The ECB and its expanded duty to respect and promote the EU Charter of Fundamental Rights after the Steinhoff case

Diane Fromage, Maastricht University*

* I would like to thank Menelaos Markakis for his useful comments.

On 12 March 2020, the Court of Justice rejected the appeal lodged before it against the Steinhoff case (T-107/17) decided by the General Court in May 2019. Even if it has – to my knowledge – received only limited attention by scholars, this case is particularly significant because it clarifies, and indeed unconditionally expands, the European Central Bank (ECB)’s duty to ‘respect the rights [of the EU Charter of Fundamental Rights (ECFR), [to] observe the principles and [to] promote the application thereof’ enshrined in Article 51 ECFR to its consultative function.

This case belongs to the series of cases brought before the Court of Justice on the ground of the measures adopted to counter the Great Financial Crisis. More specifically, it regards the losses incurred by private creditors resulting from the restructuring of the Greek public debt, which was the largest public debt restructuring ever conducted worldwide. Indeed, F. Steinhoff and the other parties to the case were affected by the measures adopted by the Greek State with a view to making the level of Greek debt more sustainable, and to avoiding bankruptcy resulting inter alia in the Greek State offering to conduct a voluntary Private Sector Involvement Scheme. To this end, it adopted Law No. 4050/2012 which essentially entailed a restructuring offer to Greek bond holders leading to a significant reduction of their value. The proposed law also included the introduction of a (retroactive) Collective Action Clause (CAC) whereby if a majority of two thirds of the bond holders of a specific issue were in favour of the exchange, all bond holders were to see the value of their bonds reduced [CACs have since been introduced in all euro area Member States following the entry into force of art. 12(3) European Stability Mechanism Treaty]. Steinhoff and the other plaintiffs incurred significant losses even where they had not given their consent to the exchange.

Prior to its adoption, the ECB was consulted on the Greek national law since it ‘shall be consulted […] by national authorities regarding any draft legislative provision in its fields of competence’ (art. 127(4) TFEU). In its consultative opinion, the ECB did not raise any objection and was overall positive. It underlined, among other things, that the resort to CACs to exchange bonds is in line with common practice, it welcomed the fact that the modalities of the exchange could be negotiated with private creditors representatives, and it recalled that Greece alone bears the responsibility to ensure that its debt remains sustainable. After the law had been adopted, Steinhoff and the other plaintiffs sought to engage the ECB’s non-contractual liability because of the damages (i.e. the losses) they suffered as a result of the ECB not having drawn Greece’s attention to the fact that the adoption and the implementation of Law No. 4050/2012 would lead to a breach of their fundamental rights. Remedy against this law was also sought by some bond holders before the Greek Council of State, and the European Court of Human Rights, resulting in both courts rejecting the claim that the right to property and to peaceful enjoyment of one’s possessions; the principle of equality and the principle of equal treatment and non-discrimination; the principle of proportionality; and the principle of legitimate expectations and legal certainty had not been violated (for further details, see the recent article by Evangelos Venizelos). Some of the bond holders also tried to challenge the Greek law before the national courts of other Member States, such as Germany.

Like the Accorinti case and the Nausicaa case before it, the Steinhoff case is the third one in which the ECB’s non-contractual liability is being invoked in the adoption of this Greek law and the losses for private investors it provoked. In that case, the General Court was called upon to examine essentially whether the ECB was liable for not having warned the Greek government against the illegality of the law it intended to adopt in the framework of its consultation as per Article 127(4) TFEU. In particular, the applicants claimed that the ECB should have indicated in its consultative opinion that the Greek law violated the principle of pacta sunt servanda; that it violated their right to property guaranteed by the ECFR (art. 17(1) and (2)); that is also violated the freedom of capitals within the EU (art. 63 TFEU); and that it breached the prohibition to grant privileged access to financial institutional to EU and national institutions enshrined in Article 124 TFEU.

In examining this case, the General Court recalls firstly that according to settled case-law, EU institutions and bodies may incur in non-contractual liability regardless of whether the damage suffered by the applicant results from a non-legally binding act. Only the fulfilment of three conditions matters, i.e. the rule of law which was breached conferred rights upon individuals and the breach was sufficiently serious, actual damage has been suffered, and a causal link exists between the breach of the obligation of the institution author of the act and the damage suffered. The General Court then turns to examine the function and the characteristics of the ECB’s consultative function, and recalls that while the ECB’s opinions are not binding on the national authorities, its non-contractual liability may still be engaged on their basis, though considering the large margin of appreciation left to the ECB in the adoption of its opinions, only a manifest and grave disregard of its margin of discretion may lead to such an outcome.

When examining the substance of the case before it, the General Court first finds that the pacta sunt servanda principle – which is, at it recalls, a general principle of EU law – is not violated in this case. Furthermore, it states that the opinions the ECB issues under the consultation procedure do not regard the contractual relationship between a Member State and a private individual, but are addressed to the Member States and belong to the ECB’s ‘fundamental missions in the area of monetary policy’ (own translation) and notably to its duty to maintain price stability. As a consequence, the General Court finds that the ECB was not under the obligation to highlight a violation of this principle since it is a general principle of contract law which applies to the parties to that contract.

The General Court comes to an opposite conclusion as regards the ECB’s responsibility to protect the right to property guaranteed by the ECFR (and which is also a general principle of EU law). Although it eventually concludes that there has been no disproportionate restriction of the right to property whose core content also remained unaffected, it considers that the ECB has a duty to denounce a violation of the right to property in the exercise of its competence, among which its consultative function: In its quality as EU institution, it is under the obligation to ‘respect the rights, observe the principles [guaranteed in the Charter] and promote the application thereof’ (art. 51 ECFR). In the Court’s view, this is so because, as already established in the Ledra Advertising case (discussed here), like the European Commission may breach the right to property both by means of a positive act, and by passive behaviour, as well as by failing to adopt a measure it had to adopt, the ECB too may breach the right to property by its passive behaviour. Its special status does not influence in any way on the duty to respect fundamental rights or to contribute to achieving the Union’s objectives that rests upon it. Although the General Court – surprisingly – does not mention it, it had already found the conclusions to which it came regarding the Commission in the Ledra Advertising case to be applicable to the ECB (Chrysostomides case). As further detailed below, this is thus not the novel part in the General Court’s reasoning.

The General Court subsequently examines a potential breach of the free movement of capitals guaranteed by Article 63 TFEU. It states that overriding reasons of general interest existed in that case that would justify a restriction to the free movement of capitals, that the plaintiffs have failed to show that the restriction imposed was disproportionate, and that therefore no breach of Article 63 TFEU occurred.

Lastly, the General Court comes to the conclusion that the ECB did not commit a sufficiently serious breach of the plaintiffs’ right for not pointing out the fact that the Greek law led to a breach of Article 124 TFEU, since there was no such breach. In any event, the plaintiffs would not be entitled to any compensation for damages even if that were the case since Article 124 TFEU aims at protecting the Union as a whole and does not confer any right on individuals and thus not on the plaintiffs.

Based on all these arguments, the General Court finds that the ECB’s non-contractual liability may not be engaged.

This judgment is of constitutional importance for the EU legal order because of the expansion of the ECB’s duty to observe and promote the ECFR it operated – a point which, by the way, the Court of Justice did not examine during the appeal procedure before it which ended in March 2020.

As explained above, the General Court essentially applies to the ECB its previous findings in the Ledra Advertising case which established the Commission’s unconditional duty to ensure that a memorandum of understanding concluded in the framework of a European Stability Mechanism programme was in compliance with the ECFR. The analogy drawn by the Court is, however, not fully convincing. In principle, the duty that rests on the European Commission may also be viewed as applicable to the ECB since it, too, is involved in the negotiation of the memoranda of understanding, and as recalled previously, the General Court itself came to this conclusion in the Chrysostomides case. However, the role played by the Commission (and the ECB) in the negotiation of the memoranda of understanding is an inherently different one from the one the ECB fulfils in its consultative function. Among other things, the Commission negotiates the memoranda of understanding, which it also signs on behalf of the ESM. It admittedly does not have any decision-making powers in accordance with the Court of Justice’s findings in the Pringle case, and the essential character of the powers conferred upon it by the Treaties is not altered by its taking part in the implementation in the ESM. But still, its active participation and thus its share of responsibility in the whole procedure is much higher than that of the ECB when it issues a merely consultative, non-binding, opinion on a piece of national legislation that falls within its field of competence. Consequently, the findings in the Ledra Advertising case cannot simply be applied to the Steinhoff case like the General Court did, and such an identical interpretation of the ECB’s duty in both cases would have, in my view, demanded a detailed justification at the very least. This is also the case because Article 51 ECFR foresees that ‘[t]he […] institutions, bodies, offices and agencies of the Union […] shall therefore respect the rights, observe the principles and promote the application thereof in accordance with their respective powers’ (emphasis added). The European Commission, which is the guardian of the Treaties, may thus arguably be viewed as being generally under a stronger obligation to actively promote the application of the ECFR than the ECB is for the ECB is an independent institution entrusted with a more limited and technical function within the EU legal order.

In its reasoning, the General Court in fact appears to disregard the rationale of the ECB’s consultative function. As established in Council Decision 98/415 on the consultation of the European Central Bank by national authorities regarding draft legislative provisions, the national authorities have to take the ECB’s opinions into account but they are not bound by them, and they alone bear responsibility for the acts adopted. The General Court also notes that the ECB benefits from a large margin of appreciation in the adoption of its opinions, so that only a grave and manifest breach of the limits of its power can lead to its non-contractual liability being incurred. It is the specific functions the ECB is entrusted with and the expertise it possesses that justify its prior consultation as specified in the OLAF case. The ECB is hence called upon to conduct a technical assessment, and not a general one that would take the whole of the EU legal framework into consideration. Therefore, requiring from it that it would check the compatibility with the ECFR of a national norm it does not contribute to shape and cannot amend in any way may be viewed as unjustified. Besides, since the ECB may give its opinion on national norms that fall outside of the scope of EU law, the risk exists that the scope of application of the Charter defined in Article 51 ECFR be eventually indirectly expanded as the Member State, which would then not be ‘implementing Union law’, would not otherwise be bound by the ECFR.

The distinction among general principles of EU law the General Court draws is the last point that deserves attention. As stated previously, even if both are general principles, the ECB is not found by the General Court to have to veil for the respect of the pacta sunt servanda principle, while it does have to protect the right to property. The Court comes to this conclusion on the basis of the fact the ECB’s opinions are directed to the Member States and belong to the ECB’s ‘fundamental missions in the area of monetary policy’, while the pacta sunt servanda principle would apply to the relationship between a Member State and a private party. But the right to property it indeed would have an active and a passive duty to protect. Since both are general principles of EU law still, why make such a distinction, and how to determine which general principles the ECB has to veil for and which it does not?

It thus seems that the General Court did not, in this occasion, contribute to further reinforce the level of protection of fundamental rights within the Union like it previously did in the Ledra advertising case for instance. A more detailed and nuanced reasoning would have arguably been needed for this to be the case. In fact, the limits of the conditions and the scope of application of the Charter may have become even more difficult to distinguish, and it can only be hoped that the General Court will provide further clarifications in the future.

Barnard & Peers: chapter 19

Photo credit: maslmaslmasl, via Wikimedia Commons

Private Schools and the Politicization of Treaty Obligations

Dr Kasey McCall-Smith, Senior Lecturer in Public International Law, University of Edinburgh

The 2019 Labour Party Annual Conference has received more than usual attention this year, notably its resolution to end private schools in the UK. Not for the first time this year, the fervour of politicians must be checked against the realities of the law, specifically international and human rights law. In March, Theresa May offered a unilateral statement to the EU on the UK interpretation of the then-Withdrawal Agreement Protocol on Ireland/Northern Ireland in relation to the backstop set out therein. A few days later, Geoffrey Cox MP incorrectly argued that article 62 of the Vienna Convention on the Law of Treaties (VCLT) offered an easy way out of the then-Withdrawal Agreement and the backstop. As exhausted with Brexit as every other academic at the time, I painstakingly set out why the UK government and Parliament would do well to stop relying on concepts in international treaty law to cure all that is disagreeable with the Brexit process.

The 22 September vote by the Labour Party to include in its manifesto a ‘commitment to integrate all private schools into the state sector’ equally demonstrates why politicians should proceed with caution when threatening rights protected by international agreements.

Whether for or against private education, there was very little tangible change from existing policy proposals to cut tax relief to the independent schools that educate approximately 6-7% of children in the UK. More notable are the questions raised by Labour’s approach to protected rights. This Labour party policy raises questions about the understanding of the limits of any UK government to restrict international human rights obligations to which it has long been bound and also incorporated into national law. One such example raised by this policy proposal is the right to education set out in article 2 of the first Protocol (P1) to the European Convention on Human Rights (ECHR).

In essence, the proposed measure eliminates the option to send children to fee-paying schools in the UK, an option that in some, though not all, cases enables parents to exercise ‘their own religious and philosophical convictions’ (P1 article 2). Clearly, it is a matter of debate whether such ‘convictions’ extend to private (cf. State-funded) education and whether eliminating private schools alone would constitute a breach of the right. Aside from removing decision-making capabilities from parents, the long-running debates about private versus public education or margin of appreciation debates, there are other legal questions to consider when parties politicize international legal obligations.

Can this or a future UK government nullify a single article of the first Protocol to the ECHR or multiple articles spanning the Convention? Continuing with the right to education example and assuming that the proposed policy is argued to breach that right, the following traces the relevant analysis under international law to determine if the UK can, effectively, change its mind about applying it treaty obligations.

The first step requires a determination of the status of the first Protocol to the ECHR once ratified and in force, which it has been for the UK since 1952. P1 article 5 dictates that ‘the provisions of Articles 1, 2, 3 and 4 … shall be regarded as additional Articles to the Convention and all the provisions of the Convention shall apply accordingly.’ In short, the articles are amalgamated into the ECHR and carry the same weight as those in the original Convention. This is reinforced in the UK Human Rights Act 1998 s1(1) (notably excluding P1 article 4).

But could the UK government cease to observe an article of the ECHR or one of its Protocols? Because the first Protocol is integrated into the umbrella of the ECHR the rules of the original Convention are applicable. By asserting that the state will no longer apply a treaty provision in full, the permissibility of such an assertion must be examined. Under the VCLT treaty rules and customary international law, the only way to exclude a treaty obligation in part or in full is by reservation. However, under both ECHR article 57 and VCLT article 19, reservations may only be made when signing or ratifying a treaty. Therefore, reservations are not an option for the UK decades after ratifying the Convention. The only possible caveat being denunciation (more below) and re-ratification with a new reservation in line with that which was done by Trinidad and Tobago in relation to Optional Protocol 1 to the ICCPR. Still, this procedure is not currently recognized in ECHR practice or under customary treaty law and would no doubt set a dangerous precedent.

Some have also queried the possibility of ‘denouncing’ a single article. ECHR article 58 governs denunciation of the Convention but only gives guidance on denunciation of the Convention as a whole. It is silent on denunciation of an individual article. When a treaty is silent on issues of procedure, the default rules of the VCLT are used to fill any gaps. VCLT article 44 outlines a preference against the separability of individual treaty provisions by denunciation, withdrawal or suspension unless expressly provided for by the relevant treaty. Furthermore, article 44 must be read in conjunction with Articles 56 or 60 VCLT. Article 56 VCLT addresses denunciation when a treaty is silent on the issue – but the ECHR is not silent on this.  Article 60 VCLT deals with termination or suspension of a treaty as a consequence of its breach. The breach must be by another state, thus the UK cannot invoke article 60 if it breaches the ECHR. It is safe to say that denunciation of a single article or even multiple articles is not a possibility.

The only remaining option for abrogating an individual article would be derogation. ECHR article 15 clarifies that though some fundamental rights may never be subject to derogation, ‘[i]n time of war or other public emergency threatening the life of the nation any High Contracting Party may take measures derogating from its obligations under this Convention to the extent strictly required by the exigencies of the situation’. While the right to education, and indeed most rights, could be subject to derogation, it is difficult – if not logically impossible – to see how such a public emergency could justify a policy of prohibiting private education per se.

What the last few months have taught us is that politicians would do well to recognise the legal implications of their policy strategies and ambitions before straining too far into rhetoric. And for those wishing to insulate the UK against global interference, this is a timely reminder that regardless of any future status in the EU, the UK will continue to have international and regional obligations.

Photo credit: Tatler

Applying the EU Charter of Rights to Member States' internal market derogations

By Steve Peers

Today’s judgment of the Court of Justice of the European Union (CJEU) in Pfleger confirmed an important issue as regards the scope of the EU Charter of Fundamental Rights – but also raised some implicit questions about its added value in such cases.

The case concerned Austrian restrictions on gambling machines. In fact, the CJEU has decided very many cases relating to national restrictions on gambling, an issue which is not regulated by detailed EU legislation but which is nonetheless in principle subject to EU internal market law. Here, the parties challenging the enforcement of the Austrian law raised questions concerning the compliance of that law with the EU Charter, in particular as regards Articles 15 to 17 of the Charter (concerning freedom to conduct an occupation, to run a  business and the right to property) and Article 50 (the prohibition on double jeopardy).

Does the Charter apply?

Article 51 of the Charter limits the scope of its application to EU bodies, and to the Member States ‘only’ when they are ‘implementing’ EU law. At first sight, this rule narrows the established scope of the previous CJEU case law on the scope of human rights protection, which (going back to the 1991 judgment of ERT) had always held that any national derogations from EU free movement rights had to comply with human rights obligations as general principles of EU law. On a strict interpretation, such national derogations could not easily be seen as measures ‘implementing’ EU law, and many academics therefore wondered whether the Charter was narrower in scope than the general principles.

However, last year’s judgment in Fransson confirmed that the scope of the Charter was exactly the same as the scope of the general principles. Logically, it followed that national derogations from free movement rules are within the scope of the Charter, but the Pfleger case was the first opportunity that the Court has had to confirm this.

Comparing internal market rules and the Charter

Despite the importance of this case from a human rights perspective, the main issue in the Pfleger judgment is the compliance of the national rules with EU internal market law. The CJEU, no doubt exhausted with the amount of litigation on this issue, simply reiterates its prior case law, and asks the national court to apply it to the facts. Also, the CJEU does state that if the national restrictions on gambling do not have any real link to combating crime or social problems, but are simply a means of increasing tax revenue, then this cannot be justified – but it relies on the national court’s findings in this regard.

What does the Charter add to this? On the facts of this case, not very much. According to the CJEU, if the national law restricted internal market freedoms, then it also restricted the economic rights in Articles 15-17 of the Charter. Equally, if it could not be justified under the internal market rules, then it could not be justified as a limitation on Charter rights pursuant to Article 52 of the Charter either.

It should be noted that the Court did not rule that an analysis of the internal market rules in the Treaty would always lead to the same result as the Charter analysis. The ruling expressly concerned ‘circumstances such as those at issue in the main proceedings’. So it is possible to imagine, for instance, that as regards a different aspect of the free movement of services more directly connected to human rights than gambling – broadcasting, for instance – a national restriction might be proportionate from the point of view of the internal market but a questionable restriction of freedom of expression. At the very least, a separate application of the internal market and human rights rules would surely be called for where (for instance) the content of communications is being restricted.

The Court did not touch on the separate question of whether the enforcement (as distinct from the substance) of the national rules needed to be judged from a human rights perspective, noting only that if the national rules breached the Treaty rules on internal market freedoms, they could not be enforced anyway. The Advocate-General’s opinion, in contrast, assumed that if the national rules were substantively in compliance with internal market law and the Charter, the details of their enforcement could still be tested for compliance with the Charter.

Implications of the judgment

While this judgment only concerned national derogations from internal market Treaty freedoms, there is no reason to think that its impact is limited to such cases. There is a lot of EU legislation on different issues which allows Member States to derogate in various ways from its rules, and there is no reason to think that the internal market Treaty provisions are in some way special as regards the scope of application of the Charter.

In particular, as discussed already on this blog, the national derogations from the e-privacy Directive, as regards data retention and other forms of interception of telecommunications, are subject to the Charter, even following the annulment of the data retention Directive. The Court has already examined such national derogations in the context of civil proceedings, and logically should do so as regards criminal proceedings too.

Barnard & Peers: chapter 9, chapter 16