Nothing stands in the way of including prerequisite clauses in collective bargaining agreements, that relate to inflation or interest rates. No law forbids such, and the negotiation parties are unequivocally permitted to negotiate such provisions. Such prerequisite clauses in no way bind the hands of the Central Bank of Iceland or its monetary policy committee and have no effect on the bank’s independence whatsoever.
This is the unequivocal conclusion of the law firm MAGNA lögmenn, which at Efling’s request has written a legal opinion on the effect of prerequisite clauses in collective bargaining agreements on the independence of the Central Bank of Iceland. The opinion can be found below but unfortunately only in Icelandic.
In the current collective bargaining negotiations, the Confederation of Employers (SA) has put forward the stance that the statutory independence of the Central Bank of Iceland may be weighted with prerequisite clauses related to inflation and interest rates. For that reason, SA has refused to agree to the prerequisite clauses that The Union Alliance has demanded in the collective agreements. The Union Alliance’s demands have previously been explained on Efling’s website. The article can be found here.
Independence of the monetary policy committee guaranteed
Magna’s opinion states that according to the law, the Central Bank of Iceland is an independent institution owned by the state, which a minister oversees. However, the bank is not subject to the authority of ministers or other government authorities by law but is independent in its actions. The bank is then not subject to the supervision of any minister but is supervised by a board elected by Alþingi. That supervision does not concern the bank’s decisions in individual cases.
Furthermore, the bank’s monetary policy committee, which makes decisions on the application of management tools regarding financial stability, including decisions on key interest rates, also enjoys independence from the bank’s senior management. According to the law, committee members must meet strict conditions of independence and impartiality. The monetary policy committee’s decisions must be based on the objectives of a stable price level and be based on a quality assessment of the situation and prospects in the economy. Therefore, the independence of members of the monetary policy committee is guaranteed in various ways by law.
Concerning collective agreements the opinion states that freedom of contract is one of the principles of contract law. For that reason, the parties to a contract are free to enter into agreements between themselves and dispose of their rights and obligations, as long as other laws allow such actions.
Collective agreements have no legal effect on the Central Bank
In their legal opinion, Magna lawyers assess SA’s statement, that prerequisite clauses can in some way weigh against the independence of the Central Bank. “First of all, it should be noted that the bank is not a party to such agreements and that the members of the general labor market do not have the power to bind the bank by entering into collective bargaining agreements. The conclusion of such agreements, regardless of their content in each case, cannot therefore result in a change in the bank’s legal status,” says the opinion. It further states that collective bargaining agreements can therefore in no way weigh on the statutory independence of the bank, nor on the scope of its monetary policy committee to make decisions, including on key interest rates.
“The provisions of the collective agreement that refer to the decisions of the Central Bank therefore have no legal effect concerning the statutory independence of the bank and do not bind the bank in its decision-making,” the opinion further states.
A long tradition of prerequisite clauses related to inflation
Of course, contracting parties cannot negotiate among themselves in a binding manner on inflation or interest rates, they neither have the power to do so nor is it the subject of collective agreements. However, nothing prevents the preconditions of a long-term collective agreement from being adjusted to external conditions such as inflation or interest rates. The contracting parties are unequivocally allowed to agree on such matters.
In MAGNA’S legal opinion, it is also pointed out that there is a long tradition of tying the content of collective agreements to some extent to assumptions about inflation and interest rates. “Such precondition clauses have invariably been in the long-term agreements of unions within ASÍ and SA in recent years.” It also says that if the legislator had considered such clauses incompatible with the independence of the Central Bank, it must have been dealt with through legislation.
Niðurstaða lögmannsstofunnar er því að ákvæði í almennum kjarasamningum sem bindi efni þeirra við tiltekið verðbólgu- eða vaxtastig sé í fullu samræmi við sjálfstæði Seðlabankans, lög um sjálfstæði bankans komi ekki í veg fyrir að slík ákvæði séu sett í samninga og þau dragi ekki úr sjálfstæði hans.
The law firm concludes that clauses in general collective bargaining agreements that tie their content to a specific inflation or interest rate are fully compatible with the independence of the Central Bank, laws regarding the bank’s independence do not prevent such clauses from being included in contracts and they do not reduce its independence.