The German Federal Constitutional Court on Outright Monetary Transactions by the European Central Bank – pressing the CJEU or a friendly gesture?
On Friday, February 7th, 2014, the German Federal Constitutional Court (BVerfG) requested the CJEU for preliminary ruling for the first time. The request is exceptional in terms of both European Union law and German constitutional law. Commentators call the decision a Spring in the Desert, a Golden Bridge to Luxembourg or simply put Historic. The BVerfG stated its opinion throughout several decisions regarding fundamental questions between the European Union and its Member States (e.g. Solange I, Solange II, Maastricht, Lisbon), but always abstained from requesting a preliminary ruling. This time, however, the BVerfG indeed submitted a question. The stakes in the case are high, as the BVerfG considers giving an ultra vires ruling regarding a decision by the Governing Council of the European Central Bank (ECB) concerning Outright Monetary Transactions (OMT) unless the CJEU announces that that decision is partially incompatible with primary law or restricts its scope. If the “conditions” laid out by the BVerfG are not met by the CJEU, the decision on OMT will be declared incompatible with the German constitution. The consequence would be that German authorities would not be bound to the decision by the ECB. In other words, the German central bank with around 18 % in capital subscriptions (shares) of the ECB would not participate in OMTs.
Outright Monetary Transactions – What’s the deal?
Outright Monetary Transactions are a program installed by the ECB to purchase sovereign bonds issued by euro Member States. Thus OMTs are open market operations performed by the ECB and national central banks. The central banks therefore operate as regular participants in sovereign bonds markets. Since the ECB holds no mandate to purchase sovereign bonds on primary markets, OMTs shall only affect secondary markets, so central banks may solely purchase sovereign bonds from resellers. The OMTs will also be subject to several conditions laid out by the ECB. One important condition for OMTs is the conditionality attached to a European Financial Stability Facility (EFSF) or a European Stability Mechanism (ESM) program, which involves primary market purchases of sovereign bonds and changes in national monetary policies. In addition, the amount of transactions is unlimited ex ante and the ECB accepts the status of a usual creditor.
As stated by Mario Draghi, President of the ECB, the objective of OMTs is to safeguard the monetary policy transmission mechanism in the euro area. This includes the objective to preserve the singleness of the monetary policy and to ensure proper transmission to the real economy. In particular, the ECB invokes distortions in government bond markets as a main threat to the monetary policy transmission mechanism. Therefore OMTs should enable the ECB to address distortions originating from fears of the reversibility of the euro. OMTs should also repair monetary transmission channels which may have a positive effect on credit growth and the real economy.
The BVerfG, however, draws the monetary political value for OMTs in doubt and is convinced that the OMT approach is outside the mandate of the ECB. It considers OMTs ultra vires for two reasons, first because the ECB thereby acts outside its monetary mandate, and second because OMTs infring the prohibition on monetary budget funding stated in Article 123 (1) TFEU. These doubts stand in line with concerns by Jens Weidmann, President of the German Central Bank, and several German academics in political economics.
According to the BVerfG, OMTs may be qualified as self-contained economic measures. Nonetheless, economic policies and measures are core competencies of the Member States. The EU and its bodies only hold economic competencies in areas explicitly assigned by the Treaties (i.e. Articles 121, 122, and 126 TFEU). The main economic mandate consists in coordinating the economic policies of the Member States. According to Articles 119 (2) and 127 (1) TFEU and Article 2 on the Statute of the ESCB and of the ECB, the ECB itself may only support the economic policy of the EU in general. However, OMTs contain measures similar to the ESM and the European Financial Stability Facility (EFSF). But then, policies like these – according to Article 136 (3) TFEU – belong to the structural core competencies of the Member States. OMT measures would also lead to a redistribution of budget resources between the Member States, which the Treaties (i.e. Article 125 TFEU) do not provide for (paras 39-41).
At the same time, the BVerfG considers the justification given by the ECB about OMTs being instruments to address distortions of transmission mechanisms as insufficient. Calling OMTs a monetary policy would not qualify OMTs as such. Mere possible monetary effects of OMTs would also not constitute a monetary policy. For several reasons on the basis of the Pringle decision (commented here), the BVerfG would not classify OMTs by their objectives and the effects of their instruments as monetary policy measures. Some of these reasons represent special concerns to the BVerfG. Especially the conditionality of OMTs with EFSF/ESM programs may lead OMTs to be qualified as economic policies and therefore outside the mandate of the ECB. The ECB does not only demand to fulfill the conditions of the economical political EFSF/ESM programs for OMTs, but can also check the compliance with these programs themselves including the possibility to terminate OMTs in case of non-compliance. Therefore the ECB may act in terms of economic policy (paras 65, 69-79).
The BVerfG also notes a possible infringement of the prohibition on monetary budget funding of Member States by the ECB. Article 123 (1) TFEU states, for motives of stability, that sovereign bonds emitted by Member States cannot be purchased on the primary market. Also, for reasons of effet utile, this prohibition should not be bypassed through similar functional measures. Parallel measures to ESM und EFSF such as the ex-ante unlimited purchase of sovereign bonds, the neutralization of interest spreads, the higher risk of suffering a haircut on debt, the possibility to hold sovereign bonds until they are due, and the influence on market indices and stock prices, as well as the intended persuasion of participants to purchase government bonds on the primary market, lead the BVerfG to redeem OMTs as such bypasses. Especially the status as a usual creditor and therefore the possible participation in haircuts on debt has a direct budget funding effect, albeit without a service in return. The BVerfG sees no difference in directly funding a budget and purchasing funds with the possible intention to waive the payback (paras 84-88). Furthermore, allowing the ECB to purchase sovereign bonds during every distortion of the transmission mechanism would equate to allowing the ECB to intervene with every aggravation of a Member State’s credit rating by purchasing sovereign bonds of said Member State. This would suspend the prohibition on monetary budget funding (paras 95-97).
Not all is lost
At this point, one may wonder whether the CJEU can give any reply that would satisfy the BVerfG and avoid a destabilization of the markets and sovereign bonds markets in particular. The BVerfG itself, however, seems to be willing to build some – admittedly narrow – bridges for the CJEU. If the CJEU views the above-mentioned mechanism of OMTs incompatible with primary law, there would be no room for an ultra vires ruling by the BVerfG. A second possibility to avoid an ultra vires ruling would be that the CJEU interprets the decision on OMT in conformity with primary law in a way that would not interfere with the purpose of OMTs. The BVerfG explicitly states that it wishes no interferences with the conditionality of EFSF and ESM programs. There should also be no participation in a haircut on debt, no unlimited purchase of sovereign bonds of a single Member State, and interferences with pricing through markets should be avoided (paras 99-100).
There are some possible readings of the request for a preliminary ruling. One would be the BVerfG is trying to place a shot across the bows of the current EU management of the eurocrisis whose effects are to be soothed by still giving a last chance to the CJEU to avoid an ultra vires ruling. Another reading might be that the BVerfG is offering its cooperation by submitting itself to the ultimate interpretative authority of the CJEU.
To close this post with a perhaps courageous, yet possible reading: Is this request an attempt to define and perhaps preserve the character of the European Union as a union governed by the rule of law instead by (unfounded) fears of markets and investors?