Alicia Hinarejos, Downing College, University of Cambridge; author of The Euro Area Crisis in Constitutional Perspective
On June 16th, the Court of Justice ruled in the Gauweiler case, declaring the European Central Bank’s (ECB) Outright Monetary Transactions (OMT) program legal under EU law. This decision has significant implications for the ECB’s authority, the EU Economic and Monetary Union’s constitutional structure, and the relationship between the Court of Justice and the referring court, the German Federal Constitutional Court. This marked the first instance of the German court seeking a preliminary ruling, leaving uncertainty as to whether the Court of Justice’s response will be satisfactory. (Previous comments on the Advocate-General’s opinion in this case can be found here).
Background
The ECB, responsible for euro area monetary policy, operates within a narrowly defined Treaty-based role. However, this role has significantly evolved in recent years. In response to the euro area sovereign debt crisis, the ECB introduced various “non-standard” measures, including the OMT program, announced in September 2012 (press release) and yet to be implemented.
The OMT program allows the ECB to purchase government bonds from struggling eurozone countries when other buyers are scarce or bond yields are prohibitively high. This action aims to prevent member states from defaulting due to an inability to cover interest payments on new bonds. The Treaty explicitly prohibits the ECB from directly acquiring government bonds (Art 123 TFEU) to avoid monetary financing, where the ECB effectively becomes a direct lender of last resort to a Member State. Therefore, the ECB would buy government bonds from a party that initially purchased them from a Member State, rather than directly. While the ECB has engaged in such actions before, the OMT program introduces formal conditionality. This requires the Member State to receive financial assistance from the European Stability Mechanism or the EFSF and adhere to their conditions (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 OMT program exceeded the ECB’s Treaty-defined role. They claimed it functioned as an economic, rather than monetary, policy tool and violated the prohibition on monetary financing. In a display of asserting its jurisdiction, the German Constitutional Court preliminarily deemed the OMT program illegal under EU law. For the first time, the case was referred to the CJEU. The referring court suggested the Court of Justice could either declare the OMT scheme contrary to EU law or offer a more limited interpretation aligning with the Treaties. The German Court outlined potential limitations and stated that the OMT scheme’s potential violation of the German Basic Law’s constitutional identity hinged on the CJEU’s interpretation of the scheme’s conformity with EU primary law.
This case carried significant weight for several reasons. Though unused, the OMT program’s announcement played a crucial role in stabilizing the euro area during the crisis’s peak and offered a potential defense against future crises. A declaration of illegality or substantial limitations on the program could have jeopardized the post-crisis recovery. Moreover, as the first referral from the German Constitutional Court, its bold tone hinted at a potential conflict between the two courts, with unpredictable consequences for EMU. Lastly, the case touched upon the legitimacy and nature of the ECB’s role as an independent expert and the dichotomy between the original rules-based EMU and the evolving, policy-oriented EMU emerging from the crisis.
The Court of Justice’s Decision
(1) Preliminary questions
Arguments against the reference’s admissibility focused on the nature of the ECB’s OMT program announcement and its reviewability, as well as the circumstances of the national court’s referral.
Firstly, some argued the ECB’s announcement was not a legal act but a preparatory one without legal effects. This view was rejected by the Court of Justice. Secondly, the Court similarly dismissed arguments that the referral circumstances were incompatible with the preliminary ruling procedure. These arguments cited the abstract and hypothetical nature of the questions, the German court’s potential non-compliance with the preliminary ruling, and the possibility for German citizens to directly challenge an EU act’s validity without resorting to Art 263 TFEU. The Court upheld the division of competences between itself and national courts within the preliminary ruling framework, refusing to question the German court’s assessment of the necessity for a preliminary ruling or the national rules governing judicial review. As anticipated, the Court reaffirmed its preliminary rulings’ binding nature on national courts.
(2) The legality of the OMT programme
Two main concerns were raised by the German court: the OMT program’s classification as an economic, not monetary, policy measure exceeding the ECB’s authority; and its alleged incompatibility with Art 123(1) TFEU’s prohibition on monetary financing of Member States.
Is it monetary policy?
The Court began by examining the OMT scheme’s nature and its categorization as a monetary or economic policy measure. Applicants argued it aimed to salvage the euro by addressing inherent flaws in the monetary union’s design, such as pooling euro country debt, effectively making it an economic policy measure. They emphasized the conditionality’s impact on Member States’ economic policies, pushing the OMT program beyond the ECB’s limited supporting role in economic policy as per the Treaties. The German Constitutional Court concurred, highlighting features like the OMT scheme’s conditionality, its alignment with ESM and EFSF financial assistance programs (and its potential to circumvent them), and its selective application to specific countries.
Conversely, the ECB maintained that the scheme aimed to “unblock” the ECB’s monetary policy transmission channels, rather than dictate economic policies or ease financing conditions for certain Member States. The crisis hindered the ECB’s ability to implement monetary policy through usual channels. Bond-buying would normalize credit conditions and allow the ECB to resume its monetary policy. Conditionality was deemed necessary to prevent interference with the macroeconomic reform program agreed upon between the ESM and the Member State receiving financial assistance.
Mirroring its approach in Pringle, the Court determined the measure’s categorization (monetary or economic policy) by analyzing its objectives and instruments. The OMT program’s stated objectives, safeguarding “appropriate monetary policy transmission and the singleness of the monetary policy,” were deemed contributory to the ultimate aim of monetary policy: price stability. The Court drew parallels with Pringle, arguing that potential indirect economic policy effects (contributing to euro area stability) did not alter the OMT program’s classification. Similar conclusions were drawn after examining the program’s instruments. Consequently, both the OMT program’s objectives and instruments, and thus the program itself, were classified as falling under monetary policy.
Interestingly, while Advocate General Cruz Villalón agreed with the OMT program’s categorization as a monetary policy measure, he introduced a caveat. He raised concerns about the ECB making bond-buying conditional on a Member State’s compliance with a macroeconomic reform program within the ESM or EFSF framework, particularly given the ECB’s active role in negotiating and monitoring this program. This dual role (first in a financial assistance framework considered economic policy according to Pringle and then in its OMT bond-buying role) potentially pushed the OMT scheme beyond the ECB’s purview, blurring the line between monetary policy and its supporting role in economic policy. The AG recommended the ECB distance itself from the Troika and conditionality monitoring if the OMT were to be activated.
Contrarily, the Court found no issue with the conditional bond-buying. It viewed this as creating indirect economic policy effects, deemed irrelevant to the measure’s classification, and ensuring that the ECB’s actions wouldn’t undermine ESM/EFSF conditionality. This approach aligned with the ECB’s obligation to support the Union’s general economic policies. The Court justified the differing classifications of bond-buying in secondary markets (economic policy for ESM and monetary policy for ECB) by highlighting their distinct objectives. Notably, the Court made no mention of the ECB’s involvement within the troika.
Is it proportionate?
The Court found the OMT program, as initially described by the ECB, to be suitable for achieving its objectives without exceeding what was necessary. The review recognized the ECB’s broad discretion in complex economic assessments and technical choices, resulting in a light-touch review. The Court found the ECB’s reasoning satisfactory and saw no manifest error of assessment in its economic analysis or its view that the OMT program was suitable for its intended effect. Similarly, the program, as described in the press release, was deemed not exceeding the necessary scope, given its limited nature and specific activation criteria (achieving specific objectives, ceasing upon their attainment). No prior quantitative limit was considered necessary.
Is it against the prohibition on monetary financing?
Next, the Court addressed the potential circumvention of the prohibition on monetary financing of Member States. While direct purchase of government bonds from Member States is prohibited, the referring court argued that OMT’s indirect approach through the secondary market effectively achieved the same outcome, undermining fiscal discipline and potentially making certain Member States liable for the debts of others.
The Court of Justice concurred that the ECB shouldn’t engage in secondary market bond-buying that mirrored the effects of direct purchases, essentially negating the purpose of Art 123(1) TFEU. To assess if the OMT program constituted such a circumvention, the Court sought to clarify the aim of Art 123(1) TFEU (prohibition on monetary financing of Member States) and the extent to which indirect bond-buying within the OMT scheme threatened that aim.
According to the Court, the prohibition on monetary financing aimed to encourage sound budgetary policies among Member States. Without relying on monetary financing, Member States would face market discipline and need to avoid excessive debt and deficits to sell bonds and access credit on favorable terms.
The OMT program’s indirect bond-buying could undermine this aim by improving a Member State’s access to credit unless safeguards were in place. The Court found the ECB’s assurances regarding these safeguards convincing: distortion to a Member State’s bond-selling conditions in the primary market would be limited by not pre-announcing bond purchases and allowing a reasonable time lapse between primary and secondary market transactions. The Court also believed that the limited nature and scope of the OMT program meant that the mere possibility of ECB intervention wouldn’t discourage prudent budgetary policies. Finally, the conditionality linked to ESM/EFSF compliance ensured that financial assistance recipients wouldn’t view the OMT program as an alternative to fiscal consolidation.
In conclusion, the Court declared the OMT program, as presented in the press release and subject to the ECB’s explanations, compatible with the prohibition on monetary financing. It found that while indirect bond-buying under the OMT program could affect Member States’ access to credit, this wouldn’t be equivalent to direct purchases (monetary financing) and wouldn’t undermine the ban’s objective of promoting prudent budgetary policies.
Final Remarks
The Gauweiler judgment aligns with expectations: the ECB’s OMT program is deemed compliant with the Treaties, provided it’s implemented as assured by the ECB. The required safeguards are neither novel nor overly burdensome, falling short of the German Federal Constitutional Court’s stipulations. While the outcome is predictable, it remains to be seen whether these safeguards satisfy the referring court and how the decision will impact the relationship between the two courts.
The Court of Justice acknowledges the ECB’s broad discretion in complex economic judgments and technical choices while striving for a meaningful and necessary role. It avoids second-guessing the expert body’s policy decisions, focusing instead on procedural requirements and applying a light touch when assessing the scheme’s proportionality. The judgment’s final section, addressing the OMT program’s compatibility with the ban on monetary financing, exhibits stricter scrutiny. It’s here that the Court seeks to demonstrably apply a coherent and appropriately rigorous (within judicial boundaries) compatibility test. Whether this effort convinces will depend on the specific audience within the Court. The decision can be seen as following the Pringle precedent, acknowledging the shift from a rules-based to a policy-driven EMU in response to the crisis. Ultimately, disagreement will persist between those who view this evolution as unavoidable and even essential for EMU’s survival and those who oppose it or advocate for a different approach. Finally, the Court’s discussion, like the AG’s Opinion, centers on the OMT program’s specific features rather than broader questions regarding the nature of EMU, its evolution, and the role of solidarity within its constitutional framework. While the decision should undoubtedly be interpreted within its broader constitutional context, a judicial setting might not be the most suitable for such discussions.
Barnard & Peers: chapter 19