Steve Peers

The German Federal Constitutional Court (BVerfG) has finally submitted a legal question to the Court of Justice of the European Union (CJEU) on a critically important issue: the legality of the European Central Bank’s (ECB) Outright Monetary Transactions (OMT) policy. This policy is widely credited with saving the EU’s single currency. If either court finds the policy unlawful, the euro’s continued existence could be in jeopardy.

In simple terms, the OMT is a 2012 commitment by the ECB to buy government bonds from struggling eurozone countries on secondary markets (from banks and financial institutions). This policy aimed to boost confidence in these economies and the euro. In exchange, these countries would commit to austerity measures. Although never implemented, the OMT’s existence seems to have significantly calmed financial market anxieties about the euro’s survival. The BVerfG’s decision to refer this question to the CJEU is groundbreaking, following similar moves by the Spanish and French Constitutional Courts. This signals that all major European constitutional courts are now engaging with the CJEU.

However, the BVerfG doesn’t seem to fully accept the CJEU’s authority. It asserts its right to declare the OMT unconstitutional based on the CJEU’s response. Conversely, the CJEU has always maintained its exclusive right to judge EU law validity. Can the single currency withstand this clash of principles?

The Legal Issues

The BVerfG, alongside many others (especially in Germany), questions the OMT’s legality, arguing that it’s an economic policy, not a monetary one, and that it involves the ECB buying government debt, which is prohibited by EU treaties.

Let’s examine these arguments. Firstly, is the OMT an economic policy? While the EU has established an economic and monetary union (EMU) for eurozone members, with intertwined policies, EU law distinguishes them. Monetary policy is solely the EU’s responsibility within the eurozone, managed by the ECB.

Conversely, economic policy is primarily a national matter; the EU only coordinates it. While this separation might be economically illogical, transferring significant economic power to the EU would be politically impossible and raise concerns about EU legitimacy.

In 2012, the CJEU ruled in the Pringle case that the treaty establishing the European Stability Mechanism (ESM), a system for eurozone members to support each other financially, was an economic policy, not a monetary one. However, the CJEU didn’t define “monetary policy.”

The BVerfG questions the OMT because it sees it as the ECB’s independent economic policy. However, it acknowledges that treaties (Article 127(1) TFEU) state that the European System of Central Banks (of which the ECB is central) should support general economic policies in the Union, aligning with EU objectives outlined in Article 3 TEU. Arguably, the OMT does exactly that by supporting member states’ economic policies (including the ESM) regarding the single currency. If the economic conditions attached to the OMT are similar to or consistent with those of the ESM and EU economic governance rules, the OMT cannot be considered the ECB’s separate economic policy.

Secondly, does the OMT violate the ban on buying government debt? Article 123 TFEU states that the ECB and national central banks cannot “purchase directly” the “debt instruments” of eurozone governments. “Directly” is key; a complete ban would have omitted it. Clearly, the ECB can buy such bonds from financial institutions on a small, non-systematic scale.

However, the BVerfG is concerned about circumventing the ban’s intention: preventing central banks from “propping up” governments. If the ECB systematically bought all eurozone government bonds from initial buyers, it could be seen as circumventing the ban.

The best approach is interpreting the ECB’s powers alongside its duty to support EU objectives, particularly the single currency. Ordinarily, buying large amounts of eurozone government bonds on secondary markets might not directly impact the single currency’s existence. However, in the current situation, it does. This justifies flexibility in the ECB’s actions – as long as purchases are on secondary markets and are essential for the single currency’s survival.

Judicial Politics

The BVerfG is clear about its expectation: the CJEU should interpret the OMT program within its limitations; otherwise, it will be deemed unconstitutional under German law. However, the BVerfG has issued warnings to the CJEU before without following through, resembling a parent who makes empty threats to a misbehaving child. The child learns to ignore these threats.

Another factor is at play. When the BVerfG was asked whether Germany could ratify the Lisbon Treaty, for example, it had a clear way to enforce its judgment: it could order the German government not to. Similarly, in cases involving EU banana market rules or age discrimination laws, it could have ordered German authorities not to apply those rules. It’s less clear how it can stop the ECB, which likely wouldn’t consider itself bound by a BVerfG ruling. The BVerfG suggests requiring the German government to act (unless the German constitution is retroactively amended), but how this would stop the OMT is unclear. Therefore, both the CJEU in Luxembourg and the ECB in Frankfurt know that the BVerfG’s threat is likely empty.

So, how will they react? While many of the BVerfG’s concerns can likely be addressed, not all can. For instance, the OMT would struggle to achieve its goals if the ECB couldn’t buy significant numbers of government bonds on secondary markets. The CJEU might allow this, with conditions strict enough to appease the BVerfG. Based on its ruling’s tone, the BVerfG seems to be searching for a way to uphold the OMT, despite its reservations.

[Update: the CJEU gave its ruling in this case in June 2016. See the analysis of the judgment here.]

Barnard & Peers: chapter 19