Towards a European Monetary Fund: Comments on the Commission’s Proposal

Michael Ioannidis, Senior research fellow, Max Planck Institute for Comparative Public Law and International Law, Heidelberg.

On 6 December, the European Commission presented a package of proposals on the further integration of the Eurozone. This was the first effort of European institutions to put on paper the rules that could shape post-crisis EMU, an issue that took centre stage in European politics after Macron’s election in France and will probably receive a new impetus after the formation of the new government in Germany. The most important part in Commission’s package is the proposal to bring the European Stability Mechanism (ESM) within the EU framework. The ESM, Europe’s main financial assistance mechanism, was set up in 2012 by an international treaty between Eurozone Members. For various reasons, legal and political, it was established as an organization of public international law, outside the EU. The Commission now proposes that the Council adopts a Regulation to make the ESM “a unique legal entity under Union law”, change its name, and add few more tasks to its mandate. Annexed to the proposed Council Regulation is a Statute governing the new body that is largely (but not entirely) based on the current ESM Treaty (ESMT).

Rebranding

The proposed Regulation starts with a marketing exercise, rebranding the ESM as EMF (European Monetary Fund). The name EMF was popularised by academics at the beginning of the crisis as part of the call to establish a European assistance mechanism, a suggestion that was practically largely realized with the establishment of the ESM in 2012. The name EMF remained, however, in the agenda of policy-makers as a symbol of Europe eventually getting its own regional equivalent of the IMF – and becoming less dependent on the latter in future crises. The Commission takes on board the widespread charm of the name EMF – but this is not a choice without its problems.

The new name, having “monetary” at its centre, alludes to the monetary tasks within the EMU that the TFEU (and the CJEU in Pringle) clearly distinguishes from economic policies and ascribes exclusively to the ECB. Quite expectedly, the body with the closest name to EMF in European institutional history was the European Monetary Cooperation Fund (EMCF), established by Regulation (EEC) No 907/73 with monetary-related tasks. Even if one admits the allure of IMF’s acronym, two things need to be reminded of. First, the original name under which the IMF itself was conceived was “International Stabilization Fund” (ISF). The reason for ultimately adopting IMF instead of ISF was United Kingdom’s (and JM Keynes’) insistence that the word “stabilization” alluded to the stabilization funds of the past, used to influence currency exchange rates and connected to unpleasant British experiences of keeping the pound pegged to the international gold standard. Such connotations are not of contemporary concern.

Second, the IMF, which has access to financial resources through the central bank reserves of its members, has closer connection with proper monetary authorities than the ESM, which is financed by issuing bonds in capital markets. The establishment of the European Financial Stabilisation Mechanism (EFSM) by the EU in 2010, a body within the EU framework and very similar function with the EMF, attests to the view that the words “Stability” or “Stabilization” are accurate descriptors of the function of the future EU financial assistance mechanism. ESF (European Stability Fund) could thus be a plausible alternative to EMF.

Conditionality

The Commission rebrands the ESM to mirror the IMF’s name, but it is much more hesitant to give the new body real IMF-like teeth. There is one single concept that made the Washington-based prototype famous: conditionality. That is, the power to set and monitor the conditions under which countries can access IMF resources. In Commission’s proposal, though, conditionality is not a job for the EMF but mainly for the Commission itself.

During the crisis, the conditionality task was shared by three, and later four, institutions: the Commission, the ECB, the IMF, and, at a later stage, the ESM. The Commission’s proposal deletes all references of the ESMT on the involvement of the IMF in Eurozone conditionality, but does not give this role to the EMF. Conditionality is for the Commission to keep. According to Art. 13 of the proposed EMF Statute, conditionality is negotiated by the Commission, in liaison with the ECB, and “in cooperation with the EMF”. “Cooperation” is admittedly a very weak form of involvement, especially if it’s compared with the phrase “together with” that previously described IMF involvement in the ESMT. Moreover, MoUs shall be signed both by the Commission and the EMF. In the ESMT, in contrast, MoUs where signed by the Commission “on behalf” of the ESM. The phrase “on behalf”, establishing an agent-principal relation between Commission and the ESM, is now stricken out, meaning that the Commission becomes legally a co-owner of EMF conditionality. Finally, under the proposed EMF Statute, compliance with conditionality is being monitored solely by the Commission, in liaison with the ECB. No role is explicitly provided for the EMF in this critical phase.

The no-bailout clause and conditions for assistance

At the beginning of the crisis, when the idea of a financial assistance mechanism for Eurozone Members was first tabled, Art. 125(1) TFEU appeared to many as a critical legal obstacle. Art. 125(1) TFEU contains two sentences with two identical prohibitions. The first is directed to the EU and the second to the Member States. Both the Union and the Member States “shall not be liable for or assume the commitments” of (another) Eurozone Member State.

Considering that ESM assistance could be seen as indirectly amounting to an assumption of commitments, the Member States thought necessary in 2011 to introduce Art. 136(3) in the TFEU. According to this provision, “[t]he Member States whose currency is the euro may establish a stability mechanism to be activated if indispensable to safeguard the stability of the euro area as a whole. The granting of any required financial assistance under the mechanism will be made subject to strict conditionality”. Drafted with the ESM in mind, Art. 136(3) TFEU only refers to the establishment of a fund by Member States and not by the EU. It thus “clarifies” only the second sentence of Art. 125(1) TFEU.

Does that mean that establishing the EMF as an EU body contravenes Art. 125(1) first sentence TFEU? The answer is no. In Pringle, the CJEU adopted an interpretation of Art. 125(1) TFEU that allows financial assistance if it is indispensable for the stability of the Eurozone and is coupled with “strict conditionality”. Although in Pringle the Court was called to interpret the second sentence of Art. 125(1) TFEU, that is directed to the Member States, the first sentence, which will be relevant for the EMF, should be read in the same way: a Fund established by the EU that meets Pringle-conditions is compatible with Art. 125(1) TFEU.

Whether the Commission’s proposal is fully Pringle-compatible, however, is not straightforward. The proposal introduces a fundamental difference to the ESMT that seems to go unnoticed in Commission’s explanations of the proposal. It refers to the objective of the EMF and the conditions for offering assistance. Currently, under Arts 3(2) and 12 ESMT, assistance is possible “if indispensable to safeguard the financial stability of the euro area as a whole and of its Member States”. According to the Commission’s proposal, however, the EMF can provide assistance if “indispensable to safeguard the financial stability of the euro area or of its Members” (emphasis added). Deleting the phrase “as a whole” (in Art. 12) and replacing “and” with “or” (in Arts 3(2) and 12 of the proposed Statute) means that a crisis that threatens the stability of a single Member State but not the euro area as a whole can (and shall) prompt action from the EMF. This is a very important shift of focus from Eurozone to the Member States.

This change needs to be assessed in light of the judgment of the CJEU in Pringle and the spirit of Art. 136(3) TFEU. In paras 136 and 142 of Pringle, the Court follows para. 5 of the ECB Opinion on the draft amendment to Art. 136 TFEU, presenting as condition of financial assistance that such assistance is indispensable for the euro area’s stability. Moreover, Art. 136(3) TFEU, although not directly applicable to the Regulation proposal because EMF will be a Union body, expresses the same central idea: an assistance mechanism may be established with the objective to offer assistance “if indispensable to safeguard the stability of the euro area as a whole.”

Control by the Council and the European Parliament

Under the proposal, the EMF is a “unique body of EU law”, independent, and governed by its own Board of Governors and Board of Directors. In order to be compatible with the Meroni principle (the EU law principle which limits the delegation of powers), Art. 3(1) of the proposed Regulation requires that the Council is responsible for approving a series of important decisions of the EMF Board of Governors and Board of Directors. The Council approves these decisions following the qualified majority rules provided in Art. 238(3) TFEU.

This arrangement creates two complications. First, the majority required for Council approval is different from that envisaged in Art. 4 EMF Statute both in terms of the necessary thresholds and the basis for their calculation. Art. 238(3) TFEU requires 55% of the members of the Council representing the participating Member States, comprising at least 65% of the population of these States while Art. 4 EMF Statute requires 85% of voting rights that are equal to the number of share allocated to it in the authorised capital stock of the EMF. It is thus legally possible that a decision that has the support of 85% of voting rights/shares is not backed by the minimum of 11 Member States required in the Council. Second, the Council approval makes the Council, an institution of the whole of the EU, responsible (also judicially) for the decisions of the EMF, a body of the euro area.

Moreover, the proposed Regulation claims to make the EMF accountable to the European Parliament. The EMF is required to submit reports, respond to oral and written questions, and accept invitations to its Managing Director. There are two difficulties with such an accountability scheme. First, these are only reporting obligations and do not allow the Parliament any influence in the actual decision-making of the EMF. Second, the European Parliament may not be an adequate forum for EMF accountability purposes in the first place. Members of the EMF are only euro area Members, but in the European Parliament and the Council all EU Member States are being given seats, not only those that have adopted the euro. The EMF is thus made accountable to institutions with a different composition than the Members that provide for its capital.

Is Art. 352 TFEU a sufficient legal basis?

The Commission suggests as legal basis of the proposed EMF Regulation the flexibility clause of Art. 352 TFEU. Art. 352 TFEU allows the Council to adopt measures when Union action is necessary to attain one of the objectives set out in the Treaties and the Treaties have not provided the necessary powers in other provisions. The latter condition is easily met in this case. In Pringle, the CJEU ruled that the Treaties, and Articles 2(3), 5(1), 122(2), and 143(2) TFEU in particular, do not contain an appropriate legal basis for the establishment of a stability mechanism. Moreover, the objective of the EMF, namely to ensure the financial stability of the euro area, does fall within the Union objective to establish an economic and monetary union.

The critical question for the applicability of Art. 352 TFEU is whether the establishment of the EMF is also “necessary” to attain those objectives. Here, the picture gets more complicated. Since the establishment of the ESM in 2012, the Eurozone disposes of a financial assistance mechanism to assist Members in distress and to safeguard Eurozone stability. That might mean that the establishment of the EMF by means of a Regulation is not any more necessary. In order to satisfy Art. 352 TFEU, what needs to pass the necessity test is not the existence of an assistance fund – such a fund already exists; it is rather the integration of the fund in the EU framework that the Commission must prove to be necessary. This is a more difficult test for the EMF proposal.

A final issue with regard to Art. 352 TFEU has to do with the extension of Union competences. In its Opinion 2/94, the CJEU has ruled that Art 352 TFEU “cannot serve as a basis for widening the scope of [Union] powers beyond the general framework created by the provisions of the Treaty as a whole and, in particular, by those that define the tasks and the activities of the [Union].” The question in this context is whether a future EMF – a Union body – that employs “strict conditionality” to its funding programmes goes beyond the allocation of powers the Union, which in the field of economic policy has simply coordinating competences. The Eurozone experience shows that this is possible. The macroeconomic conditions that have been tied to financial-assistance packages since the beginning of the crisis seem to go beyond coordination in intensity and beyond EU competences in breadth. As long as ESM was an intergovernmental organization this did not pose such critical competences question – although it has been raised with regard to the Two Pack reforms. This critical question, which goes directly into the question of the extent to which the Treaties allow a real economic Union, will need to be revisited if the EMF plans succeed.

Barnard & Peers: chapter 19

Photo credit: www.bibliotecapleyades.net

The European Fiscal Board’s first report and the future of the EU’s fiscal framework

Paul Dermine (PhD candidate in EU institutional law, Maastricht University) and Diane Fromage (Assistant Professor of European Law, Faculty of Law, Maastricht University)

EU Fiscal Governance in the post-crisis era: The start of the reflection period and the European Fiscal Board’s first report

Recent events suggest that the Eurozone may soon be entering a new phase of its short but already tumultuous life. As the dust of the sovereign debt crisis starts settling, and the continent slowly returns to growth, winds of change are blowing across the zone, and EMU reform is back on the agenda and hence ardently debated at EU and Member States level. The context is thus ripe to critically reflect on the economic governance system the crisis has brought about, and on the actions carried out by the EU institutions and the Member States within that setting.

This post offers to do just that with regard to fiscal governance. As is well known, the crisis precipitated a substantial upgrade of the rules making up the European fiscal discipline, and an unprecedented strengthening of the surveillance paradigm in the field of budgetary affairs. Since it entered into force, this new normative catalogue introduced mainly by the Six-Pack and the Two-Pack reforms, as well as its main enforcer, i.e. the European Commission, have attracted a great deal of criticism (from the European Central Bank (ECB), the International Monetary Fund and some Member States).

The last blow came recently, from the newly established European Fiscal Board (EFB), which did not wait long before hitting hard. Indeed, the EFB’s creation was first announced in the June 2015 Five Presidents report. The EFB was to ‘coordinate and complement the national fiscal councils that have been set up in the context of the EU Directive on budgetary frameworks. It would provide a public and independent assessment, at European level, of how budgets – and their execution – perform against the economic objectives and recommendations set out in the EU fiscal governance framework. […Furthermore, s]uch a European Fiscal Board should lead to better compliance with the common fiscal rules, a more informed public debate, and stronger coordination of national fiscal policies.’ Its Chair – the Dane Niels Thygesen (a former member of the Delors Committee) – and its four members were designated at the end of 2016 when it hence started to function.

In its first annual report ever, published on 15 November, the EFB presents a mixed picture of the current regulatory framework, and the Commission’s action as its guardian. It focuses on three issues: an evaluation of the implementation of the EU's fiscal framework, a review and assessment of the fiscal stance for the euro area as a whole, and the identification of best practices in the functioning of national fiscal councils. It concludes with some suggestions on the future evolution of the EU’s fiscal framework.

In performing its evaluation, the EFB in fact underlines three characteristics of the current fiscal governance framework that will guide our analysis: its complexity, its persistent asymmetry and the important discretion left to the Commission in the application of the rules in place. It furthermore analyses the possibility of centralized fiscal stabilization within the Euro area.

This report constitutes a welcome opportunity to explore some of the main challenges the EU fiscal governance currently faces, and to suggest potential reform avenues.

Such endeavour is all the more timely as the reincorporation of the Fiscal Compact into EU law and the review of the Six-Pack and Two-Pack reforms will constitute key priorities of the upcoming December EMU package of the Commission. Such political momentum will certainly offer broader opportunities to further enhance and streamline the Stability and Growth Pact (SGP), and the other instruments making up EU fiscal governance.

Background to the EFB’s first report

Before proceeding with an analysis of the EFB’s first report, a few reminders are in order. As is well known, the crisis precipitated a fundamental overhaul of EU fiscal governance. On the one hand, the procedural framework for fiscal surveillance and coordination was substantially strengthened, most notably by increasing the scope and intensity of the oversight exercised by the EU on national public finances. On the other hand, the very substance of the fiscal rules Member States are subject to was tightened and further expanded.

In a nutshell, the fiscal targets are now defined more strictly, requiring stronger yearly adjustment efforts from the Member States. If the deficit remains the central criterion of the EU fiscal discipline regime, the debt criterion has been further operationalized, and an expenditure benchmark was added. The reliance on structural rather than nominal indicators has been further generalized. These developments show the clear intent of the EU to exercise close and continuous scrutiny over all aspects of national budgets, in order to enhance their overall sustainability.

However, conscious of the need to accommodate a range of contingencies, and eager to preserve a certain room for flexibility, the Six-Pack reform has also multiplied the escape clauses entitling Member States to derogate from their budgetary obligations under certain circumstances (i.a. structural reforms implementation, severe economic downturn).

The overpowering complexity of EU fiscal governance

Certainly, a major shortcoming of this new normative body is its overwhelming complexity. In the post-crisis era, EU fiscal discipline consists of a dense web of detailed rules and sub-rules governing public debt, deficit and expenditure. Those rules display a high level of prescription and specificity, and yet, are tempered by an equally complex array of general escape clauses and potential loci for flexibility and derogation. Further increasing the systemic intricacy of the EMU fiscal discipline regime, the rules are spread over different EU regulations and directives, partially replicated in international treaties and national laws (which do not always fully overlap).

Against that background, it is proven that national authorities struggle to understand the exact rules they are to abide to, and the margin of manoeuvre they still enjoy under the current framework. Such lack of clarity also undermines transparency with regard to the rules’ ‘indirect’ addressees, namely the general public and the markets, and may in the long run harm the efficiency of public oversight and market mechanisms as enforcement channels of fiscal discipline in the EMU.

Quite obviously, there is a strong need for simplification. Even the European Commission seems to acknowledge that. Too many rules, too many operational targets do not favor compliance, monitoring, enforcement and overall intelligibility, thereby undermining the legitimacy of the EU’s actions. In that regard, interesting proposals for reform are currently on the table. Correctly positing that the ultimate aim of the EU fiscal regime is the preservation of debt sustainability, IMF officials and, although to a lesser extent, the EFB consider that the system would gain in readability and overall efficiency if it were to revolve around one fiscal anchor (the debt ratio instead of headline deficit) and one operational target (possibly the ‘fiscal effort’ variable). In a similar fashion, a substantial streamlining of the existing escape clauses would also appear necessary.

The structural asymmetry of EU fiscal discipline

Another important issue inherent to the current regime is its structural asymmetry. From the outset, the SGP was designed as a tool to correct excessive deficit and debt levels and tame profligate States. Its rules and procedures are thus exclusively driven by that objective, and the crisis further strengthened this focus. Conversely, the rules do not contemplate that States may be too frugal. Under the SGP, surplus equals balance, and surplus countries are under no parallel duty to bring their fiscal position back to equilibrium. As an asymmetric construct, the SGP is one-sided, and toothless when it comes to dealing with too ‘virtuous’ countries.

This has proven particularly problematic over the last few years, as the Commission was seeking to achieve a positive fiscal stance for the Euro area, and sought to enjoin the few Member States accumulating large budgetary surpluses (such as Germany, Luxembourg or the Netherlands) to engage in mildly expansionary policies by using the available fiscal space and boosting public investment. Under the current regime, such injunctions are at best wishful thinking, and lack any kind of legal support in the texts.

In our view, such asymmetry ought to be corrected, especially at a time when Europe heavily suffers from an investment backlog. Does this mean that an ‘Excessive Surplus Procedure’ should be established? This would probably be a step too far. But if the achievement of budgetary equilibrium is to be the ultimate rationale of the SGP, its provisions should be amended so that when appropriate, fiscal expansion too can be commanded.

How complexity and flexibility empower the European Commission

The current regime’s inherent complexity and flexibility, combined with the conceptual indeterminacy of some of its founding concepts (such as that of the output gap), have also created significant room for administrative discretion, which the Commission has been very eager to exploit. It is indeed impressive to note that at any key stage of the surveillance procedure organized by the SGP (either under its preventive or corrective arm), the Commission enjoys discretion and needs to exercise judgement.

Under a supposedly rules-based system, this appears to be problematic (to some extent at least), and obviously comes at the expense of the predictability, even-handedness and efficiency of the entire regime. The main risk is that certain choices of the Commission may no longer be economically motivated, but founded on political or ad hoc considerations that may run counter to the economic rationale underlying the EMU fiscal framework. In that regard, one may for example mention the very generous decision of the Commission that Italy was eligible to the ‘structural reforms’ escape clause, or its lenient stance in the framework of the Excessive Deficit Procedure against France, which was never stepped up despite the clear insufficiency of the French consolidation efforts ('Because it is France' was the main justification expressly advanced by Juncker).

The surprising decision of the Commission in the summer 2016 not to impose sanctions (even symbolic) on Spain and Portugal for failing to take corrective action in the framework of their EDP, also shows that discretion may come at the expense of enforcement and, ultimately, of compliance. This notwithstanding, it is clear that a system of smart rules cannot do without a dose of flexibility and discretion. In the future, the focus should therefore not be on trying to erase the loci for administrative judgement, but on making sure that such judgement is primarily driven by an economic, non-political rationale.

This might however prove difficult as the Commission (also) needs to ensure that its actions remain legitimate in the eyes of the citizenry in addition to guaranteeing the EU’s fiscal stability and it arguably has to take account of the fact that its decisions to impose fines on non-complying Member States can only be overcome by qualified majority in the Council. Simplifying the normative corpus should nevertheless help in pursuing this objective of economically-based decisions. The Commission should also be more transparent on its methodologies, and consistent in their application. On a different note, the risk of biased, political application of the SGP by the Commission primarily comes from its current hybrid nature: “between an independent executive agency and a political government”, as the EFB rightly puts it (p. 63).

Such risk may be mitigated by a stronger reliance on economic advice independent of short-term political considerations. Where this input should come from remains to be seen. Quite naturally, the EFB has already offered its services. On the face of it, the EFB’s role is significantly different from that of national fiscal councils since it is not bound to take an active role in the implementation of the EU fiscal framework; rather it has to evaluate the Commission’s actions in this regard.

By contrast, even if national councils in most cases do not issue decisions binding on their governments, they have to produce or endorse macroeconomic previsions, they declare the activation of the automatic correction mechanism etc. In its evaluation, the EFB offers to endorse responsibilities closer to that of national councils.

Finally, in an attempt to further reduce discretion, EMU fiscal discipline could gain in consistency, foreseeability and congruence if it were to rely on smarter enforcement mechanisms by means of financial sanctions. Financial sanctions have shown all their limits in the past. In our view, macroeconomic conditionality, i.e. linking access to EU funds to (an almost) compliance with the fiscal rules of the SGP, could be the way to go. It is already used under the current multiannual financial framework, although in a much limited way. The pattern could be generalized under the next framework.

Towards a Fiscal Union?

Next to the issues of complexity, asymmetry and discretion visible in the EU fiscal framework, the question of centralized fiscal stabilization also deserves attention. The Eurocrisis has brought out in the open the founding insufficiencies of the rules-based paradigm, and the necessity to transcend such approach by endowing the supranational level (the EU or the Eurozone) with a fiscal capacity of its own is now clearer than ever.

This shift from negative to positive fiscal integration could take the form of unemployment insurance or investment protection, with the exemption of investments from the golden rule or not. The introduction of a rainy-day fund – also envisaged by the Commission – could also be a possibility. In our view, such a fund could appear to be a valuable option since it would function on the basis of accumulated resources regularly paid by Member States which would have a direct incentive to follow SGP rules. To this type of fund or an unemployment insurance the EFB however favors the protection of investment, which admittedly should be guaranteed too; perhaps it is also the least bold shift towards an unpopular Fiscal/Transfer Union.

Another possibility could be the introduction of an EU budget. Although the EFB acknowledges that this debate falls outside of its remit, it provides its opinion ‘as economists involved in the analysis of public finance more generally’ (p. 67), thereby arguably affirming its standing in the more global EU financial area. The form this budget should take – whether as a dedicated euro area budget (as recently suggested by President Macron) or as a dedicated budget euro area budget line in the EU budget (as envisaged by the European Commission) – is left open; in the absence of a dedicated euro-area parliamentary arena, perhaps the latter option is preferable to avoid further increasing the European democratic gap.

Beyond this, such a move would significantly go beyond the sole fiscal stabilization and adopt a broader stance on fiscal policy. This move, which would in fact represent the return to a perspective adopted at previous stages of the European integration process, would indeed be particularly welcome as it would (eventually) provide remedy to some of the shortcomings of the current fiscal policy design.

What does this report tell us?

This report is, in our view, important for at least two reasons. First, it bears a valuable assessment of the current EU fiscal framework as implemented by the Commission at a time when reflections on the future of the Eurozone architecture are high on the EU agenda. Second, it clears up certain doubts that could have existed when the EFB was first established, in particular as to its capacity to provide a truly independent assessment of the Commission’s actions. Indeed, concerning the latter point, a certain degree of uncertainty existed in light of the close ties between the EFB and the Commission, as well as in light of the absence of the EP’s involvement.

Furthermore, the EFB’s ability to act as an authoritative institution was not a given since it was established as a completely new institution that hence had to first prove its reliability (and independence). The content of the first report analysed here appears to indicate that the EFB is likely to surpass both hurdles successfully, at least as long as it is chaired by the prominent and respected expert Niels Thygesen.

Concerning the future of the EU fiscal framework, it certainly provides a useful and timely assessment. It both highlights the weaknesses in the current fiscal framework and in its enforcement by the Commission and makes a valuable contribution to the debate on its reform; this contribution is all the more valuable as it stems from the EU institution tasked with performing this assessment and not from the ECB or the IMF as had been the case thus far. We will now have to wait until the beginning of December to see if and how these proposals have been picked up by the Commission.

Barnard & Peers: chapter 19

Photo credit: Supertrader 

Bailouts, Borrowed Institutions, and Judicial Review: Ledra Advertising

Alicia Hinarejos, Downing College, University of Cambridge; author of The Euro Area Crisis in Constitutional Perspective 

One of the features of the response to the euro area crisis has been the resort to intergovernmental arrangements that largely avoid judicial and parliamentary control at the EU level. The paradigmatic example has been the European Stability Mechanism (ESM), created by the euro area countries in order to provide financial assistance to countries in difficulties, subject to conditionality. The ESM was created through the adoption of an international agreement, the ESM Treaty; it is an intergovernmental mechanism created outside the framework of the EU, but with significant links to it. Most importantly, the ESM ‘borrows’ two EU institutions, namely the Commission and the European Central Bank (ECB), in order to carry out its functions. (Those two bodies, along with the International Monetary Fund, constitute the so-called ‘Troika’ which oversees the controversial bail-out processes).

The nature of the ESM and the way it operates raises important questions regarding judicial protection. As mentioned above, ESM financial assistance is granted after strict conditions have been negotiated and agreed in a Memorandum of Understanding. These conditions typically require the Member State in receipt of assistance to adopt ‘austerity’ reforms that have an impact on its citizens—understandably, these citizens may wish to challenge the validity of these conditions, often questioning their compliance with the EU Charter of Fundamental Rights.

In Pringle, the Court stated that Member States were not within the scope of application of the Charter of Fundamental Rights when creating the ESM, or presumably when acting within its framework. This meant that their actions could not be reviewed for accordance with the Charter (although they can still be reviewed in national courts for compliance with purely national law, or in the European Court of Human Rights for compliance with that treaty). This, however, left open the question of whether, or in what form, the Charter applied to the EU institutions—the Commission and the ECB—when operating under the ESM. This is the question that the Court of Justice had to answer in the Cyprus bailout cases (Ledra Advertising and Mallis).

Cyprus wrote to the Eurogroup in 2012 to request financial assistance, and it was in receipt of ESM assistance from 2013 until 2016. The country had to recapitalize its biggest bank and wind down its second. The Memorandum of Understanding stipulated that bondholders and depositors would bear part of the cost. As a result, the applicants suffered substantial financial losses and turned to the EU courts: first to the General Court, and then on appeal to the Court of Justice. They were challenging the validity of the Memorandum of Understanding (Ledra Advertising), as well as a Eurogroup statement that referred to the conditions attached to the bailout (Mallis); they also asked for damages. In their view, the involvement of EU institutions—the Commission and the ECB—in the adoption of these measures meant that it should be possible for individuals to challenge their validity at the EU level; they also argued that these institutions’ involvement should trigger the EU’s non-contractual liability.

The General Court dismissed all complaints as inadmissible. It decided that neither the Memorandum of Understanding nor the Eurogroup statement could be the subject of an action for annulment; the former because it is not a measure adopted by an EU institution, the latter because it is not intended to produce legal effects with respect to third parties. It considered that the involvement of the Commission and the ECB in the adoption of these measures was not enough to attribute authorship to them, or to trigger the non-contractual liability of the Union.

The Court of Justice agreed, in part, with the General Court: neither the Eurogroup statement (Mallis) nor the Memorandum of Understanding (Ledra Advertising) can be the object of an action for annulment. The Court insisted again on its finding in Pringle that ESM acts fall outside the scope of EU law; the involvement of the Commission and the ECB does not change this, and is not enough to attribute authorship of these acts to them for the purposes of judicial review.

Yet the Court goes on to reveal a twist in Ledra Advertising: even if they are not its authors, the involvement of the Commission and the ECB in the adoption of an ESM Memorandum of Understanding may be unlawful, and thus able to trigger the non-contractual (damages) liability of the EU. The Commission, in particular, retains its role as ‘guardian of the Treaties’ when acting within the ESM framework. As a result, the Commission should not sign an ESM act if it has any suspicions as to its accordance with EU law, including the Charter.

The Court repeated the usual rules for the EU institutions to incur non-contractual liability: (a) they must have acted unlawfully, (b) damage must have occurred, and (c) there must be a causal link between the unlawful act and the damage. Not just any unlawful act gives rise to damages liability: there must be ‘a sufficiently serious breach of a rule of law intended to confer rights on individuals’. While the right to property enshrined in the Charter was a ‘rule of law intended to confer rights on individuals’, that right is not absolute: Article 52 of the Charter allows interference with some Charter rights. Applying that provision, the Court came to the conclusion that the measures contained in the Memorandum did not constitute a disproportionate and intolerable interference with the substance of the applicants’ right to property, given ‘the objective of ensuring the stability of the banking system in the euro area, and having regard to the imminent risk of [greater] financial losses’.

So individuals can challenge the EU institutions’ bailout actions by means of an action for damages (non-contractual liability), but not by means of an annulment action. It is useful to remember that the rules on access to the EU courts as regards those two types of remedy are quite different. The standing rules are more liberal for damages actions: it’s sufficient to allege that damages have been suffered as a result of an unlawful act by the EU, whereas it’s much harder to obtain standing to bring annulment actions. The time limits are more liberal too: individuals have five years to bring damages cases, but only two months to bring actions for annulment. On the other hand, the threshold to win cases is much higher for damages cases: any unlawfulness by the EU institutions leads to annulment of their actions, but only particularly serious illegality gives rise to damages liability.

In any case, we know from the Court’s ruling that breaches of at least some Charter provisions within the ESM framework could potentially give rise to damages liability. In the anti-austerity context, it should be noted that social security and many social welfare claims fall within the scope of the right to property, according to the case law of the European Court of Human Rights. In the case at stake, the Court did not discuss the proportionality of the interference with the applicant’s rights at much—or any—length, but it is clear that future applicants will face an uphill struggle.

On the whole, Ledra Advertising is a welcome change from other cases concerning measures adopted as a result of a bailout, where the Court’s approach had been to deny the existence of any link to EU law. Indeed, it seems unavoidable that the EU should bear the appropriate degree of responsibility when allowing its EU institutions to operate within the ESM framework. This is not to say that it will be easy for individuals to be awarded damages; as this case illustrates, the threshold is extremely high. Moreover, while a significant aspect of the role of the EU institutions within the ESM has been clarified, questions remain concerning the judicial and democratic accountability of this mechanism. Overall, however, Ledra Advertising is a step in the right direction.

Barnard and Peers: chapter 19, chapter 8

Photo credit: www.newsweek.com

Further development of the EMU – should legitimacy come first or last?

Päivi Leino-Sandberg: Adjunct Professor of EU Law, Academy of Finland Research Fellow, University of Helsinki

The June 2012 European Council adopted a report setting out ‘four essential building blocks’ for the future Economic and Monetary Union (EMU): an integrated financial framework, an integrated budgetary framework, an integrated economic policy framework and, finally, strengthened democratic legitimacy and accountability.[1] In its discussions, the European Council stressed that:

Throughout the process, the general objective remains to ensure democratic legitimacy and accountability at the level at which decisions are taken and implemented. Any new steps towards strengthening economic governance will need to be accompanied by further steps towards stronger legitimacy and accountability.[2]

But while the European Council has repeatedly expressed its concern about the legitimacy problems of the EMU, the tools proposed for tackling these problems have remained extremely modest. This trend continues in the recent Five Presidents’ Report adopted in June 2015 (discussed here and here), which again includes a brief concluding section on ‘Democratic Accountability, Legitimacy and Institutional Strengthening’, but manages to discuss the topic without any tangible results. For many readers of the Five Presidents’ Report, it might not be evident that a further centralization of power to EU institutions will automatically bring about greater legitimacy. After all, in many cases the democratic guarantees continue to function best at national level.

There are various legitimacy related challenges that should be addressed if there indeed is a wish to make the EMU more sustainable. For example, think about the blurred division of competence between the EU and its Member States especially in the area of economic governance. While the Treaties still specify economic and fiscal policy as falling under Member State competence, the six-pack and the two-pack have increased EU level steering, and in practice turned EU recommendations binding by introducing sanctions for non-compliance. Since all EU institutions agreed on the necessity of these amendments, their significance for the division of competences between the EU and Member States has been subject to very little public discussion.[3] Many of the reforms are legally problematic, but a formal Treaty amendment reassessing the nature of Union economic policy competence was not deemed possible within the timeframe that has been deemed necessary. Ambiguity in drafting the rules has in many ways been intentional, but it has also contributed to blurring responsibilities between the EU and national level. The complexity of rules has increased, which in its turn has strengthened the discretion of the Commission in implementing the rules, and weakened faith in them. At the same time, Member States have needed to embark on numerous ‘solidarity operations’. In addition, the strict conditionality attached to financial assistance has had major implications for the policy choices of programme countries. As a result of the crisis and the way in which it has been dealt, Europe is effectively divided into creditors and debtors. Very few see the EMU as treating them fairly.  This has contributed little to the aim of improving the legitimacy of decision-making, and is probably the strongest motivation for the need to reform the EMU. An arrangement that is widely experienced as being unfair cannot be sustainable in the long run.

Second, thinking how many of the problems relating to the euro-crisis are connected with a lack of transparency when making past decisions, one would think that European decision-makers would now hurry to do what they can to improve openness. In April 2011 the President of the Euro Group, today the President of the Commission, Jean-Claude Juncker, was quoted as stating that when it came to economic policy, he was ‘for secret, dark debates’.[4] Even the more minor steps are still to be taken, such as the formal extension of the scope of Regulation No 1049/2001 on public access to documents to those held by the European Council; however, almost six years after the entry into force of the Lisbon Treaty stipulating such an extension, the amendment is still to be made. Most decisions aiming at curing Europe’s economic crisis are characterised by a lack of procedural transparency. Proposals have been made late; this sets clear limitations on national discussions,[5] as well, since they are then conditioned by the fear that the EU would – in particular in case national debates proved substantial and required amendments - not be capable of taking the necessary decisions in a timely manner. Again, this has not contributed to a stronger legitimacy of decision-making.

Last week, on 21 October 2015, the Commission adopted a package of proposals intended to implement the first stage of proposals included in the Five Presidents’ Report. In many ways, these proposals take the development to the completely wrong direction with respect to the concerns expressed above. The Commission Communication ‘On steps towards Completing Economic and Monetary Union’ once again includes the compulsory final section on ‘Effective democratic legitimacy, ownership and accountability’. It repeats the old ideas of dialogue with and debates in national parliaments, without adding anything new.

In fact, when reading the Commission Communication, there is fairly little to add to what the Grand Committee of the Finnish Parliament already commented to similar proposals in its Statement 4/2012:

“It is dangerous for democracy to adopt quasi-democratic rules that offer the appearance but not the reality of democratic legitimacy. […]The committee considers that respect for the treaty is a minimum requirement for the EU’s democratic legitimacy. […] The measures taken to control the economic crisis leave something to be desired in this respect, as regular procedures have been waived and serious doubts have been voiced about whether these measures are consistent with the treaty. […]Finally, the committee wishes to point out that democracy also requires that the principles of transparency and public access to documents are realised in the development of EMU.”

In short, the place of legitimacy and democracy seem to be exactly the same as they were in 2012.

As far as the trend of blurring competences is concerned, the package includes a Proposal for a Council decision laying down measures in view of progressively establishing unified representation of the euro area in the International Monetary Fund. While being somewhat out of touch with reality (in the form of decision-making rules in the IMF, and the modalities for amending them), the reading of Union competence reflected in the proposal is fundamentally flawed. The proposal refers to how the recent measures of economic governance

“have integrated, strengthened and broadened EU-level surveillance of Member State policies in essential areas of macroeconomic and budgetary relevance. The European Stability Mechanism was established as the permanent crisis resolution mechanism for the countries of the euro area. The Union has also put in place a Banking Union with centralized supervision and resolution for banks in the euro area and open to all other Member States. At the same time, the external representation of the euro area has not kept up with those developments. The progress that has been achieved on further internal integration of the euro area needs to be projected externally […].”

While unified representation does not necessarily mean a shifting of competence, in the view of the Commission, there is in the IMF context an obligation of “full coordination” of national positions. The proposal does not stipulate what happens if a shared position cannot be found. Considering that economic and fiscal policy remain national competence, as does the ESM, one wonders whether this new attempt to blur the division of competence further does anything to strengthen the voice of the euro group in the IMF, or whether actually the opposite is the case.

The new package also includes a Commission decision establishing an independent advisory European Fiscal Board, which many European actors have seen necessary in  limiting Commission discretion in the application of the rules of economic governance and making the monitoring exercise more objective. The Board set up by the Commission based on its own decision, and applicable as of 1 November 2015, now has the task of contributing ‘in an advisory capacity to the exercise of the Commission's functions in the multilateral fiscal surveillance as set out in Articles 121, 126 and 136 TFEU as far as the euro area is concerned’. For this purpose it shall provide to the Commission an evaluation of the implementation of the Union fiscal framework, advise it on the prospective fiscal stance appropriate for the euro area as a whole based on an economic judgment; cooperate with the national fiscal councils, and on the request of the President, provide ad-hoc advice.

While all of these are undoubtedly noble and necessary tasks which could contribute to strengthening the credibility of EU rules, the public is not to enjoy from information concerning them any more than the Member States are, since information provided by the Board is to remain primarily a Commission prerogative. The decision stipulates that the meetings of the Board shall not be open to the public. And as far as transparency is concerned, the Commission decision is rather straightforward:

Article 6 Transparency

The Board shall publish an annual report of its activities, which shall include summaries of its advice and evaluations rendered to the Commission.

It is of an interest that the Commission sees it fit to set up a body for assisting itself in exercising its Treaty-based tasks, administratively attached to the Commission's Secretariat General, but without a trace of the Treaty-based transparency obligations that apply to the Commission itself: the presumption of openness, and the principle that access to documents can only be limited on a case by case basis, based on Regulation No 1049/2001, which includes an exception to be invoked in case of harm to the financial, monetary or economic policy of the Union or a Member State. Instead of providing access as the main rule, apart from summaries published at a later stage, only the Commission is to know what the European Fiscal Board advices. While this would also seem to be contrary to the Treaty, such an arrangement does little to increase faith in the objectivity of decision-making or the legitimacy of the exercise. Instead, it seems to be nothing than a new way of buttressing the Commission’s own position in the application of rules by offering it the opportunity to justify its position with reference to unpublished advice by an independent Board.

At the same time, the Treaty of Lisbon would already offer a number of solid tools specifically aimed at tackling the Union’s well-known problems relating to democratic legitimacy, through improved openness and wider citizen participation in decision-making, and a clearer division of competence between the EU and its Member States. None of these reforms are as much as mentioned in any of the high-level reports. And yet, they would provide a number of concrete means for many of the problems illustrated above. The most recent Commission package yet again demonstrates a complete failure to grasp what legitimate decision-making is about. It matters how decisions are taken, and what their outcomes are. Therefore, instead of treating the questions relating to legitimacy and democracy as an appendix or afterthought in the style of the recent reports, these should be the questions that are tackled first. An economic policy that is not experienced as legitimate is seldom effective. This would be useful starting point for the further development of the EMU.

Barnard & Peers: chapter 19

Photo credit: voxeurop.eu

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[1] Towards a Genuine Economic and Monetary Union. A report prepared by Herman Van Rompuy, President of the European Council in close collaboration with José Manuel Barroso, President of the European Commission; Jean-Claude Juncker, President of the Eurogroup and Mario Draghi, President of the European Central Bank, 5 December 2012. See also European Council conclusions on completing EMU adopted on 14 December 2012. 

[2] December 2012, para 14; European Council conclusions on completing EMU, adopted on 18 October 2012, para 15.  For a discussion, see e.g. Päivi Leino and Janne Salminen, Should the Economic and Monetary Union Be Democratic After All? Some Reflections on the Current Crisis, 14 German Law Journal (2013) 844–868. 

[3] See Päivi Leino and Janne Salminen, “Going ‘Belt and Braces’ – Domestic Effects of Euro-crisis Law”, EUI Working Paper LAW 2015/15.

[4]“Eurogroup chief: 'I'm for secret, dark debates'”, published by euobserver on 21 Aril 2011, available at https://euobserver.com/economic/32222 .

[5] For a discussion, see Päivi Leino and Janne Salminen, ’The Euro Crisis and Its Constitutional Consequences for Finland: Is There Room for National Politics in EU Decision Making?’, 9 European Constitutional Law Review (EuConst) 3/2013 451–479.  

The European citizens’ initiative and EU competence over Greek debt ‘haircuts’

Professor Daniel Sarmiento, Professor of EU Law at the University Complutense of Madrid*

EU competence is a touchy area of EU law. It has become very complex, together with the also intricate case-law on legal bases, which, after several decades of case-law, is not always easy to follow. After the entry into force of the Lisbon Treaty, EU competence has become a major domain for EU constitutional lawyers and it deserves very careful attention. The fact that the Treaties now include a typology of EU competences and enumerate them is a sign that many future battles in EU law will be fought in this terrain.

Furthermore, cases like Pringle, Gauweiler (discussed here) or Vodafone prove that issues of competence and legal bases are not the exclusive domain of institutional litigation, but areas that can be brought to the courts by private parties too. The Court of Justice has always been sensitive to these cases and it has dealt with them with utmost care, mostly in Grand Chamber formation.

Last week a rather surprising route for EU competence litigation came under the radar. In the case of Anagnostakis (no English version available, I’m afraid), the General Court ruled on an action of annulment brought by a private party against the decision of the Commission to reject, on the grounds of lack of competence, a European citizens’ initiative (ECI). Mr. Anagnostakis, together with more than a million supporters, brought a proposal pursuant to Article 11.4 TEU (which provides for the existence of ECIs) and Regulation 211/2011 (which sets out the detail of the ECI process), demanding that the Commission introduce in EU legislation “the principle of state of necessity, according to which, when the financial and political subsistence of a State is at stake due to its duty to comply with an odious debt, the refusal of payment is necessary and justified”. According to the promoters, the legal base of the initiative was to be found in Articles 119 TFEU and 144 TFEU.

The Commission did not seem very impressed and, pursuant to Articles 4(2)(b) and (3) of Regulation 211/2011, it refused to register the proposal, based on a lack of competence.

Mr. Anagnostakis introduced an action of annulment before the General Court, attacking the Commission’s Decision for breach of Articles 122(1) and (2) TFEU, 136(1) TFEU and rules of international law.

The General Court dismissed the action, but it did not limit itself to scrutinizing the Commission’s duty to state reasons. Instead, the Court went into some detail in order to ascertain if haircuts in government debt are not only a competence of the EU, but also in conformity with EU Law. In a rather surprising format and procedural context, the General Court dealt quite openly with one of the Union’s hottest potatoes at the time: the unsustainable Greek public debt.

It is true that the judgment is quite laconic in its reasoning, but it relies several times on Pringle and Gauweiler when interpreting Articles 122 and 136 TFEU. But no matter how laconic it may be, the judgment makes an assertion that will probably not go unnoticed when the Greek public debt becomes politically toxic again. In paragraph 58 of the judgment, the General Court states that “the adoption of a legislative act authorizing a Member State to not reimburse its debt, far from being a part of the concept of economic policy guidelines in the sense of Article 136.1.(b) TFEU […] it would have the effect of substituting the free will of the contracting parties by a legislative instrument allowing for a unilateral abandonment of public debt, which is clearly not what the provision allows” (free translation).

The assertion might be formally correct in light of the limited scope of Article 136(1)(b) TFEU, but the language of the judgment is politically explosive. Even in legal terms, one wonders if Pringle was openly precluding any kind of haircut of government debt by any means. After reading the General Court’s decision in Anagnostakis, it seems that haircuts will be mission impossible in the future, despite the circumstances, the consensus among Member States (the IMF has been explicitly positive about a future Greek haircut) and, above all, the terms and scope of the haircut.

But of course, this judgment could be just a superficial decision undertaking a superficial degree of scrutiny due to the peculiar procedural context of the case. It could be argued that highly contested issues such as the EU’s competence in the area of EMU is something should be left to the Court of Justice, but not to the General Court in the circumstances of a case like Anagnostakis. The General Court might be aware of this and thus the brief and straight-forward reasoning of the decision. However, after reading the judgment several times, the more I read it the more explosive it sounds to me.

*Reblogged from the Despite our Differences blog

Barnard & Peers: chapter 5, chapter 19

Photo credit: www.thenation.com

Saving the single currency? Gauweiler and the legality of the OMT programme

Alicia Hinarejos, Downing College, University of Cambridge; author of The Euro Area Crisis in Constitutional Perspective 

On the 16^th 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