Introduction

The European Union has experienced widespread political and economic consequences due to the financial crisis. These effects extend to the legal realm, leading to the European Central Bank (ECB) not only creating debatable new methods for involvement in monetary policy but also acquiring new authority in banking supervision. Additionally, the ECB, alongside the European Commission and the International Monetary Fund (forming the ‘Troika’), has become engaged in austerity measures within Member States requiring financial support. 

The following two blog entries examine recent legal developments concerning the review of the ECB’s powers related to monetary policy (Weiss: blog post by Annelieke Mooij) and banking supervision (La Banque Postale: blog post by Carlos Bosque and Alejandro Pizarroso). Regarding the judicial review of austerity policies, the EU General Court recently built upon the Court of Justice of the European Union (CJEU) ruling in the Ledra Advertising case with its judgments in Bourdovali and Chrysostomides.

These judgments, while reaffirming the restricted judicial review of ECB actions on monetary and austerity policies, imply a contrasting readiness to seek stricter judicial examination of banking supervision. Whether this develops into a broader pattern is yet to be determined.

Judicial Review of the ECB’s Monetary and Economic Policy Powers: Latest Developments

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

June marked the final bailout agreement with Greece, indicating the conclusion (for the time being) of the Greek financial crisis. The European Central Bank (ECB) concluded its Asset Purchasing Programme, also referred to as Quantitative Easing, in December 2019. The latest significant case in euro-crisis jurisprudence, the Weiss case, was decided in December. However, discussions regarding the economic and monetary union are not finalized, and future financial crises cannot be ruled out. Therefore, it’s essential to analyze the previous crisis and make preparations for potential future ones.

Numerous issues were debated during the euro-crisis, with the ECB’s powers being the most prominent. The key question was: To what extent can monetary policy influence economic policy? While the Treaty on the Functioning of the European Union (TFEU) distinctly separates economic and monetary policy—assigning the former to Member States and the latter to the ECB—the euro-crisis revealed that these two policy areas are not easily separated. This led to separate cases where the Court had to decide on the legality of the OMT programme (Gauweiler) and the Public Asset Purchasing Programme (Weiss). Now that the crisis and the Court’s judgments are behind us, it’s an opportune moment to evaluate and address the extent to which the ECB can engage in economic policy and the instruments it has gained.

Brief Recap

To evaluate the crisis’s impact, a concise overview of the pre-crisis situation is necessary. The TFEU defined the ECB’s monetary objective as price stability, which the ECB defines as inflation nearing but remaining below 2%. Furthermore, the ECB can support general economic policy without jeopardizing monetary policy.

The instruments available to the Bank are outlined in the Protocol of the ESCB. Article 18.1 specifies two primary instruments: the purchase and sale of marketable instruments and conducting credit operations. Article 123 TFEU forbids the ECB from directly financing Member States, and Article 125 TFEU prohibits the ECB from bailing out Member States. These provisions formed the crucial boundaries of the ECB’s monetary policy powers before the crisis. Then, the euro-crisis emerged.

Crisis Case Law

The euro-crisis case law consists of three significant cases: Pringle, Gauweiler, and Weiss. Though Pringle didn’t directly involve the ECB but rather the European Stability Mechanism (ESM) programme—a treaty among Eurozone members to assist struggling peers—it’s crucial because the Court acknowledged potential overlaps between economic and monetary policies. This viewpoint deviates from the Treaties’ strict separation. This isn’t entirely surprising from the ECB’s perspective, as it’s permitted to implement monetary policy and support economic policy. However, the definition of “support” becomes problematic, implying it shouldn’t “determine” economic policy, although the boundary between the two remains unclear.

In the Gauweiler decision, the Court stated that to determine whether a measure falls under monetary or economic policy, its objectives and instruments must be assessed. The OMT program discussed in Gauweiler aimed to restore monetary transmission channels and the unity of monetary policy, including counteracting speculation about a Eurozone breakup. While adding the goal of preserving the euro might not strictly adhere to the law, it’s understandable that the ECB opted to safeguard it, as the Eurozone’s collapse could have further jeopardized price stability.

The second factor in classifying a measure as monetary or economic policy involves the instruments employed. In Gauweiler, it was determined that these operations might have economic consequences but shouldn’t breach the no-bailout clause or the direct lending prohibition, either directly or indirectly. The Court established that the key evaluation criterion was whether the motivation for maintaining responsible budgetary policies persisted.

The Weiss case added that these so-called “indirect effects” don’t need to be unforeseen and can be knowingly accepted. Furthermore, the Court acknowledged that to achieve inflationary targets, the ECB’s policy will inevitably impact interest rates and the real economy. This effectively acknowledges that effective monetary policy will often influence economic policy, which is neither unexpected nor inherently undesirable, as the Treaty explicitly empowers the ECB to support economic policy. However, in the Gauweiler case, the Court also accepted the ECB’s role within the “Troika.”

The Troika comprises the Commission, ECB, and the IMF, formalized in the ESM Treaty. When a member seeks assistance, this treaty tasks the Commission, IMF, and ECB with negotiating and overseeing the Memorandum of Understanding (MoU) with the member requiring aid. This MoU encompasses numerous aspects arguably economic. While the Advocate General considers the negotiation and monitoring process as economic policy, the Court’s judgment doesn’t delve into this matter. By not addressing the ECB’s role within the Troika, the Court seemingly accepts—or at least permits—this function. Consequently, the ECB appears to have gained the authority to negotiate and implement specific economic goals during the crisis. Classifying these instruments as monetary policy tools is challenging; the remaining option is to categorize them as supporting general economic policy.

Weiss – A Conclusive Chapter?

The Weiss case arguably represents the latest chapter in crisis case law, at least for now. In Weiss, the program under scrutiny was the Public Sector Purchasing Programme (PSPP). Unlike the OMT program, which was adjudicated hypothetically, the PSPP was implemented. This distinction is legally insignificant. This program is technically one of four under the Asset Purchasing Programmes, although the term “technically” is used because the PSPP’s purchases significantly outweigh the others. In its final month, the PSPP accounted for approximately 81% of total purchases.

This is noteworthy because one criticism following Gauweiler was that the ECB’s arguments were accepted at face value. The Advocate General’s argument that PSPP is “merely one of four programs” seems applicable here. This might be partly because the Court only examines whether the ECB committed a “manifest error of assessment.” However, the Court also states in the same paragraph that monetary policy decisions are often contentious, and “nothing more can be required of the ESCB apart from that it use its economic expertise and the necessary technical means at its disposal to carry out that analysis with all care and accuracy.” This practically renders technical evaluation of the ESCB’s judgment impossible, as finding an appropriate body to “second-guess” the ECB’s decision-making is challenging.

Another key difference between the two programs was that the OMT program only applied to nations fulfilling specific conditions, while the PSPP was a general program, arguably aligning more closely with the ECB’s monetary goals. The Court believes a general program can still violate Article 123 TFEU’s monetary assistance prohibition if the ESCB creates a de facto guarantee of purchase for primary actors. 

Intriguingly, it also considers that due to the division key, the greater a Member State’s debt accumulation, the smaller the proportion purchased by its national bank. Therefore, despite the program’s general application, the ESCB can still maintain incentives for individual Member States to uphold sound budgetary policies. Unlike the referring court, the ECJ refrains from examining the numerical specifics of purchase volumes, indirectly confirming the ESCB’s budgetary independence. However, this also implies that few, if any, EU bodies can scrutinize the details of ESCB decisions.

Conclusions

As the euro-crisis gradually recedes into the past (for now), it’s time to assess its impact. The impact on the European Central Bank has been significant. Case law demonstrates that monetary and economic policies aren’t entirely separate and can influence each other (Gauweiler). While this influence cannot contradict monetary policy, the effects can be foreseen and knowingly accepted (Weiss). Secondly, the ECB’s authority to support general economic policy is now more clearly defined. This authority may include negotiating and monitoring fiscal reform compliance. The legality and implications of the latter have sparked scholarly debate and could constitute a cumulative process warranting close observation. While the Weiss case didn’t introduce major reforms or appear out of place, it further illustrated that few bodies exist to scrutinize specific arguments presented by the ECB. Although the ECB was designed as a highly independent institution, it’s doubtful this level of independence was intended.

Stricter Judicial Review for the ECB

Carlos Bosque* and Alejandro Pizarroso**

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

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

The opinions expressed here are solely those of the authors and not of the European Investment Fund or the Bank of Spain.

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

- Richard Dworkin

Certain European legal cases (including many recent ones, such as the decision on the legality of the public sector asset purchase program) instantly garner well-deserved attention. Conversely, others tend to go unnoticed. One such case is La Banque Postale (T-733/16), a General Court case (accompanied by five identical rulings concerning other French credit institutions) focusing on the review of ECB supervisory decisions, which, for the first time, resulted in the annulment of such a decision. The case centered on the level of discretion the ECB should have in its supervisory actions. The message conveyed by the General Court was unambiguous: it effectively introduced the ECB to a heightened standard of review—a “hard look” review.

This issue will be analyzed here, but first, let’s examine the case.

The facts are straightforward. Following the financial crisis, EU lawmakers introduced a leverage ratio to discourage financial institutions from taking on excessive leverage risk. This ratio evaluates an institution’s capital relative to its exposures, but it does so without considering the risks associated with those exposures to measure an institution’s overall exposure. However, some exemptions are permitted. In 2014, Article 429(14) of Regulation 575/2013 was passed, creating a derogation for exposures arising from deposits an institution may be compelled to transfer to a public sector entity to finance general interest investments. The provision states that the ECB “may permit” the exclusion of these exposures from an institution’s leverage ratio calculation.

Based on this provision, La Banque Postale requested that the ECB exclude the amounts collected through certain regulated savings accounts—which it was legally obligated to transfer to a public entity—from its leverage ratio calculation. The ECB denied the request, citing three reasons: (1) the institution remained globally liable for these exposures; (2) La Banque Postale was required to reimburse depositors for amounts transferred to the public entity, regardless of whether those funds were returned to the institution or in the event of France defaulting; and (3) potential delays in retrieving funds from the public entity could trigger a fire sale during a bank run. La Banque Postale, facing a 50% increase in its leverage ratio denominator due to the refusal, challenged the decision.

The case presented two questions: (1) whether the ECB had discretion in applying the exemption, and (2) if so, whether it exercised its discretion appropriately.

While the first issue was relatively simple to address, given the clear language of the provision (“may permit”), the second was more complex. After establishing that the ECB has discretion in applying the exemption provided that the conditions outlined in Article 429(14) are met, the General Court moved on to the second question. The answer was unambiguous: the ECB did not exercise its discretion acceptably. To reach this conclusion, the General Court relied on its established standard of review for discretionary decisions, noting that EU courts should not substitute their judgment for that of administrative bodies. Their assessment is limited to determining whether an administrative decision is based on materially inaccurate facts or contains an error of law, a manifest error of appraisal, or a misuse of powers. However, the application of this standard was noteworthy.

The General Court found that the ECB’s first two arguments were flawed due to an error of law, as it denied the exemption based on reasons inherent to the exposures addressed in the provision, rendering the exemption practically unusable. The possibility of France defaulting—the ECB’s primary justification during the trial—was specifically dismissed. Since the Article 429(14) derogation only applies to amounts deposited in a public entity (and thus state-backed), a potential default by the country in question cannot justify denying the exemption.

Furthermore, the opinion determined that the ECB’s third argument was invalidated by a manifest error of appraisal. The General Court noted that although the supervisor-identified liquidity risk might materialize in some cases, the ECB previously acknowledged that minor delays in retrieving funds from the public entity were insignificant when evaluating an institution’s liquidity ratio. In fact, the ECB had established this view in a prior decision concerning La Banque Postale’s liquidity ratio, and the EBA supported its analysis. The court determined that this inconsistency contradicted the principle of sound administration applicable to all EU institutions. Consequently, the ECB’s decision to deny the exemption’s application was annulled.

This ruling should not be disregarded. It marks the first time an ECB supervisory decision has been annulled since the Single Supervisory Mechanism’s implementation in 2014. How should this case be interpreted? The limited attention received by the judgment is striking considering, as we believe, that the General Court is sending a clear message to the ECB regarding its discretionary powers in banking supervision.

Indeed, the General Court seems to be introducing a “hard look” review of supervisory decisions. This term, originating in the United States, refers to the rigorous standard of judicial review applied to agency actions since the 1970s (often associated with the US Supreme Court decision in State Farm). While the General Court cites its usual standard of review for administrative discretion, as Professor Craig has taught us, the key lies in how the test is employed—the intensity of the court’s review (Paul Craig, EU Administrative Law 445 (3rd ed. 2018)). The two specific rules derived from the case—that discretion cannot be exercised contrary to the objective or effectiveness (effet utile) of the provision being applied and that discretion does not allow for inconsistent administrative assessments of a given subject—seem reasonable.

However, the crucial factor is the meticulousness of the General Court’s assessment, evident in the (sometimes excessively) lengthy and intricate ruling. The court refrains from replacing the ECB’s judgment but carefully considers each argument despite the clear discretion afforded by the governing rule and the technical nature of the issue. The court appears to be conveying to the ECB that unlike monetary policy, where it “must be allowed … a broad discretion” (Gauweiler, C-62/14, ¶ 68), banking supervision requires stringent review of discretionary administrative actions.

However, the General Court offers the ECB a way out: sufficient justification. While the opinion doesn’t explicitly emphasize it, it suggests that the ECB could have justified denying the exemption by clearly outlining its reasoning. By thoroughly examining the likelihood of France defaulting or the liquidity risk incurred by La Banque Postale for transferring funds to a public entity, the General Court implies, the decision might have been upheld. It’s now evident that in its supervisory role, the ECB is merely another EU administrative body whose actions will be subjected to intense General Court scrutiny and whose decisions will require meticulous justification to withstand this heightened standard of review.

Whether this development should be applauded (enhanced judicial review?) or criticized (bureaucratization of administrative actions?) is subjective. Reasonable individuals can hold differing opinions, but its significance necessitates due consideration. The conclusions drawn here are provisional, pending further judgments (from the General Court or the Court of Justice) that may or may not conform to this case law. Nevertheless, La Banque Postale serves as a cautionary tale for the ECB: welcome to hard look review.

Barnard & Peers: chapter 19

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