Alicia Hinarejos, Downing College, University of Cambridge; author of The Euro Area Crisis in Constitutional Perspective (OUP)
On January 14th, Advocate General Cruz Villalon presented his legal opinion on the Gauweiler case (C-62/14), which concerns the legality of the European Central Bank (ECB) Outright Monetary Transactions (OMT) program. He believes the OMT program generally complies with EU treaties, provided certain conditions are met if it’s activated in the future. This case has significant implications for the European Monetary Union’s (EMU) constitutional framework, the ECB’s role, and the relationship between the German Constitutional Court (Bundesverfassungsgericht) and the Court of Justice of the EU. This is the first time the German Constitutional Court has ever requested a preliminary ruling from the Court of Justice.
Background
The ECB is responsible for the euro area’s monetary policy, a role narrowly defined in the EU treaties. However, this role has significantly evolved and expanded recently. The ECB has announced or adopted various ’non-standard’ measures in response to the euro area sovereign debt crisis. The OMT program, announced in a September 2012 press release and never used, is one such measure.
The program allows the ECB to buy government bonds from struggling eurozone countries when no one else will or when their yield becomes so high that the Member State cannot cover interest payments on new bonds. This inability to secure credit risks default. However, the treaty prohibits the ECB from directly acquiring government bonds (Article 123 TFEU) as this constitutes monetary financing – effectively becoming a direct lender of last resort to a Member State. Instead, the ECB would purchase government bonds from an institution that initially bought them from a Member State (the secondary market), not directly. While the ECB had done this before, the OMT program would add a formal conditionality element. The struggling Member State would need to receive financial assistance from the European Stability Mechanism (ESM) or the European Financial Stability Facility (EFSF) and comply with their conditions, meaning macroeconomic reforms negotiated between the Member State and the troika (the Commission, the ECB, and the IMF).
Applicants before the German Court argued that the ECB overstepped its treaty role by creating a program that functions as an economic, not monetary, policy tool. They also alleged the program violated the monetary financing prohibition. In an exercise of ultra vires review (reviewing whether an action exceeds legal power or authority), the German Constitutional Court’s preliminary response deemed the OMT program illegal under EU law. For the first time, the national court then referred the case to the CJEU. They believe the Court of Justice could either declare the OMT scheme contrary to EU Treaties or provide a more limited, treaty-compliant interpretation. The German Court suggested limits for the program.
This case is sensitive for several reasons. Even though it’s unused, the OMT scheme’s announcement played a crucial role in stabilizing the euro area during the crisis’s acute phase and offers a credible defense against similar future events. A declaration of illegality or placing substantive limits on the program could jeopardize the post-crisis recovery. This referral is also the first ever from the German Constitutional Court and uses quite strong language, highlighting a clear potential for conflict between the two courts with unknown consequences for the EMU. Furthermore, the case concerns the nature and legitimacy of the ECB’s role as an independent expert and the dichotomy between the initial rules-based EMU concept and the evolving, more policy-oriented EMU that emerged from the crisis.
The AG Opinion
AG Cruz Villalon delivered a carefully argued opinion. First, he acknowledged and analyzed the significance of the exchange and dialogue between the German Constitutional Court and the Court of Justice. Second, he considered all concerns raised by the national court. In doing so, the AG concluded that the ECB has the freedom to create and implement a scheme like OMT, provided it adheres to certain limitations, which are far more permissive than those suggested by the German Court.
(1) The relationship between the two courts
The German Constitutional Court has been outspoken about the limits of European integration, vowing to exercise its ’emergency jurisdiction’ in various scenarios: to protect human rights enshrined in the German Basic Law (Solange saga); to ensure EU action is not ultra vires—that it doesn’t exceed what’s allowed in the treaties (Maastricht, Honeywell); and to protect Germany’s constitutional identity, which includes a particular understanding of democratic legitimacy and national parliamentary power protection (Lisbon and various post-crisis decisions).
In the present case, Gauweiler, the German Court exercised its ultra vires jurisdiction. They arrived at the preliminary conclusion that the ECB’s actions went beyond the powers granted to it in the Treaties. Following its approach in Honeywell, the German Court referred the matter to the Court of Justice before reaching a final decision. While a more thorough examination of this point is beyond the scope of this analysis, it’s worth noting that ultra vires and constitutional identity are intertwined in this case. First, the German court used its understanding of democratic legitimacy to ‘sharpen’ its ultra vires jurisdiction. For the first time, it was citizens’ right to vote that gave them standing to challenge EU action for overstepping EU primary law. Second, the German Court suggested that further review based on constitutional identity would or might follow a Court of Justice decision finding the OMT scheme not ultra vires. Whether the OMT scheme violates the Basic Law’s constitutional identity depends on the Court of Justice’s specific interpretation of the scheme’s conformity with EU primary law.
AG Cruz Villalon engaged with the referring court’s case-law on the limits of European integration and acknowledged the background and significance of a referral worded in very strong (some might say aggressive) terms by the German court. This discussion might be seen as the most diplomatic part of the Opinion.
The AG emphasized the ‘functional difficulty’ of the referral. In short, the Court of Justice shouldn’t issue a preliminary ruling if the requesting national court might depart from the received answer. This, he argues, is not the intended or proper use of the preliminary ruling procedure. But was this such a situation? It’s problematic that the German Court might still conduct its own independent ‘identity review’ after the Court of Justice performs its ultra vires review. Nevertheless, the AG relied on the principle of sincere cooperation, arguing that trust is required: the Court of Justice should provide a constructive ruling, ‘on the basis of a particular assumption regarding the ultimate fate of its answer’. So, because both courts must cooperate sincerely and trust each other, the Court of Justice should issue the requested ruling to the German court, trusting the latter will, in turn, ‘do the right thing’. The AG was clear about what he considered the right thing: ‘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 OMT program’s legality can be summarized as follows: It’s an economic, not monetary, policy measure, exceeding the ECB’s remit; and it amounts to monetary financing of a Member State, prohibited by Article 123 TFEU. This would allow the ECB to become a lender of last resort to a country in financial distress and transform the EMU into a transfer union—something not envisaged in the current treaties.
Is it monetary policy?
The AG began by examining the nature of the OMT scheme, considering whether it should be categorized as a monetary or economic policy measure. The applicants argued it should be classified as economic policy aimed at saving the euro by addressing flaws in the monetary union’s design, such as pooling euro countries’ debt. They also emphasized the attached conditionality’s effects on Member States’ economic policies, arguing that this placed the OMT scheme outside the merely supportive role the ECB is allowed in economic policy according to the Treaties. The German Constitutional Court agreed, citing various OMT scheme features: its conditionality and parallelism with ESM and EFSF financial assistance programs (and its ability to circumvent them), and its selectivity (OMT bond-buying would only apply to certain countries, while monetary policy measures typically apply to the entire currency area).
Conversely, the ECB argued that the program’s objective ‘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’. In other words, the crisis hindered the ECB’s ability to implement monetary policy through usual channels. The proposed bond-buying would normalize credit conditions, enabling the ECB to resume its monetary policy. Additionally, the ECB argued that the conditionality element was necessary to prevent the OMT scheme from interfering with the macroeconomic reform program agreed upon between the ESM and the Member State receiving financial assistance.
The AG first considered that it falls within the ECB’s considerable discretion to adopt ’non-conventional’ monetary policy measures in exceptional circumstances. He accepted that the ECB’s intention when announcing the OMT scheme was to pursue monetary policy and then analyzed whether the OMT program’s characteristics supported this initial aim. He addressed each of the German court’s arguments and concluded that the OMT scheme was indeed a monetary policy measure—with one caveat. He saw a problem with the ECB making bond-buying through the OMT scheme conditional on the Member State’s compliance with a macroeconomic reform program adopted under the ESM or EFSF framework and the ECB’s very active role in negotiating and monitoring this program with the Member State. This dual role for 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 push the OMT scheme beyond the ECB’s mandate: monetary policy with, at most, a supporting role in economic policy. Therefore, the AG believed that if the OMT were activated, the ECB would have to immediately distance itself from the Troika and cease monitoring the conditionality for financial assistance.
Is it proportionate?
Satisfied with the OMT scheme’s monetary nature, the AG then reviewed its proportionality. This being a non-conventional use of competence made the proportionality assessment even more critical.
The OMT program is incomplete. Not all its features were specified in the ECB press release, and it has never been implemented. The AG believed the program’s basic characteristics were known and could undergo an initial proportionality assessment, but a full review would only be possible once the OMT program was fully regulated. This initial assessment was positive. The OMT program’s basic configuration passed the suitability, necessity (the AG felt the referring court’s suggested limitations would render the program ineffective), and proportionality stricto sensu tests. The broad discretion given to the ECB influenced the proportionality test’s application. In short, the program was deemed proportionate in principle, subject to the ECB fulfilling proportionality requirements (including the duty to provide reasons) if ever implemented.
Is it against the prohibition on monetary financing?
After discussing the OMT program’s nature, the Opinion addressed the possible circumvention of the prohibition on monetary financing of Member States, another expression of a core EMU principle: fiscal discipline. While the Treaty prohibits the ECB from directly purchasing government bonds from a Member State, the referring court argued that although OMT bond-buying would occur in the secondary market, this amounted to circumventing the same rule. This, they argued, would undermine fiscal discipline and make some Member States ultimately responsible for the debts of others, violating Article 125 TFEU.
The AG considered the prohibition of monetary financing (as an expression of fiscal discipline) one of the EMU’s constitutional framework features contributing to a higher objective: the monetary union’s financial stability (Pringle). Therefore, exceptions to this prohibition must be interpreted restrictively, avoiding a formalistic approach. The focus should be on the measure’s substance, not whether bond-buying happens directly or on the secondary market.
The referring court identified several technical features of the OMT scheme as contrary 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 large-scale bond-buying in the secondary market would happen shortly after their issuance (making it too similar in effect to buying bonds directly from the state); and that the ECB’s action would encourage new investors to buy newly issued bonds. Broadly, the German court believed these features amounted to a circumvention of the prohibition of monetary financing because, even though the bond-buying would occur in the secondary market, it would disrupt the market and undermine fiscal discipline to an unacceptable degree.
The AG disagreed on all counts except one. After discussing each technical feature’s effects, he concluded they weren’t disruptive enough to the market’s normal functioning and fiscal discipline to violate the Treaty. Again, with one caveat: If the ECB implements the program, the timing must allow for a market price to form for government bonds before the ECB purchases them. If the ECB does this, according to the AG, the OMT program’s technical features don’t disproportionately endanger fiscal discipline and, as such, won’t make Member States responsible for each other’s debts or turn the EMU into a transfer union.
Final Remarks
The AG Opinion in Gauweiler is well-considered and thoroughly argued. His discussion of the German court’s case-law and the problematic referral is measured while aiming to protect aspects of the Court’s jurisdiction that he deems essential to the EU legal system’s integrity. It will be interesting to see how the Court of Justice handles the matter in its decision and, just as importantly, how the German Constitutional Court reacts.
The Opinion is less diplomatic when addressing the OMT scheme’s legality: it dismisses almost all concerns raised by the referring court, doing so from a particular perspective on the ECB’s independence and the role of courts in overseeing its activities. In this respect, the Opinion can be seen as following Pringle’s path, ratifying the shift from a rules-based EMU to a policy-based one following the crisis. Yet, despite the ECB’s wide discretion, the Court plays a vital role in safeguarding the EMU’s and the Union’s constitutional frameworks. The AG, in his Opinion, fulfills this task by grounding a significant part of the analysis on the OMT’s technical features and their effects. This is particularly evident regarding the program’s compatibility with the monetary financing prohibition, where the discussion focuses on technical matters rather than more abstract ones such as the nature of EMU, its development, and the role of solidarity within its constitutional framework. While this may seem like a missed opportunity, it’s understandable. This broader debate is paramount, but the Court (or any court) may not be the best forum for it.
[Update: the Court gave its ruling in June 2015; see analysis here.]
Barnard & Peers: chapter 19