Central Bank Digital Currency: The Legal Obstacles of the Digital Euro

 

Dr. (Annelieke) Anne Marieke Mooij, Tilburg University

The ECB has decided to launch the preparation phase for the digital euro. The digital euro is a digital currency (euro) issued by the ECB, a so called ‘Central Bank Digital Currency’ (CBDC). The ECB has currently evaluated different design options for the digital euro in its report. The designs vary from a limited form, only accessible to financial institutions. It could, however, also be designed to be accessible to all consumers via their national central banks. The ECB has not yet settled on a single design but the launch statement makes it unlikely that the ECB will opt for a digital euro only accessible by financial institutions. The different designs carry different legal obstacles. This blog will consider the main legal hurdles.

The power for the ECB to issue legal tender is founded in Article 128 TFEU, which provides the ECB with the exclusive power to issue banknotes. These are the only banknotes to carry legal tender. Secondary law refers to physical money such as banknotes and coins as carrying the status of legal tender. However, Grunewald et. al. consider that a purposive reading of Article 128 TFEU allows for a broader interpretation of this provision. The most convincing argument here is the change of financial systems. The possibility of digital legal tender was not expressly provided for because it was not yet a viable option when the Lisbon Treaty was adopted. Moreover, the Treaties do not provide any grounds for prohibiting the creation of digital legal tender. Therefore, it does not seem impossible that the ECB could issue digital banknotes based upon Article 128 TFEU.

Article 128 TFEU further raises a question of design, more specically can the digital euro accumulate interest? Grunewald et. al. conclude that digital notes should resemble cash, in the sense that no interest should be accumulated. The recent judgment of the CJEU in Dietrich & Häring v. Rundfunk, however, indicates that digital money under EU law may not have to resemble cash. Dietrich & Häring v. Rundfunk concerned the status of the cash money as legal tender. The CJEU considered that the “concept of ‘monetary policy’ is not limited to its operational implementation […] but also entails a regulatory dimension intended to guarantee the status of the euro as the single currency […]” (para 38). The Court furthermore argued that legal tender carries three criteria: mandatory acceptance, acceptance at full face value and the power to discharge debts (paras 48-49). Interestingly, the criterion on whether or not a currency accumulates interest – called ‘storage of value’ – is neither clarified by secondary legislation nor in the case law of the CJEU. Additionally, as the CJEU stated, the ECB’s authority is not limited to executing monetary policy but also includes a regulatory dimension (para 38). This regulatory dimension should be interpreted to include the design of legal tender, without violating the three primary criteria. Following the Court’s judgment in Dietrich & Häring v. Rundfunk, it seems likely that the ECB could introduce the digital euro as legal tender and include the use of interest rates.

The question of interest rates is particularly important when considering the potential use of the monetary policy. The first concern described by the ECB in their report is that of potential foreign currencies, i.e. other CBDCs and cryptocurrencies (see p. 9). If these currencies took hold in the Eurozone they could limit the transmission channels of the ECB. The ECB’s transmission of monetary policy depends on the euro as the dominant currency. If foreign CBDCs or commercial currencies such as Bitcoin became more prominent than the euro the ECB would not be able to influence monetary policy. A digital euro, however, could safeguard the status of the euro and the singleness of monetary policy in the Eurozone. Furthermore, economists doubt whether cryptocurrencies, as opposed to CBDCS, can provide price stability. As per Article 127(1) TFEU price stability is the primary objective of the ECB. To use a digital euro to prevent cryptocurrencies takingover would prevent the instability of cryptocurrencies. Such an objective is within the ECB’s monetary aim. Furthermore, the digital euro could provide a more direct transmission of monetary impulses. Currently the ECB influences interest rates in the real economy through the rates it charges commercial banks when they borrow from the ECB. Through a digital euro the ECB could directly change interest on the consumer accounts. To ensure the transmission of monetary impulses, the digital euro should be account-based and carry interest. Meaning that consumers would have access individual digital euro accounts with the ECB. Such accounts can be accessible through the commercial sector but consumers would have a claim upon the ECB or their national central bank. A design whereby the digital euro is only available to financial institutions carries limited legal questions. The account-based design, however, becomes more legally challenging. In such a system the digital euro might compete with commercial bank accounts.

It is clear that for the ECB to introduce the digital euro as part of its monetary policy, the ECB would have to comply with its monetary mandate established in Article 127 TFEU. According to the ECB’s monetary mandate under Article 127 TFEU, a measure must have a monetary aim and comply with the principle of proportionality. In Gauweiler, the CJEU considered the aim of the policy as the primary indicator of whether a policy is monetary or economic (para 46). In Weiss, the CJEU furthermore placed very few limits on the indirect effects of the ECB’s adopted policy. According to the CJEU in Gauweiler, the aim of safeguarding the status of the euro complies with the monetary aim of the ECB (para 48). The account-based and interest carrying design of the digital euro aims to introduce new transmission channels. The ECB will be able to directly change interest rates on consumer accounts through the digital euro. Whilst not being the same as restoring the available transmission channels, it does not render the design of a digital euro unlawful. The CJEU stated in Gauweiler that the “[…] objective of safeguarding an appropriate transmission of monetary policy […]” falls within the scope of monetary policy (para 49). The CJEU speaks of “transmission of monetary policy” rather than individual channels (para 49). There is clear evidence that current monetary policy transmission of the ECB? is not as effective as previously thought. The digital euro could improve transmission and reduce the concerns about the lower bound. The introduction of a digital euro should be considered as pursuing a monetary rather than economic aim. Even if fulfilling the monetary aim, the digital euro would still comply with the principle of proportionality.

The CJEU in Gauweiler and Weiss reviews the proportionality of an ECB measure by examining the  suitability and necessity of said measure (para 72). Regarding the suitability criterion, it should be noted that, at present, cryptocurrencies have never been implemented as a large-scale payment mechanism. The technology is, however, capable of facilitating such mechanisms in the near future. Economists, therefore, argue that the introduction of a CBDC is a natural progression of monetary policy. Whilst the effect of CBDCs on the markets is still debated, the ECB has been given a wide margin of discretion by the CJEU in adopting suitable measures. It is clear that the CJEU will only review whether the ECB has not made ‘a manifest error in judgment’ (Gauweiler, para 74). It seems unlikely that the Court would find the latter for the introduction of a digital euro.

This leaves the question of necessity. To comply with this second criterion, the digital euro may not go beyond what is necessary. The evaluation of this criterion depends on the aim that is pursued by the ECB: (1) the promotion of the euro as a single currency in light of commercial and foreign currencies, or (2) a more direct transmission of monetary policy. The first aim by itself would not justify the introduction of account-based and interest-bearing accounts. Commercial currencies are attractive because of their cheap and fast payment option. The potential for quick settlement through a digital euro does not require interest rates. Nor do cryptocurrencies accumulate interest rates, hence commercial euro accounts will remain attractive. Regarding international payments a mechanism of exchange using the digital euro and cryptocurrency should be considered. It is unlikely one cryptocurrency will take over the eurozone’s physical market. Meaning there will still be demand for a single currency in shops and restaurants. International payments are likely to be conducted with cryptocurrencies. An exchange mechanism can bridge the gap between euro’s and cryptocurrencies. Safeguarding the importance of both.  If one includes the introduction of a more direct transmission channel, the account-based system with interest rates would be necessary. Without individual accounts consumers cannot gather individual interest rates. The interest rates are necessary to transmit monetary impulses. This, however, does not yet settle the interest rate level that can be charged. In particular, the impact of the potential interest rate of a digital euro on commercial banks should be considered.

Economists disagree on the impact of CBDC on the commercial sector. Some argue that the uptake of CBDC will be limited. The introduction of CBDC will thus not have a large effect on the commercial sector. Whilst others argue that the ECB will have a competitive advantage due to their (perceived) stability, and thus the possibility for competition from the private sector is significantly decreased. It would therefore seem unlikely that the CJEU would qualify a digital euro which diminishes the commercial sector as necessary. The design of the digital euro should therefore allow the commercial sector to compete. The potential for competition stimulates technological growth and allows for consumer choice. A digital euro that diminishes the banking industry would reduce consumer options. This would not be beneficial to either consumers or the open market.

Based on the analysis above, the introduction of a digital euro thus seems legally possible. However, some questions remain. The interests that could be charged on the digital euro are not yet certain. Additionally, this post only considered a digital euro in a tiered system whereby consumer access would be realized through market infrastructer. The second option is a form of CBDC that is directly accessible through the national central banks. This system is considered a solution to the unbanked, i.e. consumers without a bank account. However, the number of such unbanked consumers in the EU is low. The aim of providing an inclusive banking sector is thus a primarily socio-economic rather than a monetary goal.

The economic objective of creating a digital euro which is directly accessible through national central banks is also not unlawful under EU law. In addition to its primary price stability mandate under Article 127 TFEU, this same Article states that the ECB also “shall support the general economic policies in the Union”. The scope of this secondary, economic mandate is not yet clear as there is no caselaw on this topic. However, it seems that the aim of economic inclusion fits the objectives of the Union. Article 153(j) TFEU includes the aim of social inclusion, which includes socio-economic inclusion. The economic mandate of the ECB, however, speaks of “support”. At present, no law or policy provides the authority for the ECB to introduce CBDC. It is furthermore unlikely that such a measure will be introduced.

At present access to a bank account is provided through Directive 2014/92. This directive focusses on increased competition within the EU to promote access to bankaccounts. A centralized approach to reduce the number of unbanked, through CBDC would require a 180 degree turn. The Dutch Central Bank (DNB) furthermore discovered there would be significant consumer uptake of CBDC. The DNB report states that 49% of consumers would open a CBDC account and, with an equal level of interests, 54% of consumer would deposit more than zero euro. This research was conducted when the concept of CBDC is relatively unknown (April 2021). When a CBDC becomes available and more known, the uptake should increase even further. The viability of the commercial sector would be in danger with such levels of uptake. The commercial banks require deposits from consumers to function. The deposits are used to provide loans and investments. Without consumer deposits the commercial banks would cease to exist. It is therefore unlikely that a centralized CBDC would comply with competition law.

Whilst consumers could be using a digital euro in the near future, it is unlikely that we will be banking with our national central banks. More likely the ECB will opt for a tiered-system whereby access to the digital euro is provided through market solutions.

For an extended analysis by the author click here.

Barnard & Peers: chapter 18

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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

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Accountability and Independence of the Governors of National Banks: Any role for the Court of Justice of the European Union?

Dr Marios Costa, Senior Lecturer, City, University of London

The European Union (EU) has long been criticised for administrative inadequacies and for structural deficiencies. There have been a number of reports and commentaries highlighting that the EU suffers from political irregularities. Similarly, alleged corruption, maladministration and money laundering at the national level of governance, as shown below, is of equal concern for the citizenry and the Union alike.

On 26 February 2019, the Court of Justice (Grand Chamber) gave a significant judgment on two joint cases brought by the suspended Governor of the Central Bank of Latvia, Ilmārs Rimšēvičs, and the European Central Bank (ECB) against the Republic of Latvia. Mr Rimšēvičs and the ECB argued that the Latvian Anti-corruption Office has unlawfully prohibited him from carrying out his duties as the Governor of the Central Bank which included participation in the Governing Council of the ECB. Rather unexpectedly, the Court of Justice annulled, for the very first time in the history of EU law, the national act from the Anti-corruption Office which restricted Mr Rimšēvičs from exercising his duties.

This judgment raises broader constitutional ramifications. It is therefore necessary to examine whether the Court has now gone beyond the jurisdiction set out in the Treaty framework. With all due respect, the ruling comes as a big surprise. This commentary examines the appropriateness of the recent judgment and concludes that the Court of Justice has stretched its powers of judicial review unprecedentedly. Yet, it can be set at the outset that the Court’s ruling is exceptional and closely related to the EU’s monetary regime. It remains to be seen whether this rather extraordinary case will mark the beginning of a new judicial trend with extended jurisdiction well beyond the EU legal order. 

Facts of the Case

Mr Rimšēvičs, the Governor of the National Bank of Latvia, was accused of soliciting bribery in the form of a free leisure trip as well as accepting the amount of EUR 750 000 in exchange of exercising influence in favour of a private Latvian Bank. The Latvian Anti-Fraud Office initiated investigations into the serious bribery allegations which resulted to the imprisonment of Mr Rimšēvičs. On 19 October 2018, he was released following a prohibition on performing decision-making, control and monitoring duties within the Central Bank of Latvia.

Mr Rimšēvičs and the ECB challenged the legality of the decision to relieve him from the office before the Luxembourg Court. The Court annulled the decision of the Latvian Anti-corruption Office to the extent that it has prevented the Governor of the Central Bank to exercise his EU (and national) duties.

EU Legal Framework on the Governors’ Accountability

EU law is not silent on the issue of the Governors’ accountability. Article 14(2) of the Statute of the European System of Central Banks (ESCB) and of the ECB, entitled ‘National central banks’, provides:

A Governor may be relieved from office only if he no longer fulfils the conditions required for the performance of his duties or if he has been guilty of serious misconduct. A decision to this effect may be referred to the Court of Justice by the Governor concerned or the Governing Council on grounds of infringement of these Treaties or of any rule of law relating to their application. Such proceedings shall be instituted within two months of the publication of the decision or of its notification to the plaintiff or, in the absence thereof, of the day on which it came to the knowledge of the latter, as the case may be.

Additionally, Article 130 TFEU provides:

When exercising the powers and carrying out the tasks and duties conferred upon them by the Treaties and the Statute of the ESCB and of the ECB, neither the European Central Bank, nor a national central bank, nor any member of their decision-making bodies shall seek or take instructions from Union institutions, bodies, offices or agencies, from any government of a Member State or from any other body. The Union institutions, bodies, offices or agencies and the governments of the Member States undertake to respect this principle and not to seek to influence the members of the decision-making bodies of the European Central Bank or of the national central banks in the performance of their tasks.

Judicial Review of EU Law acts

The Treaty on the Functioning of the European Union (TFEU) provides for two different methods of judicial control designed to ensure the legal exercise of power by EU institutions, offices, bodies and agencies. The relevant provisions are Articles 263, concerning direct actions for annulment, and 267, concerning indirect review via the preliminary reference procedure from the national courts. Overall, the EU system of judicial review reflects the fundamental principles of subsidiarity provided in Articles 4 and 5 TEU. Consequently, the annulment of a national act falls within the exclusive competence of the Member States and the CJEU has jurisdiction to annul a national measure only where there is an explicit power to do so in the Treaties. Rimšēvičs is therefore a unique case as it is relates to the annulment of a national measure by which the Governor of the national bank of Latvia was “relieved from office”. It becomes pressing to examine the appropriateness of the Court’s ruling and to assess whether EU law explicitly empowers the CJEU to annul the national measure adopted against the central banker.

The findings of the Court

The CJEU ruled that it has jurisdiction to annul a national measure so long as it suspends the Governor of the national bank. In doing so, the Court interpreted that “both the literal and the systemic and teleological interpretations of Article 14(2) of the statute entail the action provided for in that Article being classified as an action for annulment” (para 66). The Court went even further to explain that the statute of the ESCB derogated from the usual distribution of judicial review powers between the national court and the EU courts. The justification, according to the Court, was that the “ESCB represents a novel legal construct in EU law which brings together national institutions, namely the national central banks, and an EU institution, namely the ECB, and causes them to cooperate closely with each other, and within which a different structure and a less marked distinction between the EU legal order and national legal orders prevails.” (Para 69).  

Comment and Analysis

In Rimšēvičs the Court clarified the abovementioned provisions as regards independence and accountability of the Governors of the National Banks. Surely, any failure by an individual Governor to meet the standards described in Article 14 (2) ESCB, as set out above, can lead to a significant damage of the public image of the ECB and consequently cause a significant damage to financial stability in the EU. One can understand that the concerns and commitment to high standards exercised by the Latvian Anti-corruption Office are perfectly legitimate.

Yet the Latvian authorities were asked in a number of instances by the Court to support their serious allegations with evidence. The failure to produce any evidence supporting the suspension of Mr Rimšēvičs from office is remarkable. The lack of evidence against the serious background of alleged bribery and money laundering is related, closely, to the fact that individual Governors need to operate impartially and independently, without influence and pressure from external sources, whether national governments or private individuals. The Court protected the independence of the ECB and its Governing Council and emphasised, rightly, that under EU law any form of pressure cannot be accepted. Overall, the Court highlighted that independence should be protected under any circumstances in order for the Governor and the ECB to adopt and implement their decisions based upon technical and up-to-date scientific expertise. They adopt critical monetary related decisions that will have little or no use if they are subjected and influenced to any pressure.

The Governors must meet the highest possible standards and should perform their duties without any external influence due to their high ranking. In particular, as already explained above, Article 14 (2) ESCB requires Governors to be free from any external influence. This point is vital if the ECB is to stay independent of Member States or individuals. But let’s assume for a while that there was enough evidence that Mr Rimšēvičs obtained pecuniary advantages from the Latvian private bank. Assume further that the Latvian Anti-corruption Office concluded that the Governor needs to be held accountable for infringing his duty to behave with integrity and avoid maladministration. Is the national procedure that relieved him from the office in accordance with EU requirements to respect the rule of law? Or, does it represent an abusive behaviour exercised by the Latvian executive authorities? Relieving the national Governor whose independence is protected under EU law without evidence and without given the opportunity to see and respond to concrete evidence that supports the serious allegations constitutes a manifest violation of the notion of independence which is clearly safeguarded by the ESCB statute. Surely this is not something that can be accepted or justified. Anything that compromises the independence of the national central bankers is illegal under EU law.

    

Conclusion

Pursuant to the EU Treaties, clearly the Court of Justice has jurisdiction to decide on cases related to the accountability and independence of the ECB. Yet, the interpretation of the Court to extend its power to annul a national decision is surprising, at least. Taking into account the absence of any evidence and also the factual background of the case, one can realise that a number of irregularities by the Latvian authorities took place. The Court has made the right decision in clarifying the set EU law requirements that shield the ECB and the ESCB from any pressure. Additionally, and perhaps most importantly, the judgment provides us with clear boundaries on how to safeguard the independence of the national Governors. Independence has been a key factor in deciding Rimšēvičs, a factor which came with the cost to strike down a national decision by the CJEU in order to safeguard it.

Barnard & Peers: chapter 10, chapter 19

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The European Central Bank – judicial review of monetary policy and banking supervision

Introduction

The financial crisis has had broad political and economic effects across the European Union. It has had legal effects too – leading to the European Central Bank (ECB) not only developing controversial new means of intervention in monetary policy, but also being granted new powers of banking supervision and (with the ‘Troika’ of the Commission and the IMF) becoming involved in austerity policies in the Member States that needed financial assistance. 

The two blog posts below discuss recent developments in the case law on review of the monetary policy (Weiss: blog post by Annelieke Mooij) and banking supervision powers (La Banque Postale: blog post by Carlos Bosque and Alejandro Pizarroso) of the ECB. As for judicial review of austerity policy, the EU General Court recently followed up the CJEU ruling in Ledra Advertising (discussed here) with its judgments in Bourdovali and Chrysostomides.

While the recent judgments reaffirmed the limited judicial review of ECB measures on monetary and austerity policy, they suggest a contrary willingness to demand stricter judicial scrutiny of banking supervision. Whether this becomes a more general trend remains to be seen.

Judicial review of the ECB’s monetary and economic policy powers: the latest chapter

Annelieke Mooij, PhD student in EU law, Dublin City University

In June the last bail-out agreement was struck with Greece signalling the end (at least for now) of the Greek financial crisis. The Asset Purchasing Programme of the European Central Bank (ECB), also known as Quantitative Easing, has ended in December 2019. And the most recent case in the important euro-crisis case-law, the Weiss case, has been decided in December. This is not to say that the discussion surrounding the economic and monetary union is finalized, nor that no financial crisis will ever rise again. It is therefore important to reflect on the past crisis and prepare for the next.

During the euro-crisis several topics were an important point of discussion, but none was as prevalent as the question into the powers of the ECB. More precisely to what extend may monetary policy impact economic policy?  The Treaty on the Functioning of the European Union (TFEU) clearly splits economic and monetary policy. Whereby economic policy is left for the Member States to conduct and monetary policy is within the competence of the ECB. The euro-crisis, however, has shown that these two policies are not so easy to separate. Leading to separate cases where the Court had to decide upon the lawfulness of the OMT programme (Gauweiler, discussed here) and Public Asset Purchasing Programme (Weiss). With the crisis and the Decision of the Court behind us, it is time to add-up the scores and answer the question to what extent may the ECB enter the field of economic policy and what instruments has it gained?

Brief recap

In order to assess the impact of the crisis it is first necessary to make a brief overview of the state of the art before the crisis. The monetary goal of the ECB in the TFEU was described as price stability which is by the ECB defined as inflation close to but under 2%. In addition the ECB may support, without undermining monetary policy, general economic policy.

The instruments available to the Bank are listed in the Protocol of the ESCB, Article 18.1 defines two clear instruments. The first is the purchase and sale of marketable instruments, the second is to conduct credit operations. According to the Article 123 TFEU the ECB is prohibited from directly financing Member States and according to Article 125 TFEU the ECB may not bail-out Member States. Pre-crisis these formed the most important contours of ECB’s powers with regard to monetary policy. Then came the euro-crisis.

Crisis case law

The euro-crisis case law exists of three major cases Pringle, Gauweiler and Weiss. The Pringle case did not involve the ECB but concerned the ESM programme, in the form of a treaty between Eurozone Member States to assist those among them which were having economic difficulties. It is nevertheless an important case as the Court accepted that there can be overlap between economic and monetary policies. This approach abandons the strict separation that flows forth from the Treaties. From the perspective of the ECB this is not very unexpected as the ECB is allowed to conduct monetary policy and support economic policy. The problem however is the definition of “support”. The word support entails that it may not determine economic policy, but the line between the two seems vague.

In the Gauweiler decision the Court stated that in order to determine whether a measure is of monetary or economic policy the objectives and instruments have to be assessed. The OMT programme under discussion in the Gauweiler case had as objective to restore the monetary transmission channels and the singleness of monetary policy (paras. 46-49). This included counteraction against the speculation of a break-up of the Eurozone. Adding the objective of keeping the euro together may not have fallen within a strict adherence to the law. It is however not strange that the ECB chose to save the euro. The Eurozone falling apart may have led to further implications for the price stability goal.

The second criterion in determining whether a measure is of monetary or economic policy is that of the instruments used. In the Gauweiler case it became clear that these operations may have economic effects (para. 52).  They may however not be violating either directly or in spirit the no-bail out clause and the prohibition upon direct lending. The Court determined the main criterion to evaluate this was by asking the question whether the impetus to keep a sound budgetary policy is kept.

The Weiss case added that these so called “indirect effects” do not have to be unforeseen and can be knowingly accepted (para. 62). The Court furthermore states that in order to reach inflationary goals the ECB’s policy will impact interest rates and the real economy – thereby accepting that monetary policy, in order to be effective, will often impact economic policy (para. 63). This conclusion is neither unexpected, nor unwanted per se as the Treaty clearly provides the ECB the power to support economic policy. Yet in the Gauweiler case the Court also accepted the role of the ECB within the so-called Troika.

The Troika consists of the Commission, ECB and the IMF and has been given shape in the ESM Treaty. This Treaty provides the Commission, IMF and the ECB, when a Member applies for support, with the task to negotiate and monitor the Memorandum of Understanding (MoU) with the Member in need of assistance. This MoU contains many aspects arguably economic in nature. The negotiation and monitoring is considered by the Advocate General as one of economic policy. The Court does not go into this matter in its judgement. By not going into the role of the ECB within the Troika the Court arguably accepts – or at least allows this function. It therefore seems that during the crisis the ECB has gained the power to negotiate and implement certain economic goals. These instruments are difficult to view as monetary policy instruments. The remaining option is to classify them as in support of general economic policy.

Weiss – the last chapter?

Arguably the last chapter, at least for now, in crisis case law is that of the Weiss case. In the Weiss case the programme under discussion was that of the Public Sector Purchasing Programme (PSPP). Unlike the OMT programme the PSPP has actually been implemented. Legally, however, this makes little difference as the OMT programme was adjudicated as if it would be implemented. This programme is technically one of four programmes conducted under the Asset Purchasing Programmes. The word technically is used in this context because the PSPP purchases far outweigh the other programmes. In the last month of the programme the PSPP volume was a rough 81% of the total purchases.

This is interesting to note as one of the criticisms after the Gauweiler case was that the arguments of the ECB were taken at face value. This seems the case for the argument given by the Advocate General (para. 150.) that PSPP is “just one of the four-programmes”. Part of this might be because the Court only assesses whether the ECB has made a “manifest error of assessment” (para. 91). In the same paragraph the Court however also states that monetary policy decisions are usually controversial and “nothing more can be required of the ESCB apart from that it use its economic expertise and the necessary technical means at its disposal to carry out that analysis with all care and accuracy”. This almost creates a situation whereby technical assessment of the ESCB’s judgement is impossible, as it is difficult to find a body appropriate to “second-guess” the ECB’s decision-making.

Another main difference between the two programmes was that the OMT programme was only to be applied to countries that fulfilled certain conditionality requirements.  The PSPP on the other hand was a general programme, which is arguably closer to the ECB’s monetary goals. The Court considers that a general programme can still breach the monetary assistance prohibition of article 123 TFEU if the ESCB creates a de facto certainty of purchase for the primary actors (para. 110). 

Interestingly it also considers that due to the division key the more debt a Member State accumulates, the lower the proportion the national bank buys (para. 140). Therefore despite the general application of the programme the ESCB is still able to uphold the incentives for individual Member States to keep a sound budgetary policy. Unlike the referring court the ECJ does not go into the numeral specifics of the volume of purchases. Thereby indirectly confirming the budgetary independence the ESCB enjoys. This, however, also indicates there are few or no organs within the EU to check the details of ESCB decisions.

Conclusions

With the euro-crisis slowly becoming history (at least for now) it is time to assess its impact. The impact of the euro-crisis upon the European Central Bank has been serious. Case law has shown that monetary policy and economic policy are not strictly separated and one may influence the other (Gauweiler). This influence cannot be contrary to monetary policy but the effects can be foreseen and knowingly accepted (Weiss). Secondly the power of the ECB to support general economic policy is more clearly defined. This power may include the task to negotiate and monitor compliance of fiscal reforms. The legality and consequences of the latter caused debate amongst scholars and could form a cumulative process that should be carefully watched.  The Weiss case did not bring major reforms, nor does it seem out of place. It however further demonstrated that there are few organs to check the specific arguments put forward by the ECB. Though the ECB was designed as a highly independent bank it is difficult to imagine that this level of independence was desired.

Welcome to Hard Look Review, ECB

Carlos Bosque* and Alejandro Pizarroso**

* Legal Counsel at the European Investment Fund. Doctoral Candidate at the Universidad Carlos III de Madrid

** Legal Counsel at the Bank of Spain. LL.M. Graduate at the Columbia Law School

The views expressed herein are those of the authors, and not of the European Investment Fund or the Bank of Spain

Discretion, like the hole in a doughnut, does not exist except as an area left open by a surrounding belt of restriction. It is therefore a relative concept. It always makes sense to ask, “Discretion under which standards?” or “Discretion as to which authority?”

-          Richard Dworkin

Some European cases (and many recent ones, like the decision on the lawfulness of the public sector asset purchase program, discussed in the post above) seem to immediately draw the attention they deserve. Others, however, tend to go unnoticed. Among these, we may find La Banque Postale (T-733/16), a General Court case (sided by five identical rulings concerning other French credit institutions) dealing with the review of ECB supervisory decisions, which resulted in the annulment, for the very first time, of one such decision. The case revolved around the degree of discretion that the ECB should enjoy in its supervisory action. The message sent by the General Court was, however, quite clear. It effectively welcomed the ECB to a heightened standard of review —to hard look review.

We will analyse this question here, but first we turn to the case.

 The facts are quite simple. In the aftermath of the Financial Crisis, the European Union legislator introduced a leverage ratio in order to discourage financial institutions from taking on excessive leverage risk. This ratio assesses the capital of an institution in relation to its exposures. But it does so independently of the risks associated to the latter, so as to measure the overall exposure of an institution. Some exemptions are nevertheless permitted. In 2014, Article 429(14) of Regulation 575/2013 was passed, creating a derogation for exposures arising from the deposits that an institution may be forced to transfer to a public sector entity for the purposes of funding general interest investments. The ECB, says Article 429(14), “may permit” these exposures to be excluded from the calculation of the leverage ratio of an institution.

Pursuant to this provision, La Banque Postale requested the ECB to exclude from the calculation of its leverage ratio the amounts collected through certain regulated savings accounts that it was legally bound to transfer to a public entity. The ECB, however, rejected its request. It advanced three reasons for its decision. First, it argued that the institution remained globally liable for these exposures. Secondly, it noted that La Banque Postale was obliged to reimburse its depositors for the amounts transferred to the public entity, independently of whether the latter returned the funds to the institution, and even in the event of France’s default. Finally, the ECB contended that the inevitable delay when retrieving the funds from the public entity could lead to a fire sale in the case of a bank run. La Banque Postale, whose leverage ratio denominator was to raise by 50% from such refusal, challenged this decision.

The case presented two issues: (1) whether the ECB had discretion in the application of the exemption; and, if so, (2) whether the ECB had exercised its discretion in a permissible manner.

While the first issue was relatively easy to decide, given the clear language (“may permit”) of the provision, the second issue was rather more thorny. Having established that the ECB enjoys discretion in the application of the exemption provided that the conditions in Article 429(14) are met, the General Court turned to the second question. The answer was clear: the ECB did not exercise its discretion in a permissible manner. To reach this conclusion, the General Court relied on its traditional standard of review for discretionary decisions. EU courts —it noted— must not substitute the judgment of administrative bodies; their assessment is confined to determine whether an administrative decision is based on materially incorrect facts, or is vitiated by an error of law, manifest error of appraisal, or misuse of powers. But the application of this standard was quite interesting.

According to the General Court, the first two grounds put forward by the ECB were affected by an error of law, because the ECB denied the exemption on reasons that were inherent to the exposures referred to in the provision, thus rendering the exemption almost inapplicable. The possibility that France may default —the main basis for its decision, as the ECB admitted during the trial— was specifically dismissed. Since the derogation in Article 429(14) refers only to amounts deposited in a public entity, which are thus state backed, the possibility that the country in question may default cannot be grounds for denying the exemption.

But the opinion also found that the third reason advanced by the ECB was vitiated by a manifest error of appraisal. The General Court noted that, even if the liquidity risk identified by the supervisor may materialize in some cases, the ECB had previously admitted that small delays in retrieving the funds from the public entity were immaterial for the assessment of the institution's liquidity ratio. The ECB, in fact, had established such view in a previous decision concerning the liquidity ratio of La Banque Postale, and its analysis was backed by the EBA. This incoherence, the court found, runs counter to the principle of sound administration that applies to all EU institutions. The ECB’s decision denying the application of the exemption was therefore annulled.

In our view, this ruling should not go unnoticed. Certainly, it is the first time that a supervisory decision of the ECB has been annulled since the Single Supervisory Mechanism became operational in 2014. But how should we read this case? The little attention that the judgment has drawn appears striking if, as we are inclined to think, the General Court is sending a clear message to the ECB with respect to its discretionary powers in the field of banking supervision.

The General Court, in fact, seems to be welcoming supervisory decisions to hard look review, a term coined in the United States to refer to the rigorous standard of judicial review applied to agency's action since the 1970s (the phrase is usually associated with the US Supreme Court decision in State Farm). The General Court recites its usual standard of review for administrative discretion, but as Professor Craig has taught us, what really matters is how the test is used, the intensity of review that the court applies (Paul Craig, EU Administrative Law 445 (3rd ed. 2018)). It is true that the two specific rules that can be extracted from the case (i.e. discretion cannot be exercised in a way that runs counter to the objective of the provision being applied or its effet utile, and discretion does not allow an administrative body to be incoherent in its assessment over a given subject) appear to be reasonable.

But what matters is how scrupulous the assessment of the General Court was, as evidenced by the (at times, excruciating) lengthiness and complexity of the ruling. The court avoids substituting the ECB’s judgment. However, it carefully weighs each and every one of its arguments, despite the clear discretion afforded by the governing rule, and regardless of the issue’s technical nature. The court seems to be telling the ECB that, unlike monetary policy, where it “must be allowed … a broad discretion” (Gauweiler, C-62/14, ¶ 68), banking supervision is an area of the law where stringent review of discretionary administrative action applies.

The General Court, though, offers a way out for the ECB —sufficient justification. While the opinion does not specifically highlight this aspect, it suggests that by formulating clear reasons for its decision the ECB could have denied the application of the exemption. By carefully examining the plausibility of France's default or the liquidity risk incurred by La Banque Postale for the transfer of funds to a public entity, the General Court seems to say, the decision could have been upheld. But it is now clear that, in its supervisory role, the ECB is but another administrative body of the EU, whose action will be subject to intense scrutiny on the part of the General Court, and whose decisions will have to be carefully justified in order to survive this heightened standard of review.

Whether this development should be praised (enhanced judicial review?) or not (ossification of administrative action?) is a matter of opinion. This is an issue where reasonable minds can reasonably disagree, but its importance justifies giving it the attention it demands. The conclusions drawn here are tentative, as we need to see whether subsequent judgments (by the General Court or the Court of Justice) will conform to this case law. However, La Banque Postale should serve as a warning —welcome to hard look review, ECB.

Barnard & Peers: chapter 19

Photo credit: Flickr

Rule of Law backsliding in the EU: The Court of Justice to the rescue? Some thoughts on the ECJ ruling in Associação Sindical dos Juízes Portugueses

Laurent Pech, Professor of European Law, Middlesex University London

Sébastien Platon, Professor of Public Law, University of Bordeaux

1. Introduction

The ECJ’s judgment in the case of Associação Sindical dos Juízes Portugueses (Case C-64/16) is noteworthy for two reasons. First, it is arguably the most important judgment since Les Verts  as regards the principle of the rule of law in the EU legal system. Secondly, it comes close to being the EU equivalent of the US Supreme Court case of Gitlow as regards the principle of effective judicial protection (Gitlow led to the progressive application of the US federal Bill of Rights to all state norms even when the states act within their own sphere of competence: see AG Sharpston here for a brief account).

With respect to the rule of law, in a couple of inspired and inspiring paragraphs, the Court offers a neat digest of the essential functions and features of this fundamental value in the EU’s legal framework. One of the most innovative and welcome aspects of this judgment is its conclusion on a combined reading of Article 2 TEU (values on which EU is based and common to its Member States), Article 4(3) TEU (principle of sincere cooperation) and Article 19(1) TEU (principle of effective judicial protection of individuals’ rights under EU law):

The very existence of effective judicial review designed to ensure compliance with EU law is of the essence of the rule of law … It follows that every Member State must ensure that the bodies which, as ‘courts or tribunals’ within the meaning of EU law, come within its judicial system in the fields covered by that law, meet the requirements of effective judicial protection. … In order for that protection to be ensured, maintaining [a national] court or tribunal’s independence is essential.

The Court’s ruling in Case C-64/16 may be understood as the Court’s answer to the worrying process of ‘rule of law backsliding’ first witnessed in Hungary and now being seen in Poland. This judgment essentially establishes a general obligation for Member States to guarantee and respect the independence of their national courts and tribunals. What is particularly noteworthy is that the Court has done this solely based on Article 19(1) TEU read in light of Article 2 and Article 4(3) TEU. This reasoning should hopefully lead the Polish government to stop repeating the ludicrous claim that it can introduce whatever judicial ‘reforms’ it sees fit as the organisation of national judiciaries falls outside EU competence. (In any event, the Irish courts have just decided to ask the ECJ whether European Arrest Warrants issued by Poland must be executed, in light of rule of law concerns; see also this review of the recent ECJ case law on EAWs and human rights).

Before examining how this judgment may prove to be a potentially decisive shot across the Polish bows as first noted here by Michal Ovádek (section 4), the facts and outcome of this case will be briefly presented (section 2). This post will also seek to tackle the most challenging ‘technical’ issue raised by this case: when can one challenge a national measure under Article 19(1) TEU, now considered a self-standing provision? It will be submitted that the Court’s approach, which is centred on the notion of ‘fields covered by EU law’ and merely requires the existence of a virtual link between relevant national measures and EU law, is ground-breaking yet compelling (section 3).

2. Facts and outcome

In 2014, the Portuguese legislature introduced a temporary reduction in the remuneration paid to the persons working in the Portuguese public administration, including judges. The Associação Sindical dos Juízes Portugueses (ASJP), acting on behalf of members of the Tribunal de Contas (Court of Auditors), decided to challenge the salary-reduction measures on the main ground that that they would infringe ‘the principle of judicial independence’ enshrined, not only in the Portuguese Constitution, but also in EU law, in the second subparagraph of Article 19(1) TEU (‘Member States shall provide remedies sufficient to ensure effective legal protection in the fields covered by Union law’) and Article 47 of the EU Charter of Fundamental Rights (Right to an effective remedy and to a fair trial). This issue was then subsequently referred by the Portuguese Supreme Administrative Court to the ECJ for a preliminary ruling.

What is particularly noteworthy is that the ECJ focused exclusively on Article 19(1) TEU, which the Court described as giving ‘concrete expression to the value of the rule of law stated in Article 2 TEU’ having previously recalled that mutual trust between national courts ‘is based on the fundamental premiss that Member States share a set of common values on which the European Union is founded’. On the basis of a combined and powerful reading of Articles 2, 4(3) and 19(1) TEU, the Court underlines, more than ever before, the duties of national courts under the EU Treaties and in particular, their duty to ensure ‘that in the interpretation and application of the Treaties the law is observed’ while repeatedly observing that in order for the EU legal system to operate efficiently and for individuals to continue to benefit from the principle of the effective judicial protection of their EU rights, it is essential that national courts remain independent.

Whilst the outcome of the case itself is not surprising, it is the Court’s approach which is particularly noteworthy. Before concluding that the ‘salary-reduction measures at issue in the main proceedings cannot be considered to impair the independence of the members of the Tribunal de Contas’, the Court referred to a number of criteria which must guide national courts should they have to review measures which are alleged to infringe judicial independence: Are the measures specific to judges? Are the measures justified by an overriding reason of public interest? Can they be considered to weaken their independence?

In the present case and on the basis of these criteria, the Court convincingly concluded that ‘the second subparagraph of Article 19(1) TEU must be interpreted as meaning that the principle of judicial independence does not preclude general salary-reduction measures, such as those at issue in the main proceedings, linked to requirements to eliminate an excessive budget deficit and to an EU financial assistance programme, from being applied to the members of the Tribunal de Contas’.

3. Scope of Application of the EU Principle of Judicial Independence

The principle that national courts must be independent is not new in EU Law (see for instance Article 47 of the EU Charter of Fundamental Rights ‘CFR’ hereinafter). What makes the Court’ ruling in this case particularly significant is the way the Court exclusively relies on Article 19(1) TEU having emphasised early on in its judgment that this provision may be relied upon in national situations irrespective of whether the Member States are implementing EU law within the meaning of Article 51(1) CFR.

This is a welcome but nonetheless ground-breaking interpretation. In a nutshell, this interpretation of Article 19(1) TEU gives the principle of effective judicial protection a much wider scope of application that it would have on the basis of Article 47 CFR which is subject to Article 51(1) CFR. Article 19(1) TEU (added to the EU Treaties via the Lisbon Treaty) may therefore be ‘triggered’ in a much broader set of national situations than Article 47 CFR and in areas where there is very little to no EU acquis.

It may be worth briefly recalling at this stage that EU Law cannot be relied upon in every national legal procedure. For instance, in ‘purely internal situations’, where no links with EU law can be established, the ECJ lacks jurisdiction. The scope of application of the EU Charter is similarly limited by its Article 51(1). While the ECJ did adopt a broad interpretation of the notion of ‘implementation’ of EU law by Member States, the Court has also established that where ‘a legal situation does not come within the scope of European Union law, the Court does not have jurisdiction to rule on it and any provisions of the Charter relied upon cannot, of themselves, form the basis for such jurisdiction’ (C-617/10, para 22).

The issue of whether the salary reductions of the Portuguese judges constitutes a purely internal situation is therefore key. As there is no EU rule governing the remuneration of national judges, one may have concluded that the ECJ lacked jurisdiction in this case. The temporary reduction in the amount of public sector remuneration was however based on mandatory requirements imposed on the Portuguese Government by the EU to reduce the Portuguese State’s excessive budget deficit in 2011 in order to receive financial assistance. To that extent and as in the case of Florescu (EU Charter applies to national measures adopted to meet the conditions attached to the financial assistance granted by the EU to a Member State), one could have retorted that the salary-reduction measures had to trigger the application of EU Law.

Had the Court gone down that route, Article 47 CFR would have been available to review the compatibility of these measures with EU law, including the principle of judicial independence. Yet, the Court chose another route without much explanation, or even no explanation at all, whereas the Article 47 CFR may also have been applied in the present case. The fact that the Court relied exclusively on Article 19(1) TEU to protect judicial independence at Member State level may be understood as an implicit answer to the increasing and sustained attacks on national courts by ruling parties in countries such as Poland (see section 4). By exclusively relying on Article 19(1), the Court has enabled natural and legal persons to challenge a broader set of national measures. Indeed, the notion of ‘fields covered by Union law’ mentioned in Article 19(1) is broadly interpreted by the Court and should now be understood as being wider than the notion of ‘implementation’ laid down in Article 51(1) CFR.

The Court has gone therefore beyond the limited functional necessity of national remedies sufficient to ensure the application of EU law and now requires that Member States guarantee and respect the fundamental requirements of justice as defined by EU law and the ECJ itself, failing which they can be sued directly on the basis of Article 19(1) TEU. To give an example, Member States must ensure that national courts can exercise their ‘judicial functions wholly autonomously, without being subject to any hierarchical constraint or subordinated to any other body and without taking orders or instructions from any source whatsoever’. Any national measures which infringes this standard may now be found incompatible with the principle of judicial independence on the sole basis of Article 19(1).

What is yet to be determined is how much broader is the scope of Article 19(1) TEU in comparison to the scope of Article 47 CFR. In other words, how should the notion of fields covered by EU Law be understood compared to the notion of situations covered by EU Law (Fransson)?

At the very least, the present ruling now makes it possible for national litigants to rely on the principle of judicial independence in situations where the Charter may not be applicable by relying on Article 19 TEU. This new approach means for example that in cases such as Torralbo Marcos the ECJ would now probably accept jurisdiction to review whether national measures are compatible with the principle of effective judicial protection.

We would further argue that the Court’s present ruling must be understood as making Article 19(1) TEU a relevant standard for reviewing national measures irrespective of whether the situation is connected or not with EU law. Article 19(1) TEU may from now on be relied upon to challenge any national measure which may undermine the independence of any national court which may hear ‘questions concerning the application or interpretation of EU law’ (para. 40). The key ‘test’ is therefore whether the relevant national court has jurisdiction (or not) over potential questions of EU law. If this understanding is correct, the Court’s approach may be viewed as ground-breaking as most if not all national courts are, at least theoretically, in this situation.

In establishing a general obligation for Member States to guarantee and protect judicial independence on the basis of a combined reading of Articles 2, 4(3) and 19(1) TEU, irrespective of whether the situation falls within the scope of EU law, the Court’s ruling is reminiscent of the 1925 US judgment of Gitlow v New York, in which the Supreme Court held that the Fourteenth Amendment to the US Constitution had extended the reach of certain limitations on federal government authority set forth in the First Amendment to the governments of the individual states. In the present case, one may argue that the ECJ has essentially made the EU principle of effective judicial protection (including the principle of judicial independence) a federal standard of review which may be relied upon before national courts in virtually any situation where national measures target national judges who may hear actions based on EU law.

4. A decisive shot across the Polish bows?

The ECJ, by making Article 19(1) a stand-alone provision, has drastically increased the number of situations where litigants (for instance, a trade union representing judges) may challenge national measures which undermine judicial independence. In doing so, the Court has answered the appeal from some scholars to ‘operationalise’ Article 2 TEU by connecting it to other provisions of the TEU such as Article 4(3) and Article 19(1) TEU. In 2016, building up on the scholarship of Professor Scheppele, Professor Kochenov and one of the present authors argued for instance for the combined use of these Treaty provisions so to enable the review of national breaches of the rule of law happening beyond the areas covered by the EU’s acquis:

[T] here is however no legal obstacle preventing the Commission from using the infringement procedure to simultaneously investigate a set of diffuse and/or cumulative breaches of EU values in conjunction with EU principles such as the duty of loyalty, which is enshrined in Article 4(3) TEU … or the requirement that Member States ‘shall provide remedies sufficient to ensure effective legal protection in the fields covered by Union law’ (Article 19(1) TFEU). Article 258 TFEU does indeed speak of the necessity to ensure that the Member States fulfil any ‘obligation under the Treaties’. This also means that there is no legal hurdle preventing the Commission from bundling numerous apparently minor violations to demonstrate a pattern which itself could amount to a breach of Article 2 TEU.

By establishing, on the basis of Articles 2, 4(3) and 19(1) TEU, that Member States must ensure that their national courts meet ‘the requirements essential to effective judicial protection’, the Court has taken a most welcome stance on the existential threat which Hungary and Poland’s descent into authoritarianism poses for the EU’s interdependent and interconnected legal system. A number of statements may be understood as subliminal warnings to would-be autocrats in these two countries but also elsewhere:

‘The guarantee of independence, which is inherent in the task of adjudication … is required not only at EU level as regards the Judges of the Union and the Advocates-General of the Court of Justice … but also at the level of the Member States as regards national courts’;

‘The concept of independence presupposes, in particular, that the body concerned exercises its judicial functions wholly autonomously, without being subject to any hierarchical constraint or subordinated to any other body and without taking orders or instructions from any source whatsoever …’;

‘Like the protection against removal from office of the members of the body concerned … the receipt by those members of a level of remuneration commensurate with the importance of the functions they carry out constitutes a guarantee essential to judicial independence’.

Even more significant are the standards used by the Court when reviewing the disputed measures. For the Court, the salary-reduction measures do not infringe the EU principle of judicial independence because they were a limited and temporary reduction of remuneration to help lower ‘the Portuguese State’s excessive budget deficit’ and applied to various categories of public sector employees. The disputed measures could not therefore ‘be perceived as being specifically adopted (our emphasis) in respect of the members’ of the Portuguese Court of Auditors. This suggests, a contrario, that national measures which are (i) not justified by overriding reasons of public interest; (ii) are permanent and general in nature; and (iii) specifically target the judiciary or specific courts (e.g. a Supreme Court) could be considered by the ECJ ‘to impair the independence’ of relevant courts and their members and as such be held incompatible with the second subparagraph of Article 19(1) TEU.

What should Polish, Hungarian or Romanian judges (to mention but a few of the countries where ruling parties have sought to capture the judiciary) faced with national measures which de facto undermine their authority and independence be prepared to do in practice? As would-be autocrats tend to methodically follow a Rule-of-Law dismantlement blueprint, a Rule-of-Law resistance blueprint may be in order, such as the tentative and brief one below:

(a) National judges should aim (via trade unions preferably to avoid retaliatory measures) to systematically challenge the compatibility of any national measure which affects their independence via new rules amending their status, terms of office, etc., on the basis of Article 19(1) TEU as interpreted in Case C-64/16;

(b) To systematically request from national courts that they refer questions to the Court of Justice to enable it to rule on whether the national measures at issue in each case can be consider the impair the independence of the members of the relevant national court(s);

(c) ‘Friends of the rule of law’ should also aim to lodge complaints with the European Commission to ask it to investigate infringements of Article 19(1) TEU;

(d) With respect to countries where the national judiciary may already be captured in whole or in part by the ruling party, which may result in requests for preliminary rulings being systematically denied even at the level of courts of last resort and/or national judgments offering interpretations of EU law in bad faith, the Commission should systematically initiate infringement actions (Case C-154/08 is noteworthy in this respect).

EU institutions and key actors must wake up to the existential dangers raised by increasing rule of law backsliding within the EU. Following this welcome development in Luxembourg, it is to be hoped that the Commission will stop hesitating about whether to rely on Article 19(1) TEU in its infringement actions (see this post by Professor Taborowski for a critique of the Commission’s moving and excessively cautious legal position in the context of the pending infringement case against the Polish law on the organisation of ordinary courts). One may only hope also that the Commission will aim to think more strategically about rule of law backsliding. It was disappointing in this respect to see the Commission raising the inadmissibility of the request for a preliminary ruling in the present case or failing to initially think of requesting from the Court the imposition of a penalty payment in the Białowieża Forest infringement case when the Polish government so defiantly refused to comply with a previous order of the Court.

The time for dialogue has past. The time for action (and sanction) is now.

Photo credit : IPI

Barnard & Peers : chapter 9, chapter 10