Alicia Hinarejos, Downing
College, University of Cambridge; author of The Euro Area Crisis in Constitutional Perspective (OUP)
On the 14th
of January, AG Cruz Villalon delivered his Opinion in Gauweiler (C-62/14) on the legality of the
Outright Monetary Transactions (OMT) scheme of the European Central Bank (ECB).
In his view, the OMT programme is, in principle, in compliance with the
Treaties, as long as certain conditions are observed if the programme is
activated in the future. The case has important implications for the
constitutional framework of EMU and the role of the ECB, but also for the
relationship between the German Constitutional Court (the Bundesverfassungsgericht) and the Court of Justice of the EU.
Indeed, this is the first time that the Bundesverfassungsgericht
has ever asked the Court of Justice for a preliminary ruling.
Background
The ECB is
in charge of conducting monetary policy for the euro area and its role is very
narrowly defined in the Treaties. This role, however, has evolved and expanded
substantially in recent years, as the ECB has announced or adopted various
‘non-standard’ measures in response to the euro area sovereign debt crisis. The
OMT programme is one of these measures: it was announced in September 2012 in a
press release and, so far, it has never been used.
The idea is
that the ECB will buy government bonds from euro countries in trouble, i.e., when
nobody else buys these bonds, or their yield is becoming so high that the
Member State will not be able to cover interest payments on newly issued bonds,
thus having no more access to credit and risking default. Crucially, the Treaty
prohibits the ECB from acquiring government bonds directly (Art 123 TFEU) as
this would amount to monetary financing, or becoming a direct lender of last
resort to a Member State. Instead, the ECB would buy government bonds in the
secondary market—that is, from an institution that has bought these bonds first
from a Member State—rather than from a Member State directly. While the ECB had
already done this before, with the OMT programme there would be a formal
element of conditionality as well, as the Member State in question would need
to obtain financial assistance from the European Stability Mechanism or the
EFSF and comply with its conditions (i.e. macroeconomic reforms negotiated
between the Member State and the troika: the Commission, the ECB and the IMF).
The applicants before the German Court argued that the ECB
had overstepped its Treaty role by creating a programme that should be viewed
as a tool of economic, not fiscal, policy; it was also alleged that the
programme violated the prohibition of monetary financing. In an exercise of ultra vires review, the German
Constitutional Court’s preliminary response was to consider the OMT programme
illegal under EU law. For the first time ever, the national court then referred
the case to the CJEU. In the referring court’s view, the Court of Justice may
either declare the OMT scheme contrary to the EU Treaties, or provide a more
limited interpretation of the programme that is in accordance with the Treaties.
The German Court provided certain indications as to what those limits should
be.
The case is sensitive for various reasons: although not yet
used, the mere announcement of the OMT scheme played an important role in
getting the euro area out of the acute phase of the crisis, and offers a
credible defence against similar future scenarios. A declaration of illegality,
or the placing of substantive limits on the programme, may jeopardise
post-crisis recovery. Additionally, the reference is the first ever submitted
by the German Constitutional Court, and its tone is quite bold; there is clear
potential for conflict between the two courts, with consequences unknown for
EMU (on this aspect of the case, see this earlier blog post). Moreover,
the case touches on the nature and legitimacy of the role of the ECB as an
independent expert, and on the dichotomy between the original, rule-based
conception of EMU and the evolving, more policy-oriented EMU that rose out of
the crisis.
The AG Opinion
AG Cruz
Villalon delivered a carefully argued Opinion that, first, acknowledged and
unpacked the significance of the exchange for the dialogue between the German
Constitutional Court and the Court of Justice, and, second, considered all concerns
put forward by the national court. In doing so, the AG came to the conclusion
that the ECB is free to create and implement a scheme like OMT, as long as it
abides by certain limits in doing so. Crucially, these limits are far more
permissive than those suggested by the German Court.
(1) The
relationship between the two courts
The German
Constitutional Court has been very vocal on the question of limits to European
integration, vowing to exercise its ‘emergency jurisdiction’ in different
scenarios in the past: in order to protect human rights enshrined in the German
Basic Law (Solange saga), to ensure
that EU action is not ultra vires, i.e.
does not go beyond what is allowed in the Treaties (Maastricht, Honeywell),
and to protect Germany’s constitutional identity, which has so far included a
particular conception of democratic legitimacy and the protection of national
parliamentary powers (Lisbon and
various post-crisis decisions).
In Gauweiler, the case at stake, the German
Court exercised its ultra vires
jurisdiction, coming to the interim conclusion that the ECB’s actions went
beyond the powers given to it in the Treaties. Following its undertaking in Honeywell, the German Court referred the
matter to the Court of Justice before reaching a final decision. Space
precludes more careful consideration of this point, but it should be noted that
ultra vires and constitutional identity
intertwine in this case: first, because the German court used its conception of
democratic legitimacy to ‘sharpen’ its ultra
vires jurisdiction, in the sense that, for the first time, it was citizens’
right to vote that gave them standing to challenge EU action for going beyond
EU primary law. And second, because the German Court went on to suggest that further
review on the basis of constitutional identity would or may follow a Court of
Justice’s decision that the OMT scheme is not in fact ultra vires: whether the OMT scheme could violate the
constitutional identity of the Basic Law would depend on the Court of Justice’s
specific interpretation of the scheme in conformity with EU primary law.
AG Cruz
Villalon engaged with the case-law of the referring court on limits to European
integration and acknowledged the background and significance of a reference
that was worded in very bold (some would say almost aggressive) terms by the
German court. Indeed, this discussion may be seen as the most diplomatic part
of the Opinion.
The AG
emphasized the ‘functional difficulty’ of the reference: in short, that the
Court of Justice should not issue a preliminary ruling requested by a national
court if that request ‘already includes, intrinsically or conceptually, the
possibility that it will in fact depart from the answer received’ [36]. This,
the AG continues, is not the intended or proper use of the preliminary ruling
procedure. But was this such a situation? In this respect, it is problematic
that the German Court may still conduct its own and independent ‘identity
review’ after the Court of Justice has conducted its ultra vires review. Nevertheless, the AG relied on the principle of
sincere cooperation to argue that trust is required in this situation: the
Court of Justice should provide a constructive ruling, ‘on the basis of a
particular assumption regarding the ultimate fate of its answer’ [66]. So there
we have it: since both courts are under a duty to cooperate sincerely and to
trust each other, the Court of Justice should give the requested ruling to the
German court, trusting that the latter will, in turn, ‘do the right thing’. The
AG was very clear as to what he considered that to be: ‘it seems to me an all
but impossible task to preserve this Union, as we know it today, if it is to be
made subject to an absolute reservation, ill-defined and virtually at the
discretion of each of the Member States, which takes the form of a category
described as ‘constitutional identity’. That is particularly the case if that
‘constitutional identity’ is stated to be different from the ‘national identity’
referred to in Article 4(2) TEU.’
(2) The legality
of the OMT scheme
The German
court’s concerns regarding the legality of the OMT programme can be summarized
as follows: first, the programme is a measure of economic, not monetary policy,
and as such beyond the remit of the ECB. Second, a programme of this kind
amounts to monetary financing of a Member State, which Art 123 TFEU prohibits.
It would allow the ECB to become lender of last resort to a country in
financial difficulties, and it would transform EMU into a transfer
union—something not foreseen in the current Treaties.
Is it monetary policy?
The AG
started by considering the nature of the OMT scheme as a measure of monetary or
economic policy. The applicants had argued that the scheme should be classified
as an economic policy measure with the aim of saving the euro by changing
certain flaws in the design of monetary union, i.e. by pooling the debt of euro
countries. They also emphasized the effects of the attached conditionality on
Member States’ economic policies. All this, they argued, placed the OMT scheme
beyond the merely supporting role that the ECB may have in economic policy, according
to the Treaties. The German Constitutional Court agreed, based on various
features of the OMT scheme: its conditionality and parallelism with ESM and
EFSF financial assistance programmes (as well as its ability to circumvent
them) and its selectivity (in that OMT bond-buying would only apply to select
countries, whereas measures of monetary policy typically apply to the whole
currency area).
The ECB, on
the other hand, argued that the aim of the scheme ‘is not to facilitate the financing
conditions of certain Member States, or to determine their economic policies,
but rather to ‘unblock’ the ECB’s monetary policy transmission channels’ [104].
In other words, the crisis was making it impossible for the ECB to pursue
monetary policy through the usual channels. The proposed bond-buying would
ensure that credit conditions return to normality, and that the ECB is able to
conduct its monetary policy again. Additionally, the ECB argued that the
element of conditionality was necessary to ensure that the OMT scheme would not
interfere with the programme of macroeconomic reform agreed between the ESM and
the Member State in receipt of financial assistance.
The AG
started by considering that it is within the ECB’s considerable discretion to
adopt ‘non-conventional’ measures of monetary policy in exceptional
circumstances. He accepted that it was the ECB’s intention to pursue monetary
policy when announcing the OMT scheme and then proceeded to analyse whether the
features of the OMT programme bore out this initial aim. After addressing each
of the German court’s arguments, it came to the conclusion that the OMT scheme
was indeed a measure of monetary policy—with one caveat: the AG saw a problem
in the fact that the ECB made bond-buying through the OMT scheme conditional on
the Member State’s compliance with a programme of macroeconomic reform adopted
within the framework of the ESM or EFSF, and the fact that the ECB plays a very
active role in the negotiating and monitoring of this programme with the Member
State. This double role of the ECB (first within a framework for financial
assistance which constitutes economic policy, according to Pringle, and then in its bond-buying role within the OMT) would tip
the OMT scheme beyond the boundaries of the ECB’s powers: monetary policy with,
at most, a supporting role in economic policy. The AG thus considered that, if
the OMT were to be activated, the ECB would have to distance itself from the
Troika and the monitoring of the conditionality for financial assistance immediately.
Is it proportionate?
Once the AG
was generally satisfied as to the monetary nature of the OMT scheme, he
reviewed its proportionality; the fact that this was a non-conventional use of
competence made the proportionality assessment the more essential.
The OMT
programme is an incomplete measure (as not all its features were specified in
the ECB press release, and the programme has never been implemented). The AG
considered that the programme’s basic features were known and could be put
through an initial proportionality assessment, but that a full review of
proportionality will only be possible once or if the OMT programme is ever
fully regulated. The result of that initial proportionality assessment was
positive: the basic configuration of the OMT programme passed the tests of
suitability, necessity (the AG considered that the limitations suggested by the
referring court would likely render the programme ineffective) and
proportionality stricto sensu. The
broad discretion granted to the ECB had a bearing on the application of the
proportionality test. In sum, the programme was considered proportionate in
principle, subject to the ECB complying with the requirements of
proportionality (among them the duty to give reasons) if the programme is ever
implemented.
Is it against the prohibition on
monetary financing?
Once the
nature of the OMT programme had been discussed, the Opinion turned to the
possible circumvention of the prohibition on monetary financing of Member
States, which is a further manifestation of one of the principles underlying EMU,
namely fiscal discipline. While the Treaty makes it illegal for the ECB to buy
government bonds directly from a Member State, the referring court argued that,
although OMT bond-buying would take place in the secondary market, this
amounted to a circumvention of the same rule. This circumvention would
undermine fiscal discipline and would make certain Member States responsible,
ultimately, for the debts of others, which is banned by Article 125 TFEU.
The AG
considered that the prohibition of monetary financing (as a manifestation of
fiscal discipline) was one of the features of the constitutional framework of
EMU that contributes to the attainment of a higher objective, the financial
stability of the monetary union (Pringle).
Exceptions to this prohibition must thus be interpreted restrictively, and a
formalistic approach must be avoided: the focus must be on the substance of the
measure, and not on whether the bond-buying occurs directly or in the secondary
market.
The
referring court had identified various technical features of the OMT scheme as
running counter to this prohibition: the ECB’s lack of preferential creditor
status and waiver of rights, its exposure to excessive risk, the disruptive
effects of holding the bonds until maturity, the fact that bond-buying in the
secondary market would take place on a large scale and only a short time after
their issue (making it too similar in its effects to buying bonds directly from
the state) and that the ECB’s action would encourage new investors to buy newly
issued bonds. In very broad terms, the German court’s view was that these features
amounted to a circumvention of the prohibition of monetary financing because,
even though the bond-buying would take place in the secondary market, it would
disrupt the market and undermine fiscal discipline to an intolerable degree.
The AG
disagreed on all counts but one; after discussing the effects of each technical
feature, he considered that they were not disruptive enough of the normal
functioning of the market and of fiscal discipline to fall foul of the Treaty.
Again, with one caveat: if the ECB ever implements the programme, the timing
needs to allow for actual formation of a market price in respect of government
bonds before the ECB buys them. If the ECB does that, according to the AG, the
technical features of the OMT programme do not endanger fiscal discipline to a
disproportionate degree, and as such they do not have the potential to make
Member States responsible for each other’s debts or turn EMU into a transfer
union.
Final Remarks
The AG
Opinion in Gauweiler is thoughtful
and carefully argued. His discussion of the German court’s case-law and the
problematic of the reference is measured, while still seeking to protect
certain elements of the Court’s jurisdiction that he considers essential to the
integrity of the EU legal system. It will be interesting to see how the Court
of Justice handles the matter in its decision but, just as importantly, how the
German Constitutional Court reacts to the latter.
The Opinion
is less diplomatic when it comes to the legality of the OMT scheme: it rejects
almost all concerns put forward by the referring court, and it does so from a
particular conception of the independence of the ECB and the role of courts in
controlling its activities. In this regard, the Opinion can be said to continue
in the Pringle vein of ratifying the
move from a rules-based EMU to a policy-based
one in the wake of the crisis. Yet despite the wide margin of discretion
enjoyed by the ECB, the Court has a crucial role to play in protecting the
constitutional framework of EMU and of the Union. In his Opinion, the AG
discharges this task by grounding an important part of the analysis on the
technical features of the OMT and their effects: this is particularly clear
when it comes to the question of whether the programme is compatible with the
prohibition of monetary financing, where the discussion turns on technical
matters rather than on more abstract ones such as the nature of EMU, its
evolution, and the role of solidarity within its constitutional framework.
While this may seem like a shame, it is also understandable: this broader
debate is of paramount importance, but the Court (or any court) may not be the
most suitable forum for it.
Barnard
& Peers: chapter 19
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