the international treaty.
2. The laws and international treaties adopted in the federal plebiscite are inscribed in the Official Journal of the European Union.

Article 56 – Obligatory plebiscite
The federal plebiscite is obligatory about
a) modification of the constitution of the European Union,
b) laws expanding the constitution of the European Union,
c) accession of the European Union to an international organization or a military alliance,
d) adoption of an international treaty or withdrawal of it,
e) adoption of a new member of the Union,
f) a law about the status of the federal territory.

Article 57 – Restriction of the subject of voting
Restriction or abolition of democratic public order and restriction or abolition of the rights in the Chapter two of the Constitution of the Union, in particular prohibition of death penalty, torture, slavery or other cruel treatment may not be the subject of the federal plebiscite.

Article 58 – Organization of voting
1. The federal plebiscite is declared if at least 0,78% of the citizens of the Union authorized to vote to the House of People of the Assembly of the Union from at least eight member states request it.
2. The Council of Chancellors declares the date of the federal plebiscite being no more than 200 days after the day when the required number of the citizens request it.
3. The request of the citizens of the Union is not necessary to hold the federal plebiscite about the matters enumerated in the article 56.
4. The Council of Chancellors may submit any proposed law passed by the Assembly of the Union and submitted to itself for the federal plebiscite.
5. The law stipulates details about organization of the federal plebiscite.

Article 59 – Repeated voting
The matter rejected in the federal plebiscite may not be submitted again to the people earlier than after three years.

Subsection 1 – Federal plebiscite about a proposed law
Article 60 – Subject of voting and adoption of a law
1. Any legal arrangement of a matter that comes under competence of the Union can be the subject of the federal plebiscite about a proposed law. In one voting, more different proposals of the same thing can be submitted.
2. Modification of the constitution of the Union or a law expanding the constitution is adopted if at least two thirds of involved voters and at the same time two thirds of the member states vote in favour of it. Result of voting in the member state counts as the vote of the state.
3. A law except of a law expanding the constitution is adopted if the majority of involved voters and at the same time the majority of the member states vote in favour of it. Result of voting in the member state counts as the vote of the state.

Article 61 – Limits in adoption of a law
1. The Assembly of the Union may not repeal or modify a law adopted in the federal plebiscite.
2. A bill containing a matter rejected in the federal plebiscite must not be introduced in the Assembly of the Union for a period of three years.
3. The law adopted in the federal plebiscite must comply with conditions of paragraphs 10, 11, 12 of the article 33.

Subsection 2 – Federal plebiscite about an international treaty
Article 62 – Adoption of an international treaty
1. After an international treaty is submitted to the people a term of 200 day runs during which at least 50000 citizens of the Union authorized to vote to the House of the People of the Assembly of the Union can submit proposals of the change of the submitted international treaty. If such proposals are submitted there is voting about more proposals of the international treaty at the same time.
2. The international treaty is adopted if a majority of involved voters and at the same time a majority of the member states vote in favour of it. Result of voting in the member state counts as the vote of the state.
3. An international treaty that endangers democratic public order in the European Union or is inconsistent with rights, freedoms and principles provided in the chapter two of this constitution cannot be adopted.
4. Accession of the European Union to an international organization or a military alliance must have the form of an international treaty that contains all obligations and right of the Union within the respective organization or alliance.