The AG’s opinion on the Outright Monetary Transactions Case
By Daniela Jaros
On January 14, Advocate General (AG) Cruz-Villalón issued his opinion in the reference for a preliminary ruling on Gauweiler et al. v Deutscher Bundestag on the ECB’s Outright Monetary Transactions (OMT). The OMT Programme launched in September 2012 was part of a series of measures taken by the ECB in response to the Euro crisis accompanying the loan facilities (European Financial Stability Facility – EFSF, European Stability Mechansim – ESM).
The German Constitutional Court (Bundesverfassungsgericht, “BVerfG”) had asked the Court of Justice (CJEU) two questions in what it classified as an ultra vires review of acts of the European Union. Roughly speaking, the BVerfG wanted to check whether the European Central Bank (ECB) had transgressed the limits of its powers derived from the treaties. If the ECB had, this would have consequences for the constitutional identity of Germany. Therefore, the BVerfG first wanted clarification on whether the Outright Monetary Transactions (OMT) Programme was an economic rather than a monetary measure and whether the ECB had therefore exceeded its powers by establishing it. Second, the BVerfG raised the question whether the OMT programme was not violating the prohibition of monetary financing of Member State.
The AG concludes that the OMT programme was compatible with the TFEU. As this post will show, this decision does not come with much surprise. The AG posited, however, two conditions: It is only compatible with the Treaty, if the ECB “refrains from any direct involvement in the financial assistance programs to which the OMT program is linked, and complies strictly with the obligation to state reasons and with the requirements deriving from the principle of proportionality” and provided that the timing of its implementation permits the actual formation of a market price in respect of the government bonds.
In this blog post, I will first focus on the admissibility question that raises an important point about the ECB’s governance. In a second part, I will place the material questions into their bigger context of Eurocrisis management.
The ECB’s crisis containment and the OMT
In 2008, after the outbreak of the financial crisis, the ECB first lowered the key interest rate and also adopted several non-standard policy measures such as providing unlimited liquidity to the Euro area banks at a fixed interest rate and against an adequate collateral and then extending the list of accepted collateral.
Most importantly, however, it launched its Securities Market Programme (SMP) in May 2010. The SMP was adopted as a “decision” on the basis of Art. 18(1) of the Statute of the ECB regarding open market operations, which means that it is considered to be a standard policy measure (even if sometimes the opposite is argued). The programme was supposed to apply ‘temporarily’ but without an explicit limitation in time, and allowed both national central banks and the ECB to buy on the secondary market eligible marketable debt instruments issued by the central governments or public entities of the Member States whose currency is the Euro; as well as on the primary and secondary markets eligible marketable debt instruments issued by private entities incorporated in the Euro area.
In September 2012 the SMP was terminated and replaced by the OMT programme. Although both, the SMP and the OMT function similarly, countries are only eligible for OMTs when they are under the EFSF/ESM umbrella – meaning that they have to be subject to adjustment programmes in exchange for access to the loan facilities. In other words, as opposed to the SMP, OMTs only come with conditionality. The OMT programme was announced by the ECB in a press conference – which is not so surprising – but even its technical features were determined in a press release, not in a standard legal act, and the programme was further specified in a speech in September 2013.
This last point immediately leads us to the issue of admissibility raised by a number of Member States as well as institutions that have submitted observations in the present case. The argument was that, since the OMT programme was not properly adopted by the Governing Council of the ECB and therefore was not constituting a legal act, the OMT’s validity could not be reviewed.
In response, the AG quotes case-law of the CJEU holding that for an act to be actionable, it must be binding and capable of producing legal effects. The quoted case law (at 78-80) stipulates that the application of these conditions is more flexible where the act constitutes a general programme of action that is aimed at binding an authority being the author of the decision and where the act contains a measure that creates rights and obligations with regard to third parties. “The reason for that is that the general action programmes of public authorities may take atypical forms and yet still be capable of having a direct impact on the legal situation of individuals”, argues the AG (at 75). He therefore concludes that the OMT programme can be reviewed in this preliminary ruling, also because “the alternative – namely declaring an act such as the OMT programme not actionable – would entail the risk of excluding a significant number of decisions of the ECB from all judicial review merely on the ground that they have not been formally adopted and published in the Official Journal” (at 89).
The AG’s arguments regarding the necessity of reviewing the OMT and the drastic consequence of declaring it inadmissible for review, are certainly convincing, as any other decision would resemble a blanket authorization for powerful European institutions to govern with new non-legal policy measures. With his opinion, the AG enables the rule of law to keep up at least to some extent with the speed of necessary monetary policy decisions for which the standard legal procedures and mechanisms seem to be too ponderous and slow (see also paragraphs 115 to 122 on these issues).
However, while I agree with the end result of the AG’s opinion, his reasoning is quite unsatisfactory because one would have expected more criticism for not establishing such an important programme as the OMT as one of the “legal acts” listed in Art. 288 TFEU. In the above-cited press release, the ECB does not even quote a legal basis for the OMT programme. The AG justifies his standpoint with statements like “the communication strategy of central banks has become one of the central pillars of contemporary monetary policy” (at 87) and he stresses that “there is no doubt that the ECB now also includes communication among its key monetary policy tools” (at 88). Yet he does not address the fundamental problem that the ECB as an EU institution uses “tools” outside the toolbox provided by the Treaty. Even though under exceptional circumstances it may be argued that legal requirements such as the publication in the Official Journal do not have to be met in a specific case, this method of adopting measures should at least have been criticized in order not to create a precedent for future “measures” taken by press release. Moreover, even if one may acknowledge that, for the sake of having an impact on the market monetary policy, measures need to be published first by press release, there should still be a subsequent legal act which is properly adopted.
The questions referred for preliminary ruling
Both referred questions – the distinction of monetary policy measures from economic policy measures and the prohibition of monetary financing – have to some degree already been discussed in the Pringle ruling on the ESM. Unfortunately, just like the CJEU in the Pringle ruling, the AG can be accused of legal formalism in his argumentation.
Regarding the alleged excess of power by “disguising” economic policy (Art. 5 para 1 TFEU) as monetary policy (Art. 3 para 1 lit c TFEU), the CJEU adopted a very formalist reasoning in that ruling, holding that
“[…t]he objective pursued by [the ESM], which is to safeguard the stability of the euro area as a whole, that is clearly distinct from the objective of maintaining price stability, which is the primary objective of the Union’s monetary policy. Even though the stability of the euro area may have repercussions on the stability of the currency used within that area, an economic policy measure cannot be treated as equivalent to a monetary policy measure for the sole reason that it may have indirect effects on the stability of the euro.” (Pringle v. Government of Ireland, C-370/12 at 56)
In his opinion on the OMT programme, the AG builds on the Pringle precedent and argues that the Court’s ruling can be applied mutatis mutandis in this case, namely that “a monetary policy measure does not become an economic policy measure merely because it may have indirect effects on the economic policy of the Union and the Member States.” (at 129) He elaborates on the objectives of the OMT programme as monetary policy measures, which trigger the transmission mechanism and have an impact on interest rates on government bonds of specific countries, and states that all these objectives were, with regard to the deterioration of the sovereign debt market for several states in summer 2012 legitimate. Yet, he does not precisely determine in the light of what these policy measures were legitimate. It would have been interesting to understand which notion of legitimacy is used here and, as will be discussed below, how legitimacy of indirect conditionality – the OMT programme refers to the EFSF/ESM programmes and to the economic policy measures contained therein – can be argued.
The ECB is part of the “Troika” establishing the adjustment programs now under the ESM Treaty. These programmes undoubtedly contain economic policy measures – which is one reason why they are based on the ESM Treaty outside the EU treaties. If the ECB now transforms the cooperation in ESM programmes into a precondition for the OMT, economic and monetary competences overlap. The AG solves the question on whether the ECB has therefore exceeded its powers by indirectly adopting economic policy measures by way of adding a condition to his final judgment, namely that no excess of power had taken place: The ECB must refrain from any direct involvement in the financial assistance programmes to which the OMT program is linked. In that way, the ECB would stay within its monetary policy domain while the economic part of the financial assistance programmes should be left entirely to the International Monetary Fund (IMF) and the European Commission, the other two parties of the “Troika”.
The AG’s argument on the separation of economic and monetary policy has been inspired by the quoted Pringle ruling. Nonetheless, it disappoints in some respects, even though the approach the AG chooses in the end is wise. He does not deviate from the road indicated by Pringle: he keeps the distinction of monetary and policy measures short without engaging in the debate on the historic flaws of the Economic and Monetary Union. This is the disappointing part since already in the Pringle case a more analysis of this issue was expected. The wise part of his opinion is, however, to stringently follow the Pringle argument by upholding the (formalist) distinction between monetary and economic measures and by adding a condition to his opinion that constitutes a serious limitation for the ECB.
With regard to the question on the prohibition of monetary financing (Art. 123 TFEU), the Court’s upcoming ruling is much expected by European law scholars and European policy-makers. Many had argued that bond purchases through the OMT programme (and before through the SMP) resemble purchases on the primary market so much because they have in theory the same (negative) effects, such as distorting prices and ultimately being a threat to price stability, and thus that they in essence constitute primary market purchases. The AG proposes a pragmatic, teleological solution, arguing that
“the [TFEU] does not prohibit operations on the secondary market but it does require that, when the ECB intervenes on the market, it does so with sufficient safeguards to ensure that its intervention does not fall foul of the prohibition of monetary financing.”
In that way, the ECB is obliged to wait for a market price having formed on the primary market before buying them on the secondary market. Technically, this interpretation avoids a conflict with Art. 123 TFEU. But factually, the OMT programme clearly conflicts with the prohibition of monetary financing, independently of the fact that the time span between issuance and purchase of a bond by the ECB is stretched.
The AGs arguments on both issues, first on the distinction between economic and monetary policy and second on the prohibition of monetary financing, lead us to a much more fundamental question: Given the development of the monetary union, the lessons from the banking crisis and the current economic situation in several Member States, can one really maintain the separation between monetary and economic policy – that was artificial from the beginning – and the prohibition of monetary financing (as well as the prohibition of bailouts) in this form? That discussion would, however, exceed the framework of this blog contribution (see other contributions here, here and in German here).