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

Photo credit: New Europe

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 legal challenge to ECB restrictions on Greek bank accounts – and how you can help

Steve Peers

Many EU citizens have watched with sympathy and concern as Greek citizens have been limited to withdrawing €60 a day in the last two weeks. This restriction results from a restriction imposed by the European Central Bank (ECB) on the emergency liquidity assistance which it provides to Greek banks.  

Apart from the human impact, there are grave legal, political and economic doubts about the ECB’s action. One of the central purposes of a central bank is to function as a lender of last resort to banks – and the ECB is signally failing to do that here. Also, the ECB’s actions give the impression that it is trying to influence the Greek political debate on austerity and membership of the Eurozone – a role which is well outside the Bank’s remit. The banking restrictions obviously damage the Greek economy, and so limit its ability to pay back its creditors in future.  They have nothing to do with the Bank’s task of fighting inflation, and they undermine its broader role in supporting the EU’s economic growth. (For a fuller critique, see here (paywalled); on the legal background, see here). Arguably these restrictions – or further restrictions which the ECB might impose – could lead toward a de facto ‘Grexit’ from monetary union, which is ruled out by EU law (see my discussion here).

It’s possible to challenge the ECB’s actions via the national courts, which can refer the issue to the CJEU, such as in the recent Gauweiler case (discussed here). They can also be challenged in the EU courts, such as in the UK’s recent successful challenge (discussed here). The case law takes a broad view of what ECB acts can be challenged, except where it acts as part of the ‘Troika’ which negotiates bailout conditions, when neither the Bank nor the Commission can be challenged in the EU courts. But the ECB’s restriction of assistance to Greek banks did not fall within the scope of its role in the Troika.

National governments such as Greece can go directly to the EU courts to challenge ECB actions. Other challengers besides the EU institutions would have satisfy standing rules: ‘direct and individual concern’, or (if they are challenging a non-legislative act which does not entail implementing measures) ‘direct concern’. Arguably it would be easy for a Greek bank to satisfy those rules.

In the absence of a legal challenge from a Greek bank or the Greek government, an individual depositor has brought a legal challenge to the ECB’s recent actions before the EU General Court. You can find the full text of the claim here. The ECB might restore assistance if there is a deal in the near future, but it is still worth challenging its actions, so it cannot do this (or threaten to do it) in future.

Obviously there is a possible problem with standing, although a parallel challenge could be brought in the Greek courts. The plaintiff welcomes any advice or support – contact info@alcimos.com. Or you can leave comments on this blog post.

Barnard & Peers: chapter 19

Photo credit: www.2oceansvibe.com

The law of Grexit: What does EU law say about leaving economic and monetary union?

Steve Peers 

A Greek referendum on whether to accept its creditors’ offer is currently scheduled for next week. It’s not clear at this point whether the Greek voters’ refusal to accept the offer would necessarily lead to Greece leaving the EU or EMU, or at least defaulting on its debts. In fact, it is not clear what would happen if Greek voters decided to accept the offer, since it was still under the process of negotiation when the referendum was announced, and may no longer be on the table at the time of the referendum.

However, since a wide range of outcomes are possible, it’s useful at this stage to look at the legal framework for departure from economic and monetary union (EMU) – and in particular whether Greece would have to leave the EU if it left the single currency. (See also my previous blog posts, before and after the last Greek election, and Ioannis Glinavos’ recent analysis of whether Greece could be forced out of the euro).

The starting point is that the EU Treaties contain detailed rules on signing up to the euro, which apply to every Member State except Denmark and the UK. Those countries have special protocols giving them an opt-out from the obligation to join EMU that applies to all other Member States. (I’ll say that again, more clearly, for the benefit of those who claim otherwise: there is absolutely no way that the UK can be required to sign up to the single currency. That would not change in any way if British voters decided that the UK should stay in the EU).

But there are no explicit rules whatsoever on a Member State leaving the euro, either of its own volition or unwillingly, at the behest of other Member States and/or the European Central Bank (ECB).  There’s an obvious reason for this: the drafters of the Maastricht Treaty wanted to ensure that monetary union went ahead, and express rules on leaving EMU would have destabilised it from the outset. Put simply, legally speaking, Greece can’t directly jump or be pushed from the single currency.

In practice, though, its continued existence in the single currency could be made very difficult, as Ioannis Glinavos pointed out, either by the ECB restricting or ending emergency assistance (ELA) to Greece, or by the ECB limiting or removing Greek access to payment systems. It’s possible that any such moves would be legally challenged by the Greek government, and perhaps by other litigants too. It could be argued that they are in breach of EU monetary law as such, and/or that they breach an implied rule that Member States cannot be forced out of monetary union.

But let’s imagine that some sequence of events leads to Greek departure from the official legal framework for EMU nonetheless. This could lead to the fully-fledged introduction of a national currency (the ‘New Drachma’, or somesuch). It could instead lead to some informal link with the single currency – for instance a Greek ‘version’ of the euro, or the use of the euro as Greek’s official currency in practice without participating in the legal framework of EMU. Several countries outside the EU (such as Montenegro) take the latter approach. None of these actions are legal (for a Member State) as a matter of EU law.

For that matter, the less extreme possibility of Greece defaulting on Greek debts without leaving EMU (if that were feasible in practice) is not provided for in the Treaties either. Moreover, other Member States and the EU institutions are arguably legally obliged to refuse debt relief for Greece, in accordance with the Treaties’ no bail-out rule: as the CJEU said in Pringle, this rule allows Member States to loan money to Greece in return for conditions and an appropriate rate of interest. But they cannot simply assume responsibility for Greek government debts. Forgiving those debts would have the de facto result of assuming them – although it might be possibly argued that the letter (but surely not the spirit) of EMU law would allow this as long as the Greek debts were not formally transferred to the EU institutions or Member States. It might also be argued that a Greek default on such debt would be a situation of force majeure, which could be accepted by creditors without this amounting to a breach of the no bail-out rule.

However, the no bail-out rule does not apply to the private sector, which explains the ‘haircuts’ already imposed on private banks, or to international bodies or third States. So Greece could default on its loans to the IMF without infringing the no bail-out rule (although that would surely breach some other legal rule). Thanks to the gods of irony, the IMF is the biggest supporter of Greek debt relief. And equally, without infringing that rule, Greece could refuse to pay back any loans that Putin might be foolish enough to give it.

Of course, the reason we got to this position in the first place was a series of legal breaches: Greece joined the single currency on the basis of allegedly inaccurate economic data (for the debate on that issue, see here), and was not punished (as EU law provides for) when it started to run debts and deficits well above the legal limits of EU law.

So if Greece does leave the EMU framework, and/or default on its debts in violation of EU law, is it obliged to leave the EU, as some have suggested? On the face of it, it’s certainly illegal for a Member State to leave EMU unless it also leaves the EU. But having said that, there would still be no legal obligation for Greece to leave the EU if it defaulted or left EMU.

Why is that? The main legal reason is that the Treaties have a specific legal regime on withdrawing from the EU: Article 50 TEU, as discussed in detail here. Article 50 says that a Member State ‘may decide to withdraw from the Union, in accordance with its own constitutional requirements’. This is manifestly a voluntary choice. There are no rules in the Treaty stating that a Member State ‘shall’ withdraw from the Union in any particular circumstances.

Nor is it possible to throw a Member State out. Article 7 TEU allows a Member State to be suspended for breaching key principles such as human rights, democracy and the rule of law. But there is no provision allowing a Member State to be fully expelled from the Union against its will.

So implicitly but necessarily, the Treaties rule out any expulsion from the EU and any requirement to leave it, in any circumstances.  But the Treaty drafters didn’t provide for States to leave EMU and/or default on debts either. If those States can’t be forced to leave the EU in such circumstances, what is the legal way forward?

Solutions to the tragedy

Classical Greek tragedies often ended with a ‘deus ex machina’ (‘god out of the box’). The playwright had manoeuvred the characters into an impossible situation, and the only way to resolve the plot was by the introduction of a radically new plot element – a god or goddess who could use his or her divine powers to resolve all of the problems which the characters faced. The normal rules of narrative are suspended.

In my view, this is where we stand with Greek participation in the EU’s single currency. Whether or not Greece stays in EMU, a new approach to the legal framework is necessary to try and address the Greek position.

I see four main possibilities. First of all, the Treaties could be amended to try to regulate the situation, if necessary with some degree of retroactivity. There could, for instance, be a new general power for the Eurozone States in the Council and/or the European Council to adopt measures to address the legal consequences of Greece departing EMU. Legally, this is the tidiest solution; but politically, it’s the most difficult one, since the Greek issues would get bound up with the British ones. It’s possible that the Treaty amendment process would fail due to issues related to Greece, rather than the UK – or the other way around.

Secondly, it could be argued that the implied powers of the EU (most obviously, Article 352 of the TFEU) could be used to address the situation. This is a difficult argument since the Treaty drafters considered EMU to be ‘irrevocable’. However, the CJEU has taken a generous approach to measures aimed at saving EMU that many people believed were clearly ruled out: financial assistance in Pringle, and the ECB’s bond purchasing programme in Gauweiler (discussed by Alicia Hinarejos here). It might equally take a generous approach to the legality of any measures aiming to clean up the enormous mess that a ‘Grexit’ would make.

Thirdly, some Greek law-makers have suggested that the Greek debts might be illegal, on the basis of a theory of ‘odious debts’ that violate human rights. As noted above, though, the CJEU has insisted on the conditionality of financial assistance, and it has also repeatedly refused to answer questions from national courts about the legality of those conditions. So at first sight, it looks difficult for this argument to succeed as a matter of EU law, although the Court has not ruled on this issue as such yet.

Fourthly, there’s a novel argument that I haven’t seen suggested before: Greek participation in the euro was invalid in the first place, because of the allegedly inaccurate economic statistics used at the time. The CJEU could declare in the same ruling that all of the legal commitments relating to Greek participation in EMU in the past remain legal, so as not to disturb legal certainty (there’s plenty of precedent for CJEU rulings like that). There are two possible variations here: a) if Greece is still participating in EMU, its participation must be retained for the same reasons of legal certainty; or b) if Greece has left EMU, its departure is legal because the original participation was invalid.

But in either case, a crucial exception to the ‘legal certainty’ rule can justify debt relief for Greece. It’s arguable that due to the essential illegality of the legal framework in which Greek debts were incurred, the no bail-out rule did not fully apply, leaving the creditors and Greece free to negotiate a realistic amount of debt relief. (True, the no bail-out rule does apply to non-Eurozone States too; but Greece borrowed far more than it would have done due to its illegal participation in the euro). If Greece has left the euro already, it could in future benefit from the slightly different regime for financial assistance to non-Eurozone States.

Although Greece would still be formally required to try to join the single currency in future, the EU tends not to pressure countries (like Sweden) which have no real intention of joining. Realistically, no one would pressure it to join for a very long time.

All of these solutions provide, in one way or another, that ‘it was all a dream’: either the debt or the euro participation never existed in the first place, or the Treaty or EU legislation retroactively apply to address the issues, or the Treaty means something quite different from what it was generally thought to mean. It is always preferable to avoid such an approach to the law, but it’s hard to see how any other type of solution could work in this case. Legally, simply put: Greece allegedly should not have joined the euro; it should not have been allowed to run up huge debts; it cannot leave EMU; and it cannot be forced to leave the EU. Economically and politically: Greeks have suffered more than enough; Greece can never pay its accumulated debts while taking austerity measures which depress its economy; but taxpayers of other Eurozone States understandably would like to see their money back.  

These illegalities and economic and political conflicts cannot be resolved within the current framework, so we need to revise it radically. Of the suggestions considered here, the fourth solution has the most appeal: it is consistent not only with the classical tradition of Greek tragedy, but disturbs the current legal framework as little as possible while offering solutions (a fully legal Grexit, effective debt relief) that aim to resolve the situation as best it can be managed. It is impossible to find any solution that would satisfy every legitimate demand, but in my view this approach is the least bad alternative.

Barnard & Peers: chapter 19

Cartoon: Peter Schrank, Independent on Sunday 

Can Greece be forced out of the euro? The role of the ECB in restricting funding avenues to Greece - will Target2 be next?

Ioannis Glinavos (@iGlinavos), Senior Lecturer, University of Westminster https://iglinavos.wordpress.com/

The European Central Bank (ECB) has come under harsh criticism for its support (or lack thereof) of Greece since the election of Syriza. The following comment charts the progressive tightening of funding conditions for Greece against the background of the ECB rules, and reflects on options in case an agreement is not reached to address Greece’s immediate funding needs in June 2015.

ECB stops accepting Greek government bonds as collateral

Since Greece accepted the first bailout in 2010, it has largely not been able to raise money in the markets (apart from domestic T-Bill issues). Continued support from the Troika (disbursement of bailout funds) is dependent on the successful completion of periodic reviews. As the last review was never completed successfully, Greece has not received a bailout fund payment since the summer of 2014.

The avenue through which the Greek government continued to finance its deficits in the absence of bailout disbursements was by borrowing more from its commercial banks. Indeed, although the Greek government is unable to raise long-term funding on the bond markets, it increased its borrowing by means of short-term treasury bills. The Greek government was able to borrow from its banks because those banks can borrow from the Bank of Greece (BoG) and, in turn, the BoG can borrow from the ECB so long as Greece remains in the euro. The banks themselves would be in no position to object to taking on more government debt, for political reasons and especially because sovereign default would mean that their existing holdings of government debt are written down leading ultimately to larger state ownership (a catch 22 situation for the domestic banking system). The ending of EU/IMF lending to Greece has not therefore been a binding constraint on its government budget or its foreign borrowing. It would be as if Greece had obtained ‘bailout’ lending from the loan facility or EFSF after all, causing a faster rise in Eurosystem debt, instead.

Before February 2015 and while this final assessment was being argued over, Greece did continue to finance itself via the ECB by selling bonds to its commercial banks, which then deposited those bonds as collateral with the national central banks (NCBs) in order to gain the funds (through the ECB) needed to pay for the bonds. Correspondent account balances (NCB-ECB) only pay the ECB discount rate as interest, so this is a cheap form of financing. In practice the ECB had tried to persuade NCBs to stop abuse of these accounts. The ECB had pressured Greece, Ireland, and Portugal at the beginning of the crisis to seek bilateral rescue loans and EFSF/ESM funds rather than use their banks and ECB credits to finance their deficits and rollovers. For this to work of course, state paper needs to be accepted as collateral by the ECB. Prior to the 2008 crisis, only A-rated paper was acceptable collateral. This was reduced to BBB- in October 2008 to allow for the large expansion of ESCB credit. As Greece was being threatened with a credit rating below investment grade, the ECB dropped this minimum rating requirement for Greek government in May 2010.

This ‘allowance’ for Greece ended on 4 February 2015 when the ECB’s Governing Council lifted the waiver of minimum credit rating requirements for marketable instruments issued or guaranteed by the Hellenic Republic. This suspension was in line with existing Eurosystem rules, since it were not possible to assume a successful conclusion of the programme review.

ECB rations ELA

The loss of direct access to the ECB credit line meant that the BoG had to extend its use of Emergency Liquidity Assistance (ELA) which is not subject to ECB collateral rules. Although ELA is supposed to be for short periods, there is the precedent of the Irish central bank that used it extensively. The ECB Council could order the BoG to cease ELA, but this seems unlikely given the Irish precedent. The way ELA works (the rules determining its use are extremely limited, a mere 2 page document) is by the NCB requesting it, and the ECB supplying it, unless a 2/3 majority of the governing council objects. ELA can only be provided to ‘solvent’ financial institutions and cannot be used to directly finance a state, as this would violate the No-Bailout clause in the Treaty. Further, the ECB has made it clear that the so-called Securities Market Programme portfolio of Greek bonds bought by the ECB cannot be restructured because that would be equivalent to granting an overdraft to the country and that would be contrary to Article 123 of the Treaty on the Functioning of the European Union. The ECB has continued nonetheless to support the Greek banking system via allowing incremental increases to the ELA, plugging the hole that is opening as deposits fly out in the slow motion bank run that has been in progress since elections were called at the end of 2014.

Supporting the Greek banks, and supporting Syriza through them are two different things however and the ECB has been trying to ban Greek commercial banks from buying any more government T-bills. It was reported in March 2015 that the ECB instructed Greece’s biggest banks to refrain from adding (short term) Greek government exposure. More specifically, the ECB included their recent warnings on capping Greek T-bill holdings at Greek banks in its legal framework. In March 2015, Greek banks held around €11B of T-bills, while the Greek government has a Troika-induced limit of €15B T-bill issuance (total amount outstanding). The new legal framework by the ECB would thus imply that Greek banks can’t cover this possible €4B shortfall if foreign investors don’t re-invest their maturing T-bills. The ECB already had an official cap on the amount of T-bills Greek banks can use for funding through ELA (€3.5B as of March).

This came on top of some more subtle changes, restricting the ability of Greek banks to suck liquidity out of the Eurosystem. In March the ECB also changed the rules for state-guaranteed bonds. This is another kettle of fish than the sovereign bonds (discussed above) that the ECB no longer accepts as collateral for Greece. While the ECB had prevented commercial banks from depositing sovereign bonds as collateral to borrow direct from the ECB, it continued to directly accept commercial bank bonds guaranteed by the Greek state. This is no more. The Governing Council of the ECB adopted Decision ECB/2013/6, which prevents, as of 1 March 2015, the use as collateral in Eurosystem monetary policy operations of uncovered government-guaranteed bank bonds that have been issued by the counterparty itself or an entity closely linked to that counterparty. This Decision, which aimed to ensure the equal treatment of counterparties in Eurosystem monetary policy operations (supposedly!) and simplify the relevant legal provisions, following the measures implemented on July 2012, which limited counterparties’ use of uncovered government-guaranteed bank bonds that they themselves have issued.

This little known practice (now unavailable for Greek banks) worked as follows. A commercial bank would lend money to itself by issuing a bond which it did not intend to sell. Such phantom bond was issued in order to hand it over to the European Central Bank as collateral in exchange for a cash loan. Normally, of course, the ECB would never accept such a phantom bond as collateral, as it would amount to a total circular reason for financing. It would be an assault on the meaning of collateral and a gross violation of the ECB’s rulebook. This is why the bank would take its phantom bond first to the Greek government and had it guarantee it. With the government’s guarantee stamped on it, the ECB then accepted the bank’s phantom bond and handed over the cash as the Greek taxpayer had, in the meantime, unknowingly provided the collateral for the bank’s loan.

Some European governments (Greece included) had launched schemes guaranteeing bonds issued by credit institutions shortly after the outbreak of the financial crisis in order to support their banking systems. Nevertheless, this market development suggests that the introduction of the eligibility of own-use government-guaranteed bonds accompanying the suspension of the minimum credit rating has also allowed a substantial fraction of these increasingly issued bonds to find their way into reverse transactions for refinancing credits with the ECB. Government guarantees are of importance because of two reasons. Firstly, government guarantees for risky assets pose a risk for taxpayers in case of bank default. Secondly, government guarantees can influence the valuation of the collateral as well as its credit rating, and thereby its refinancing conditions. In February 2009, the ECB extended the acceptance of own-use assets to all those guaranteed by governments. In principle, this made it possible to securitize assets into bonds, which are retained, thus never assessed by the market or a rating agency, and can still be used as collateral for refinancing credits due to the government guarantee. Moreover, the conditions in terms of valuation haircuts would be appealing if the rating of the guaranteeing government is higher than that of the issuer. As explained above, this facility is no longer available.

Could conflict with ECB end in expulsion from Target2?

The current conflict scenario may lead to Greece missing the bundled IMF payment at the end of June. If this is treated as a default event (this is doubtful, but possible) it may further impair the position of Greek banks. Even if the ECB does not label the Greek banking system insolvent (thus not eligible for ELA support), it will most certainly increase the haircut on GGBs, making it even more difficult for Greek banks to pledge collateral to benefit from ELA. A further deterioration in relations which leads to comprehensive default on sovereign debt (and/or Grexit) will put the ECB in a position where it will need to stop supporting the Greek banking system, and by extension the defaulting Greek government. It is difficult though to see the BoG cooperating with the ECB in bringing about the destruction of the Greek banking system.

If the ECB did prohibit ELA, depriving the BoG of any approved means of lending to its banks, the BoG would have no option (if the Government does not wish to issue its own currency) other than to defy the ECB and continue to lend anyway, given the consequence of not doing do: the closure of its banks for the want of liquidity. What could the ECB do to prevent this? The only way for the ECB to stop this indirect Eurosystem lending to the Greek government would be by ordering other NCBs to refuse further credit to the BoG, shutting the BoG out of the Target2 system. This scenario is reminiscent of the breakup of the post-USSR ruble zone. Such action however would prevent clearance of cross-border payments out of Greece and amount to the expulsion of Greece from the euro. The free flow of credit between Eurozone NCBs is an essential feature of monetary union. It is what keeps a euro in a Greek bank equal to a euro in banks elsewhere. As long as Greece remains in the euro, it cannot be excluded from Eurosystem credit, so Germany and any other euro countries that still have sound finances will keep lending, whether or not the Greek government defaults. If this is not done via an official loan facility, it will go through the Eurosystem (ECB), and it will increase (as it clearly has) if uncertainty about Greece remaining in the euro accelerates the flight of capital. The ECB cannot avoid continued lending to Greece or any other troubled country that remains in the euro. The ECB (or, more accurately, its owners, the NCBs that constitute the Eurosystem) is the lender of last resort whether it likes it or not. This creates a paradox. The ECB cannot legally expel Greece from the Eurozone, yet by shutting it out of Target2 it will de-facto create a Greek euro that will float against the old-euro creating valuation differentials. In any event, the legality of expelling Greece from Target2 would surely be challenged by Greece in the CJEU.

Some questions for Mr Draghi

The Greek government has complained that the ECB has placed a noose around Greece’s neck. It would be more accurate to say that the noose is around the government’s neck, but there are some serious questions now facing the ECB as the crisis evolves. I would like to ask Mr Draghi the following:

·         How will the ECB treat a default on IMF loans?

·         Will the ECB allow ELA to continue if Greece is rated as in default by the agencies?

·     Will ELA support be dependent on the introduction of capital controls in case of sovereign default?

·         How will the ECB react to ‘non-aligned’ actions by the BoG in case of default?

Further reading:

Ruparel, Even If Deal Is Reached With Greece, The Drama Is Just Beginning

Garber, The Mechanics of Intra Euro Capital Flight,  

Buiter, The implications of intra-euro area imbalances in credit flows

Varoufakis, How the Greek Banks Secured an Additional, Hidden €41 billion Bailout from European taxpayers/

Whittaker, Eurosystem debts, Greece, and the role of banknotes

Barnard & Peers: chapter 19

Art credit: www.rollingalpha.com

Is the ECB’s OMT programme legal? The Advocate-General’s Opinion in Gauweiler

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

On the 14^th of January, AG Cruz Villalon delivered his Opinion in Gauweiler (C-62/14) on the legality of the Outright Monetary Transactions (OMT) scheme of the European Central Bank (ECB). In his view, the OMT programme is, in principle, in compliance with the Treaties, as long as certain conditions are observed if the programme is activated in the future. The case has important implications for the constitutional framework of EMU and the role of the ECB, but also for the relationship between the German Constitutional Court (the Bundesverfassungsgericht) and the Court of Justice of the EU. Indeed, this is the first time that the Bundesverfassungsgericht has ever asked the Court of Justice for a preliminary ruling.

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 an institution that has bought these bonds first from a Member State—rather than from a Member State directly. While the ECB had already done this before, with the OMT programme there would be a formal element of conditionality as well, as the Member State in question would need to obtain financial assistance from the European Stability Mechanism or the EFSF and comply with its conditions (i.e. macroeconomic reforms negotiated between the Member State and the troika: the Commission, the ECB and the IMF).

The applicants before the German Court argued that the ECB had overstepped its Treaty role by creating a programme that should be viewed as a tool of economic, not fiscal, policy; it was also alleged that the programme violated the prohibition of monetary financing. In an exercise of ultra vires review, the German Constitutional Court’s preliminary response was to consider the OMT programme illegal under EU law. For the first time ever, the national court then referred the case to the CJEU. In the referring court’s view, the Court of Justice may either declare the OMT scheme contrary to the EU Treaties, or provide a more limited interpretation of the programme that is in accordance with the Treaties. The German Court provided certain indications as to what those limits should be.

The case is sensitive for various reasons: although not yet used, the mere announcement of the OMT scheme played an important role in getting the euro area out of the acute phase of the crisis, and offers a credible defence against similar future scenarios. A declaration of illegality, or the placing of substantive limits on the programme, may jeopardise post-crisis recovery. Additionally, the reference is the first ever submitted by the German Constitutional Court, and its tone is quite bold; there is clear potential for conflict between the two courts, with consequences unknown for EMU (on this aspect of the case, see this earlier blog post). Moreover, the case touches on the nature and legitimacy of the role of the ECB as an independent expert, and on the dichotomy between the original, rule-based conception of EMU and the evolving, more policy-oriented EMU that rose out of the crisis.

The AG Opinion

AG Cruz Villalon delivered a carefully argued Opinion that, first, acknowledged and unpacked the significance of the exchange for the dialogue between the German Constitutional Court and the Court of Justice, and, second, considered all concerns put forward by the national court. In doing so, the AG came to the conclusion that the ECB is free to create and implement a scheme like OMT, as long as it abides by certain limits in doing so. Crucially, these limits are far more permissive than those suggested by the German Court.

(1)    The relationship between the two courts

The German Constitutional Court has been very vocal on the question of limits to European integration, vowing to exercise its ‘emergency jurisdiction’ in different scenarios in the past: in order to protect human rights enshrined in the German Basic Law (Solange saga), to ensure that EU action is not ultra vires, i.e. does not go beyond what is allowed in the Treaties (Maastricht, Honeywell), and to protect Germany’s constitutional identity, which has so far included a particular conception of democratic legitimacy and the protection of national parliamentary powers (Lisbon and various post-crisis decisions).

In Gauweiler, the case at stake, the German Court exercised its ultra vires jurisdiction, coming to the interim conclusion that the ECB’s actions went beyond the powers given to it in the Treaties. Following its undertaking in Honeywell, the German Court referred the matter to the Court of Justice before reaching a final decision. Space precludes more careful consideration of this point, but it should be noted that ultra vires and constitutional identity intertwine in this case: first, because the German court used its conception of democratic legitimacy to ‘sharpen’ its ultra vires jurisdiction, in the sense that, for the first time, it was citizens’ right to vote that gave them standing to challenge EU action for going beyond EU primary law. And second, because the German Court went on to suggest that further review on the basis of constitutional identity would or may follow a Court of Justice’s decision that the OMT scheme is not in fact ultra vires: whether the OMT scheme could violate the constitutional identity of the Basic Law would depend on the Court of Justice’s specific interpretation of the scheme in conformity with EU primary law.

AG Cruz Villalon engaged with the case-law of the referring court on limits to European integration and acknowledged the background and significance of a reference that was worded in very bold (some would say almost aggressive) terms by the German court. Indeed, this discussion may be seen as the most diplomatic part of the Opinion.

The AG emphasized the ‘functional difficulty’ of the reference: in short, that the Court of Justice should not issue a preliminary ruling requested by a national court if that request ‘already includes, intrinsically or conceptually, the possibility that it will in fact depart from the answer received’ [36]. This, the AG continues, is not the intended or proper use of the preliminary ruling procedure. But was this such a situation? In this respect, it is problematic that the German Court may still conduct its own and independent ‘identity review’ after the Court of Justice has conducted its ultra vires review. Nevertheless, the AG relied on the principle of sincere cooperation to argue that trust is required in this situation: the Court of Justice should provide a constructive ruling, ‘on the basis of a particular assumption regarding the ultimate fate of its answer’ [66]. So there we have it: since both courts are under a duty to cooperate sincerely and to trust each other, the Court of Justice should give the requested ruling to the German court, trusting that the latter will, in turn, ‘do the right thing’. The AG was very clear as to what he considered that to be: ‘it seems to me an all but impossible task to preserve this Union, as we know it today, if it is to be made subject to an absolute reservation, ill-defined and virtually at the discretion of each of the Member States, which takes the form of a category described as ‘constitutional identity’. That is particularly the case if that ‘constitutional identity’ is stated to be different from the ‘national identity’ referred to in Article 4(2) TEU.’

(2)    The legality of the OMT scheme

The German court’s concerns regarding the legality of the OMT programme can be summarized as follows: first, the programme is a measure of economic, not monetary policy, and as such beyond the remit of the ECB. Second, a programme of this kind amounts to monetary financing of a Member State, which Art 123 TFEU prohibits. It would allow the ECB to become lender of last resort to a country in financial difficulties, and it would transform EMU into a transfer union—something not foreseen in the current Treaties.

Is it monetary policy?

The AG started by considering the nature of the OMT scheme as a measure of monetary or economic policy. The applicants had argued that the scheme should be classified as an economic policy measure with the aim of saving the euro by changing certain flaws in the design of monetary union, i.e. by pooling the debt of euro countries. They also emphasized the effects of the attached conditionality on Member States’ economic policies. All this, they argued, placed the OMT scheme beyond the merely supporting role that the ECB may have in economic policy, according to the Treaties. The German Constitutional Court agreed, based on various features of the OMT scheme: its conditionality and parallelism with ESM and EFSF financial assistance programmes (as well as its ability to circumvent them) and its selectivity (in that OMT bond-buying would only apply to select countries, whereas measures of monetary policy typically apply to the whole currency area).

The ECB, on the other hand, argued that the aim of the scheme ‘is not to facilitate the financing conditions of certain Member States, or to determine their economic policies, but rather to ‘unblock’ the ECB’s monetary policy transmission channels’ [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.

The AG started by considering that it is within the ECB’s considerable discretion to adopt ‘non-conventional’ measures of monetary policy in exceptional circumstances. He accepted that it was the ECB’s intention to pursue monetary policy when announcing the OMT scheme and then proceeded to analyse whether the features of the OMT programme bore out this initial aim. After addressing each of the German court’s arguments, it came to the conclusion that the OMT scheme was indeed a measure of monetary policy—with one caveat: the AG saw a problem in the fact that the ECB made bond-buying through the OMT scheme conditional on the Member State’s compliance with a programme of macroeconomic reform adopted within the framework of the ESM or EFSF, and the fact that the ECB plays a very active role in the negotiating and monitoring of this programme with the Member State. This double role of the ECB (first within a framework for financial assistance which constitutes economic policy, according to Pringle, and then in its bond-buying role within the OMT) would tip the OMT scheme beyond the boundaries of the ECB’s powers: monetary policy with, at most, a supporting role in economic policy. The AG thus considered that, if the OMT were to be activated, the ECB would have to distance itself from the Troika and the monitoring of the conditionality for financial assistance immediately.

Is it proportionate?

Once the AG was generally satisfied as to the monetary nature of the OMT scheme, he reviewed its proportionality; the fact that this was a non-conventional use of competence made the proportionality assessment the more essential.

The OMT programme is an incomplete measure (as not all its features were specified in the ECB press release, and the programme has never been implemented). The AG considered that the programme’s basic features were known and could be put through an initial proportionality assessment, but that a full review of proportionality will only be possible once or if the OMT programme is ever fully regulated. The result of that initial proportionality assessment was positive: the basic configuration of the OMT programme passed the tests of suitability, necessity (the AG considered that the limitations suggested by the referring court would likely render the programme ineffective) and proportionality stricto sensu. The broad discretion granted to the ECB had a bearing on the application of the proportionality test. In sum, the programme was considered proportionate in principle, subject to the ECB complying with the requirements of proportionality (among them the duty to give reasons) if the programme is ever implemented.

Is it against the prohibition on monetary financing?

Once the nature of the OMT programme had been discussed, the Opinion turned to the possible circumvention of the prohibition on monetary financing of Member States, which is a further manifestation of one of the principles underlying EMU, namely fiscal discipline. While the Treaty makes it illegal for the ECB to buy government bonds directly from a Member State, the referring court argued that, although OMT bond-buying would take place in the secondary market, this amounted to a circumvention of the same rule. This circumvention would undermine fiscal discipline and would make certain Member States responsible, ultimately, for the debts of others, which is banned by Article 125 TFEU.

The AG considered that the prohibition of monetary financing (as a manifestation of fiscal discipline) was one of the features of the constitutional framework of EMU that contributes to the attainment of a higher objective, the financial stability of the monetary union (Pringle). Exceptions to this prohibition must thus be interpreted restrictively, and a formalistic approach must be avoided: the focus must be on the substance of the measure, and not on whether the bond-buying occurs directly or in the secondary market.

The referring court had identified various technical features of the OMT scheme as running counter to this prohibition: the ECB’s lack of preferential creditor status and waiver of rights, its exposure to excessive risk, the disruptive effects of holding the bonds until maturity, the fact that bond-buying in the secondary market would take place on a large scale and only a short time after their issue (making it too similar in its effects to buying bonds directly from the state) and that the ECB’s action would encourage new investors to buy newly issued bonds. In very broad terms, the German court’s view was that these features amounted to a circumvention of the prohibition of monetary financing because, even though the bond-buying would take place in the secondary market, it would disrupt the market and undermine fiscal discipline to an intolerable degree.

The AG disagreed on all counts but one; after discussing the effects of each technical feature, he considered that they were not disruptive enough of the normal functioning of the market and of fiscal discipline to fall foul of the Treaty. Again, with one caveat: if the ECB ever implements the programme, the timing needs to allow for actual formation of a market price in respect of government bonds before the ECB buys them. If the ECB does that, according to the AG, the technical features of the OMT programme do not endanger fiscal discipline to a disproportionate degree, and as such they do not have the potential to make Member States responsible for each other’s debts or turn EMU into a transfer union.

Final Remarks

The AG Opinion in Gauweiler is thoughtful and carefully argued. His discussion of the German court’s case-law and the problematic of the reference is measured, while still seeking to protect certain elements of the Court’s jurisdiction that he considers essential to the integrity of the EU legal system. It will be interesting to see how the Court of Justice handles the matter in its decision but, just as importantly, how the German Constitutional Court reacts to the latter.

The Opinion is less diplomatic when it comes to the legality of the OMT scheme: it rejects almost all concerns put forward by the referring court, and it does so from a particular conception of the independence of the ECB and the role of courts in controlling its activities. In this regard, the Opinion can be said to continue in the Pringle vein of ratifying the move from a rules-based EMU to a policy-based one in the wake of the crisis. Yet despite the wide margin of discretion enjoyed by the ECB, the Court has a crucial role to play in protecting the constitutional framework of EMU and of the Union. In his Opinion, the AG discharges this task by grounding an important part of the analysis on the technical features of the OMT and their effects: this is particularly clear when it comes to the question of whether the programme is compatible with the prohibition of monetary financing, where the discussion turns on technical matters rather than on more abstract ones such as the nature of EMU, its evolution, and the role of solidarity within its constitutional framework. While this may seem like a shame, it is also understandable: this broader debate is of paramount importance, but the Court (or any court) may not be the most suitable forum for it.

[Update: the Court gave its ruling in June 2015; see analysis here.] 

Barnard & Peers: chapter 19