Inflationary Pressure and Labor Conflict

Benefits of a Common CurrencyCosts have to do with macroeconomic management of the economy

Benefits have to do with the microeconomic aspect

Eliminating national currencies for a common currency leads to economic efficiency gainsElimination of transaction costsElimination of exchange rate risk

Benefits of a Common Currency (cont.)Direct gains from the elimination of transaction costsEliminating the costs of exchanging one currency into another is themost visible gain from a monetary unionE.C. Estimates these gains between 13-20 billion/yearOf course banks will lose revenue they get for exchanging national currencies in a monetary unionBenefits of a Common Currency (cont.)Indirect gains from the elimination of transaction costsThe scope for price discrimination between national markets will be reducedThe unification of currency along with the other measures in creating a single market will make price discrimination more difficultThis is a benefit to the European consumer

Benefits of a Common Currency (cont.)Welfare gains from less uncertainty

The uncertainty about future exchange rate cahnges introduces uncertainty about future firm revenues

Welfare of firms will increase when common currency is introduced (exception: firms taht make money by taking on risk)Benefits of a Common Currency (cont.)Exchange Rate Uncertainty and the Price Mechanism

Exchange rate uncertainty introduces uncertainty about the future prices of goods and services

Movement towards a common currency will eliminate the exchange risk and lead to a more efficient working of the price mechanismBenefits of a Common Currency (cont.)Exchange Rate Uncertainty and Economic Growth

The elimination of the exchange risk will lead to an increase in economic growth (the EC argument)

However, this view lacks empirical dataBenefits of a Common Currency (cont.)Benefits of An International Currency

When countries form a monetary union the new currency will likely weigh more in international monetary relations than the sum of individual currencies prior to the Union

The currency is likely to find use outside of the unionThis creates additional benefits to the union:Issuer of currency obtains additional revenuesIt will boost activity for domestic financial markets (foreign residents will want to invest this creates know-how and jobs & financial institutions will have new opportunities

Benefits of a Common Currency (cont.)Benefits of a Monetary Union and the Openness of CountriesThe welfare gains of a monetary union are likely to increase with the degree of openness of an economyEx: elimination of transaction costs will benefit those countries that buy and sell a large number of goods and services in foreign countriesWith an increasing openness towards the other partners in the Union, the gains from a monetary union (per uniot of output increases)

Costs and Benefits Compared

Costs and Benefits Compared (cont.)The importance of costs and benfits depends on ones view about the effectiveness of the exhange rate instrumentMonetarist View:Exchange rate changes are ineffective as instruments to correct for these different developments between countriesEven if they are effective they make countries worse offMonetarist View

Keynesian ViewThe world is full of rigidities (wages and prices are rigid, labor is immobile) this makes the exchange rate a powerful instrumentMundells original theory represents this very wellFew countries would benefit from a monetary unionLarge countries with one currency would be better off (economically) splitting the country into different monetary zonesKeynesian View

Monetarist View and Keynesian View ComparedThe monetarist view has been in favor with economists since the early 1980s

Is the EU an OCA?Intra-UnionExports ofEU Countries (% GDP) in 2007Belgium/Lux.68.7%Denmark23,1Slovakia67,1Sweden22,8Czech Rep.60Latvia22Netherlands55,3Finland20,8Hungary54,3Malta19,5Slovenia44.2Portugal17,7Estonia36,9Italy14Austria32France13,9Ireland29,5Spain11,7Lithuania28,5United Kingdom9,1Poland26,1Greece4,9Germany25,9Cyprus4,7Is the EU and OCA? (cont.)Large differences in openness of EU countries with the rest of the Union

Cost-benefit graph will be different for each country

Most beneficial for the most open countries (ex. Benelux, Ireland)

For other countries like Italy with lower openness, their authorities obviously did not consider the loss of the exchange rate instrument costly and therefore decided to join the UnionPrice and Wage Rigidities, Labor Mobility and Monetary UnionCost-Benefit calculus of a monetary union is also influenced by the degree of wage and price rigidities

Price and Wage Rigidities, Labor Mobility and Monetary Union (cont.)An increase in the degree of mobility of labor shifts the cost curve to the left and makes the monetary union more attractiveSingle market with labor mobility makes the EMU more attractiveHowever, regional concentration of industrial activities (like that of auto production in one country) would shift the cost curve upwardsAsymmetric Shocks and Labor Market FlexibilityThe size and frequency of asymmetric shocks also matters for the attractivenss of a monetary union

Countries that have very different demand and supply shocks will find it more costly to join a monetary union Their cost line would shift upwardsAsymmetric Shocks (cont.)

1766172011Asymmetric Shocks (cont.)Countries (regions) that experience a high divergence in output and employment growth need a lot of flexibility in their labor markets if they want to benefit from a monetary unionAs the degree of divergence goes up the greater the need for flexibility in labor marketsThis relationship is shown by the line AAEmpirically, EU-15 (and EU-27) as a whole is located above the AA line from an economic point of view, a monetary union is a bad ideaHowever, there is a subset of countries which do form an OCA (EU-5: Benelux, Germany and France)Is the EU an OCA?The challenge for the EU is to move to the other side of the AA lineTwo strategies:Reduce the degree of real divergenceDifficulty: dependent on factors over which policy-makers have little influence (ex: industrial specialization)Increase the degree of flexibilityRequires reform of labor market institutions (difficult but necessary)

However, by moving towards closer political unification asymmetric shocks could be reducedLabor Unions and Monetary UnionRole of labor unions in determining the cost of a monetary union is significantPresence of asymmetric shocks: wages shoudl be flexibleCentralized wage bargaining harmfulex: German unification (E. German firms did not survive the shock of unification)Presence of symmetric shocks:Wages should be more uniform across countriesWage bargaining is still not desirable because:Asymmetric shocks less likely in unified Europe but regional specializaiton could lead to asymmetriesUneven changes in output and employment between sectors (sectors with less favorable developments would suffer)Future organization of labor unions in a monetary union will have to respect the requirements of flexibility

Costs and Benefits in the Long Run

176Costs and Benefits in the Long Run (cont.)

13176The Challenge of Enlargement of EMUSince Eurozone is in existence the question of whether or not it is optimal is academicStill important to know, however, whether or not the beneifts of the union exceed the costs for the 17 membersIf costs do not exceed benefits individual members will be quite unhappy with the ECBEnlargement of the EMU may exacerbate problems of ECBPresent Eurozone consists of 17 membersAustria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal, Spain (1999)Greece (2001); Slovenia (2007); Cyprus, Malta (2008), Slovakia (2009), Estonia (2011)The Challenge of the Enlargement of the EMU (cont.)Denmark, Sweden and the UK have not yet joined the EMUWill all of these countries bring the enlarged Eurozone closer to an optimal currency area?Degree of Openness: Central European countries are at least as open towards the EU as the EU countries themselvesCentral European countries appear to be more integrated with the EU than Denmark, Sweden and the UKThus, in terms of openness, the Central European countries would fit quite well into the existing EMUThe Challenge of the Enlargement of the EMU (cont.)Asymmetry of Shocks:Study of Korhonen and Fidrmuc (2001) analyzed the correlation of demand and supply shocks with the average of the union for the EU states and candidatesStudy finds high correlations of the large coutnries (France, Italy and Germany) with the euro areaNot surprising since these large coutnries make up a significant part of the UnionAlthough some Central European countries (Hungary and Estonia) are well correlated with the euro area, this is much less the case with othersA large number of states have negative correlations of their demand shocks (Lithuania, Latvia, Czech Republic, Slovenia and Slovakia)This could be because these states pursue independent monetary policies once in the Union this source of asymmetric shocks will dissapearBut the supply shock negative correlation is unlikely to disappear

The Challenge of the Enlargement of the EMU (cont.)The position of the UK:Correlation of demand shock is also negative this reflects UKs pursuit of its own national monetary policies quite independently from what happens in the Euro areaCorrelation of the supply shock is also quite lowConclusions:It is not clear that all countries in the sample are part of an OCA with the rest of the EU (most evident for the UK) low trade with the euro area and is more subjected to asymmetric shocks than other large members of the Union hesitation of the UK to enter the EMU is understandableDespite the openness of the Central European states to the EU many of these countries are still subjected to relatively large asymmetric shocksSome of these countries may still enter the EMU however as the best possible way to import monetary and price stabilityConclusionsIt is unlikely that the EU as a whole constitutes an OCAThe number of countries that benefit from monetary union is probably larger than most economists thought just a few years agoAs the years increase, monetary union will become a more attractive option for most, if not all EU countriesEven the countries that are net gainers from a monetary union take a risk by joining the unionWhen large shocks occur they will find it more difficult to adjustEuropean Central BankIn the postwar period 2 models of central banking have evolved:Anglo-French modelObjectives:Central banks pursue several objectives:Price stabilizationStabilization of the business cycleMaintenance of high employmentFinancial stabilityInstitutional Design:Political dependence of central bankMonetary decisions are subject to the governments approvalGerman modelObjectives:Only one objective: Price StabilityInstitutional Design:Political Independence no interference from political authorities

European Central Bank (cont.)When the European nations negotiated the Maastricht Treaty a choice between these two models had to be made and the German model prevailed as the choice for the ECBECB objectives: Article 105 of Maastricht Treaty states that it is price stabilityArticle 2 includes a high level of employmentTreaty recognizes the need to follow other objectives as well, but they are seen as secondary to price stabilityTreaty is also clear on the need for political independence of the ECBIn the absence of this independence the central bank can be forced to print money to cover deficits this would lead to inflationEuropean Central Bank (cont.)The Bundesbank is clearly the model for the ECB, however, the ECB is tougher on inflation and political inflation than the Bundesbank was

Reason: a simple majority in German parliament can change the status of the Bundesbank, changes in the ECB are much more difficult

They can only occur by a revision of the Maastricht Treaty requiring unanimity among all EU-member states, including those that are not members of EMUEuropean Central Bank (cont.)The success of the German model is intriguingWhen the EU countries negotiated the Maastricht Treaty, the Anglo-French model prevailed in almost all of the EU-member statesIt was rejected for the German model because:Intellectual DevelopmentThe reaction to Keynes: the monetarist view eruptedIt was felt that unemployment could not be lowered below its natural rate without creating inflationLowering unemployment below natural rate could only be achieved with structural policies like more flexibility in labor aned lower taxesThe central banks should only concentrate on what they can control: PRICESIt was demonstrated taht countries whose central banks were politically independent managed their economies better (lower inflation without high unemployment or lower growthEuropean Central Bank (cont.)Strategic Position of Germany in the EMU Process

Germany faced the risk of having to accept higher inflation when they entered a monetary unionIn order to reduce this risk they insisted on creating a central bank tough on inflationIn order to accept the EMU Germany insisted on having an ECB like the BundesbankEuropean Central Bank (cont.)ECB was thus modelled on the German Bundesbank with a strong mandate for price stability and weak responsibility for stabilizing output and employment functions conservative central bank an institution that attaches greater weight to price stability and lesser weight to output and employment stabilization than the rest of society

European Central Bank (cont.)This leads to a conflict:

In hard times such as an unexpected recession taht increases unemployment the ECB will do little in terms of expansionary policies or less than what the society wants it to do

This represents a conflict between the ECB and elected politicians who represent the society

ECB will argue this gives them greater credibility because of their reluctance to yield to political pressure

This leads to a trade-off between credibility and stabilizationEuropean Central Bank (cont.)For the ECB monetary policies should not be used to lower unemployment below the natural unemployment

Politicians should do this by lowering taxes on labor and introducing flexibility in the labor market

The question and the problem is: WHAT DOES THE ECB SEE AS THE NATURAL UNEMPLOYMENT RATE? and is it correct in its assesment?

European Central Bank (cont.)The Maastricht Treaty gave a mandate to the ECB to maintain price stability but also stabilize output and employment (provided this does not endanger price stability)A wall was erected around the ECB to protect it from political interference so it could accomplish these objectivesAlthough there are good reasons for independence there are also problems associated with it mainly, its lack of accountabilityIt is possible for the ECB to make a mistake, for ex to miscalculate the natural unemployment rate and therefore fail to stabilize output and employment while it could do so without endangering price stabilityEuropean Central Bank (cont.)There needs to be a mechanism to check that the ECB fulfills its mandate and applies sanctions if this is not the caseIf the government decided about interest rates there would be no need for accountability of the central bankIf the central bank has lots of power then there is a corresponding need for accountability since the government is accountable to the votersIndependence and accountability are part of the delagation of powers granted by votersEuropean Central Bank (cont.)

BundesbankFederal ReserveEuropean Central Bank (cont.)Does the ECB have the strongest degree of accountability?

Evidence suggests that it is less well developed than that of the Federal Reserve Banking System of the USA (the Fed)

Although both presidents of these two banks face the parliament regularly the chairman of the Fed faces an institution that can change the status of the Fed by a simple majority therefore he needs to pay attention to the opinions of CongressmenEuropean Central Bank (cont.)When the president of the ECB appears before parliament they have no power to change its status it can only be changed by changing the Treaty requiring a unanimity of all EU states ECB has much more power

Thus ECB has lots of independence but not a corresponding degree of accountability

European Central Bank (cont.)The other issue of accountability rises from the ECBs objectives they are not clearly definedAlthough price stability is given as its objective it was not given a precise content making it possible for the ECB to define it itselfThe other objectives of the ECB (provided price stability is achieved) have been left very vagueIf this strategy of the ECB is successful it will only really be responsible for its performance against inflationEuropean Central Bank (cont.)For ex. The Fed is responsible for movements in employment, mandated by law unlike the ECB the Fed has greater responsibilityThe primary responsibilities of the Fed:conducting the nations monetary policy to help maintain employment, keep prices stable, and keep interest rates relatively low supervising and regulating banking institutions to make sure they are safe places for people to keep their money and to protect consumers credit rights. providing financial services to depository institutions, the U.S. government, and foreign central banks, including playing a major role in clearing checks, processing electronic payments, and distributing coin and paper money to the nation's banks, credit unions, savings and loan associations, and savings banks.

The Federal Reserve SystemThe central bank of the United States

Created by Congress in 1913

Consists of a network of twelve Federal Reserve Banks and a number of branches under the general oversight of the Board of Governors. The Reserve Banks are the operating arms of the central bank The Federal Reserve System Districts

European Central BankIn summary the accountability of the ECB is weak

Absence of strong political institutions in Europe capable of exerting control over its performanceAs a result of the Treatys vagueness in defining its objectives the ECB has restricted its area of responsibility to inflationEuropean Central Bank (cont.)This creates a long-term problem for the political support of the ECB

Most central banks are responsible for macroeconomic stability: reducing business cycle fluctuations, avoiding deflation, managing financial stability,...

Difficult to see how European politicians will continue to support an institution to which great power has been delegated and over which they have so little control

European Central Bank (cont.)Some things the ECB can do to avoid this:To compensate for the lack of formal accoutnability it could enahnce informal accountability, ex. Have greater transparency (for ex the ECB can inform the public about its objectives and how it will achieve them and openness in the decision-making processThe ECB has tried to do this with its monthly reports and press conferences by the ECB presidentPublish the minutes of its meeting like th eFed showing the voting of members but the ECB says it cannot due to an article in the Treaty that prohibits it from doing soECB could broaden its responsibilityECB should announce its estimate for the natural unemployment rate giving the public something to measure it byEuropean Central Bank (cont.)Institutional Framework of the ECB:The continuing importance of nation-states in the EU made it necessary to construct monetary institutions for Euroland that are sufficiently decentralized and yet maintain unity in the conduct of monetary policyThe institutions of Euroland were established in the Maastricht Treaty. Monetary policy is entrusted to the Eurosystem which consists of:ECBNational Central Banks (NCBs) of the EU countries in the EMU (in 2013 there are 17)European Central Bank (cont.)The governing bodies of the Eurosystem are:Executive Board:President (Mario Draghi, Italy)Vice-President (Vitor Constancio, Portugal)4 Directors of ECBJrg Asmussen, GermanyYves Mersch,LuxembourgBenoit Coeure, FrancePeter Praet, Belgium

European Central Bank (cont.)Governing Council:6 members of the Executive BoardGovernors of the 17 NCBs

Members of EurolandAustria BelgiumCyprusEstoniaFinland France GermanyGreeceIreland

ItalyLuxembourgMaltaNetherlands PortugalSlovakiaSloveniaSpain

European Central Bank (cont.)Governing Council:Main decision-making body of the EurosystemIt formulates monetary policies and takes decisions concerning interest rates, reserve requirements and the provision of liquidityMeets every 2 weeks in FrankfurtEach of the 23 members has one voteExecutive board implements the monetary policy decisions of the Governing CouncilGives instructions to the NCBsSets agenda for the meetings of the Governing CouncilEuropean Central Bank

1717European Central Bank (cont.)The whole decision-making structure is called the EurosystemECB is only a part of this system and cannot take decisions on its own about monetary policiesThe national banks are fully involved in the decision-making processDecisions are then implemented by the ECBNCBs then carry out the decisions in their own marketsEuropean Central Bank (cont.)The question is whether or not this system is too decentralizedThe NCBs in the Governing Council have a clear majority (17 out of 23 members)This contrasts with other decentralized central banksFor ex. The US Feds decision-making body is the Board of Governors12 members where 5 are presidents of regional banks (representing regional interests in minority position) the other 7 members are appointed by Congress to represent the interests of the system as a wholeEuropean Central Bank (cont.)The ECB is small (employee-wise) in contrast to the national banksIt is possible for the NCBs to analyze issues to their national advantageStaff at ECB and NCBsTotal StaffIn analytical functions (research, statistics, econ.)ECB600100-150Bundesbank17,632360Banque de France16,917750Banca dItalia9,307300Banco de Espana3,269350Nederlandsche Bank1,721165Note: NCB data refers to 1995European Central Bank (cont.)However, this should not be exaggeratedIn a recent study DeGrauwe et al concluded that in case of an asymmetric shock even if all the NCBs acted in their own national interest, as long as the Executive Board took a Euroland perspective, the outcome would not be biased in favor of one country or anotherEven though the Executive Board has minority voting since the NCBs will want different things the Executive Board ends up with the majorityThis may not always be the case if the different governors end up in coalitionsEuropean Central Bank (cont.)One of the most peculiar features of Eurolands monetary system is the fact that while monetary policy was entrusted to a European institution, the responsibility for banking supervision was kept firmly in the hands of nation states

This could lead to problems

European Central Bank (cont.)Bank Regulation and Supervision were set out in an EC Directive prior to the signing of the Maastricht Treaty:Responsibility for the supervision of banks entrusted to the authorities of the coutnry where the banks have their head officeThe principle of home country controlEx. Deutsche Bank is supervised by the German supervisory authorityThis also means Germany is responsible for supervising the Deutsche Bank branches in other countriesEuropean Central Bank (cont.)Host Country is responsible for financial stability in its own markethost country responsibilityEx. France is responsible for stability of all banks in France (including foreign ones)

As long as the national banks remain within national borders there is not much of a problem

However, the degree of segmentation in the banking sector is very large

The cross-border M&A activity is expected to increaseMergers and Acquisitions in the EU Banking Sector

Example of Banking CrisisExample of a possible crisis:

It is possible that in the near future 50% or more of the banks operating in Italy will be branches of banks from another country (ex. Germany, France,...)

The Italian monetary authorities will be responsible for the stability of the banking sector in Italy and will need information on the soundness of these banks and will need to acquire this informaiton from supervisory institutions in the other country (Germany, France,...)

Example of Banking Crisis (cont.)Will this information be provided in a timely manner?

Will all necessary information be disclosed? (Most countries do not like to give out negative information on their banks)

It is possible that Italy will be badly informed and this will make it more difficult for Italy to provide the stability it is supposed to

Problem could be worse in a crisis

Example of Banking Crisis (cont.)Ex. Banking crisis happens in Italy and Italy needs to bail out good banks that are in a liquidity crisis (lender of last resort) and needs quick information

If it does not get this information quickly it may hesitate to lend to a good bank

The crisis will get worse

The ECB needs to take over this lender of last resort function to prevent banking crisesExample of Banking Crisis (cont.)Banking Crisis: Failure of a bank with bad loans, a run on other sound banks by deposit-holders threatening the closure of these banks as wellLender of Last Resort:Walter Bagehot (famous 19th century English economist) defined the principles that central banks should follow to prevent a banking crisis:The central bank should lend without limits to sound but illiquid banks (lender of last resort)The insolvent banks should either be allowed to fail or should be restructured whereby the bad loans are taken out of the failing bank and the remaining sound portfolio is placed in a new and recapitulated bank (usually the taxpayer will foot such a bill)The New Financial Regulatory and Supervisory Structure in the EUBanking crisis of 2008:Caused a major overhaul of the way banks and financial markets are regulated and supervised in the Eurozone and the EUNew framework applies to all EU countries and is not restricted to the Eurozone countriesThe President of the ECB has been given the task of analyzing sources of potential systemic risks that may affect the financial system and issuing early warnings of impending problemsThe board has no executive powerEuropean Systemic Risk Board (ESRB)As of January 1, 2011ConclusionEurosystem is unique

Compromise between national banks and unified decision-making

Its shortcomings:

Lack of accountabilityThe decentralization of the ECB making it difficult for supervision to prevent and manage financial crisesTurkish Central Bank (TCMB)Lesson will seek to answer the following questions:When was the TCMB formedHow was the TCMB formedWhy was the TCMB formedThe Birth of the TCMBCentral Banking born out of need to provide war financing in many statesThe central bank of the Ottoman State was born due to similar reasons however it was somewhat different in institutional and ownership statusThe Crimean War of 1853 was the beginning of the financial bankruptcy of the Ottoman EmpireThe Ottoman State attempted to finance the war with domestic and foreign borrowingTCMBThis led to the first foreign borrowing of the Ottoman Empire1854 the Ottoman Treasury sought long term debt in the European financial markets of London, Paris and Vienna1863 Osmanli Bankasi (Bank- Osmani-i ahane) formed by British and French capital to aid in Ottoman debt repaymentThe Bank had the right and monopoly to print moneyTCMBThe Bank would borrow at low interest in the European markets and increase its gold reserves and print three times the amount of its reserves and give the government capital advances in exchange for interestAlthough the Bank operated with profit, the Ottoman state was not allowed to share in the profit1875 the Ottoman state declared that it would default on foreign debt1881 Dyun- Umumiye daresi (Debt Management Administration) formed with the duty of managing the Ottoman states foreign debtTCMBThe formation of the Duyun-i Umumiye daresi signaled the symbolic end of the Ottoman stateThis trauma helped shape the economic politics of the new Turkish republic in 1923i.e. Avoidance of foreign debt and budget deficitsThese concepts also influenced the institutional structure of the central bank during 1930-1950TCMBThe absence of a national central bank as the symbol of economic independence became a major problem of the Ankara government especially during the War of IndependenceProblems created by this deficiencyThe rejection of the Ottoman bank formed by foreign capital to provide war financing during WWIHigh inflation and the havoc it brought on societyThe constant depreciation of the Turkish Lira 1925-1930 : the ideological foundations of a new central bank for the new Turkish state plantedTCMBThe endeavor to create the central bank brought about restlessness in the two major banks, Bankas and Osmanl BankasTrkiye Bankas supported the creation of the new institutionThe General Manager of Is Bankasi, Celal Bayar, declared that he was ready to turn Is Bankasi into the new central bank Osmanl Bankas, opposed the new institution because it did not want to lose its privileges in printing money and stated that the new institution should be formed with foreign capital and that the new state should provide its financial stability with foreign borrowingTCMBOsmanli Bankasis wishes would have led the new state to lose its economic independenceThe new leaders of the Republic decided to repay the Duyum-i Umumiye debt without foreign borrowingThis allowed for the new central bank to replace the Osmanli Bankasi which lost its priveleged status1930 the Central Bank Law passed in the Turkish ParliamentThe new institution took over the governments domestic and foreign exchange and treasury operations3 October 1931 the Turkish Republic Central Bank (TCMB) formally began its operations as the 38th central bank in the world Other central banks formed after this period:New Zealand (1933); Canada (1934); Ireland (1943); Australia (1945)Political Independence of the TCMB1930 the Governor of the Bank Council appointed for 5 years with the option of renewal by the President of the Republic1970 the law was changed to allow the upper level management to be appointed after the Bank Council declared the candidates and the Council decided on appointmentsToday the Governor of the TCMB is appointed byt eh Cabinet of Ministers and the deputies are appointed from the Governors choice of 3 candidatesSince the Governor and his deputies are not appointed at the same tme the government can shape the members of upper managementPolitical IndependenceAfter 1987 elections the individual independence of the TCMB Governor was damagedGovernor and deputiess duty period reduced to 3 years1990 Governors appointment period re-extended to 5 years2001 Governors appointment period re-extended to 5 yearsHarmonization with European Central Banking System Law (ECBs president appointed for 8 non-renewable years)Political Independence1930 no specific education requirement for Governor and top 4 executives1970 mandate that Governor should have higher education with experience and knowledge in finance, economics and bankingGovernor should have higher eduation in social sciences with previous experience in the public sectorDeputies should have an undergraduate or graduate degree in either law, finance, economics, management or banking along with adequate experience and knowledge and at least 10 years experienceSince 1970 the Banks Council is composed of 6 people selected by the Governor and General Council of the BankInstitutional Structure of the TCMB

TCMBPresident of the TCMBAssoc. Prof. Dr. Erdem Ba (since 19 April 2011) 47 y.o., PhD in EconomicsMembers of the Bank CouncilAssoc. Prof. Dr. Ahmet Faruk Aysan (since November 2011) 36 y.o., PhD in EconomicsM. Vehbi tak (since 1 May 2005) 53 y.o., lawyer with graduate degree in social sciencesAssoc. Prof. Dr. Lokman Gndz (since 1 May 2005) 43 y.o., PhD in bankingProf. Dr. Sabri Orman (since November 2011) 65 y.o., PhD in EconomicsProf. Dr. Necdet ensoy (since 7 December 2006) 59 y.o., PhD in accountingAbdullah Yaln (since 1 May 2012) 60 y.o., degree in accounting and masters in finance, former head of Etibank and auditor at Ziraat Bankas

Aims of the TCMB

TCMBThe primary aim and priority of the TCMB pre-1986 was to support the governments development programWith the changes in the foreign exchange and convertibility of the Turkish lira the aim of price stability became a major goal of the TCMBLaw No. 19126 of 3 June 1986:ekonomik gelimeye yardmc olmak amacyla; para ve kredi politikasn, kalknma planlar ve yllk programlar gz nnde bulundurularak ekonominin gereklerine gre ve fiyat istikrarn salayacak bir tarzda yrtmektir.TCMB2001 new law lists the primary aim of the Bank as price stabilityProvided that price stability is achieved the Bank can support the governments growth and employment policiesThe Bank determines the inflation target with the governmentCo-responsibility of the government and the Central BankThe EU Progress reports criticize this aspect stating that it damages the independence of the Central Bank and does not conform to EU normsTCMBThe government does not have power over the formation of the budget of the TCMB However the government must approve the TCMBs budgetThis limits the economic independence of the BankThe TCMB can also be audited by the Prime MinistryThis is incompatible with the European Central Banking System norms