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.
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’ . 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’ . 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’ . 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.
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.
[Update: the Court gave its ruling in June 2015; see analysis here.]
Barnard & Peers: chapter 19