Alicia Hinarejos, Downing College, University of Cambridge; author of The Euro Area Crisis in Constitutional Perspective
On the 16th of June the Court of Justice
delivered its decision in the Gauweiler
case, concerning the legality of the Outright Monetary Transactions (OMT)
programme of the European Central Bank (ECB). The Court considered the
programme compatible with EU law. The decision has important implications for
the powers of the ECB, the constitutional framework of the EU’s Economic and
Monetary Union, and for the relationship between the Court of Justice of the EU
and the referring court, the German Federal Constitutional Court. This was the
first time that the German court asked for a preliminary ruling, and it remains
to be seen whether the reply given by the Court of Justice will be to the national
court’s liking. (See my earlier comments on the Advocate-General's opinion in this case here).
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
a party that has bought these bonds first from a Member State—rather than from
a Member State directly. While the ECB has already done this before, with the
OMT programme there would be an added formal element of conditionality, 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 monetary,
policy; it was also alleged that the programme violated the prohibition of
monetary financing. In an exercise of ultra
vires jurisdiction, 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 might either declare the OMT scheme contrary
to EU law, 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, and it went on to state that whether the OMT
scheme could eventually be held to violate the constitutional identity of the German
Basic Law would depend on the CJEU’s interpretation of the scheme in conformity
with EU primary law.
The case was
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 defense against similar future
scenarios. A declaration of illegality, or the placing of substantive limits on
the programme, could have jeopardised post-crisis recovery. Additionally, the
reference was the first ever submitted by the German Constitutional Court, and
its tone was quite bold; there was, and is, clear potential for conflict
between the two courts, with consequences unknown for EMU. 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 Court of Justice’s Decision
(1) Preliminary questions
Various arguments had been put forward against the admissibility of
the reference. Some of them went to the nature of the ECB’s announcement of the
OMT programme and its reviewability; others to the circumstances under which
the reference had been made by the national court.
First, it was argued that the ECB’s announcement was not a legal
act, but a preparatory act without legal effects. The Court of Justice rejected
this view. Second, the Court similarly rejected arguments to the effect that
the conditions under which the reference had been made were not compatible with
the preliminary ruling procedure, because the questions at stake were too
abstract and hypothetical, because the German court would not consider itself
bound by the resulting preliminary ruling, or because the national proceedings
could be said to create the possibility for German citizens to bring a direct
action against the validity of an EU act without having to use Art 263 TFEU
(and without complying with its conditions for admissibility). In dealing with
these arguments, the Court relied on the division of competences between itself
and the national courts within the framework of the preliminary ruling
procedure, refusing to second-guess the German court’s assessment of the need
for a preliminary ruling or the rules of national law governing judicial review
and the organization of legal proceedings. Unsurprisingly, the Court reasserted
the binding force of its preliminary rulings upon national courts.
(2) The legality of the OMT programme
Broadly speaking, the German court had raised two main concerns:
that the OMT programme was a measure of economic, not monetary, policy, thus
beyond the powers of the ECB; and that the programme was incompatible with the
prohibition of monetary financing of Member States enshrined in Art 123(1)
TFEU.
Is it monetary policy?
The Court started
by assessing the nature of the OMT scheme and whether it should be classified
as a measure of monetary or economic policy. The applicants had argued that the
scheme should be viewed as an economic policy measure adopted 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.
As it had done in
Pringle, the Court set out to
determine whether the measure in question fell within the scope of monetary or
economic policy by investigating its objectives and instruments. The Court
considered the stated objectives of the OMT programme (to safeguard
‘appropriate monetary policy transmission and the singleness of the monetary
policy’) and concluded that they contributed to the ultimate aim of monetary policy,
i.e. maintaining price stability. The Court drew an analogy with Pringle at this point to argue that
possible indirect effects of the OMT programme in economic policy (the fact
that the programme may contribute to safeguarding the stability of the euro
area) did not mean the measure should be classified as pertaining to economic
policy. The Court came to similar conclusions when examining the instruments to
be used in order to achieve the objectives of the programme. In sum, both
objectives and instruments of the OMT programme—and thus the programme itself—were
taken to fall within the scope of monetary policy.
Interestingly,
while Advocate General Cruz Villalón had come to the same overall conclusion
regarding the classification of the OMT programme as a measure of monetary
policy, he had introduced an important caveat: he 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.
On the contrary,
the Court saw no problem with making bond-buying through the OMT programme
conditional upon the Member State’s compliance with ESM or EFSF conditionality;
this would lead to the sort of indirect effects in economic policy that the
Court had already considered irrelevant to the classification of the measure,
and it would ensure that ESM/EFSF conditionality would not be rendered
ineffective by the ECB’s actions. This, according to the Court, is in line with
the ECB’s obligation to support the general economic policies in the Union. The
fact that bond-buying in the secondary markets can be considered a measure of
economic policy when the ESM does it (Pringle),
and a measure of monetary policy when the ECB does it, is justified, according
to the Court, because of the different objectives pursued in each case.
Finally, the Court made no reference to the involvement of the ECB within the
troika.
Is it proportionate?
The Court concluded that the OMT programme, as first described by
the ECB in its announcement, is appropriate for attaining its objectives and
does not go beyond what was necessary to achieve them. In conducting its review
of proportionality, the Court recognized the ECB’s broad discretion to make
complex assessments and technical choices in the area, and it conducted a
light-touch review. The Court was satisfied that the ECB had satisfied the duty
to give reasons sufficiently, and that it had not made a manifest error of
assessment in its analysis of the economic situation and in its view that the
OMT programme would be appropriate to achieve the effect sought. Equally, the
Court surmised that the measure, as described in the ECB’s press release, would
not go beyond what was necessary to achieve its objectives, given the limited
nature of the programme and the wording of the press release itself (i.e. that
bond-buying would only take place in order to satisfy very specific objectives,
and that it would cease as soon as they had been achieved). No prior
quantitative limit was considered necessary.
Is it against the prohibition on monetary financing?
The Court then
turned to the possible circumvention of the prohibition on monetary financing
of Member States. 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.
The Court of
Justice agreed that the ECB should not be able to buy bonds from Member States
in the secondary markets under conditions which meant that, in practice, the
bond-buying would have the same effect as if it had taken place directly; or,
put differently, if indirect bond-buying would defeat the purpose of Art 123(1)
TFEU in the same way as buying bonds directly. In order to decide whether the
OMT programme could be considered such an illegitimate circumvention of the
Treaties, the Court sought to elucidate, first, the aim of Art 123(1) TFEU (the
prohibition on monetary financing of Member States); and second, the extent to
which indirect bond-buying within the OMT scheme would threaten the achievement
of that aim.
According to the
Court, the purpose of the prohibition on monetary financing of Member States is
to encourage the latter to pursue a sound budgetary policy: if Member States
cannot rely on monetary financing, they are subject to market discipline and
they need to avoid excessive debt and deficits if they want to be able to sell
their bonds, and thus have access to credit in the financial markets, in favourable
or sustainable conditions.
The aim of
encouraging a prudent budgetary policy could be threatened by indirect
bond-buying within the OMT programme to the extent that such actions would
improve a Member State’s access to credit, unless certain safeguards were built
into the programme. The Court was convinced by the ECB’s assurances that any
implementation of the programme would contain such safeguards: distortion to
the conditions under which a Member State can sell its bonds in the primary
market would be limited (by not announcing in advance the ECB’s intention to
buy a Member State’s bonds in the secondary market, and by allowing a
reasonable period of time to elapse between the Member State’s sale of its
bonds in the primary market and their subsequent acquisition by the ECB). The
Court was further satisfied that the uncertain possibility of having the ECB
buying a Member State’s bonds in the secondary market would not, by itself, diminish
Member States’ incentive to pursue a prudent budgetary policy, given the limited
nature of the OMT programme and the limited cases in which it may be used.
Finally, making bond-buying within the OMT programme conditional on the Member
State’s compliance with ESM/EFSF conditionality would ensure, according to the
Court, that Member States in receipt of financial assistance would not see
bond-buying through the OMT programme as an alternative to fiscal
consolidation.
Overall, then,
the Court concluded that the OMT programme—as presented in the press release
and subject to the safeguards explained by the ECB before the Court—is
compatible with the prohibition on monetary financing: under those conditions,
indirect bond-buying through the OMT programme would have an effect on Member
States’ access to credit, but that effect would not be equivalent to that of
buying bonds directly from Member States (monetary financing) and it would not
defeat the purpose of the ban of monetary financing, which is to encourage
Member States to pursue a prudent budgetary policy.
Final Remarks
The judgment in Gauweiler
brings no surprises: the ECB’s OMT programme is in accordance with the
Treaties, as long as it implemented in the way that the ECB assured the Court
it would be. So certain safeguards have to be built into the system, but these
safeguards are not new or especially onerous, and they do not go as far as the
ones put forward by the German Federal Constitutional Court as conditions of
legality. The final result is as expected; the question is whether the
safeguards required by the Court of Justice will satisfy the referring court,
and what impact this decision will have on the relationship between the two
courts.
The Court of Justice has recognized the broad discretion of the ECB
to make complex economic assessments and technical choices, while at the same
time striving to discharge a meaningful and necessary role: the Court does not
want to be seen to be second-guessing the expert body’s policy choices, so it
focuses on procedural requirements and applies a light-touch review when it
comes to assessing the proportionality of the scheme. It is in the final part
of the judgment (when assessing the compatibility of the OMT programme with the
ban on monetary financing) that the decision is at its most strict. It is in
this section that the Court seeks to apply (and be seen to be applying) a
coherent, rigorous-enough-yet-within-judicial-boundaries compatibility
test. Will the Court’s efforts prove
convincing enough? It depends on what section of the Court’s audience we
consider. The decision can be said to continue in the Pringle vein of ratifying a move away from a rules-based EMU to a
policy-based one in the wake of the crisis. Ultimately, disagreement will
remain between those that see this evolution as unavoidable and even necessary
if EMU is to adapt and survive, and those that, either do not agree with this
evolution, or think that it should take place by different means. Finally, the
Court’s discussion (like the AG’s Opinion before it) does turn on the specific
features of the OMT programme rather than on more abstract questions such as
the nature of EMU, its evolution, and the role of solidarity within its
constitutional framework. While the decision should unmistakable be read in its
more general constitutional context, the most natural forum for this broader
discussion may not be a judicial one.
Barnard & Peers: chapter 19
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