The European Court of Justice (ECJ) opinion notes that the European Central Bank (ECB) must be given significant discretion on monetary policy matters: “ECB must have a broad discretion when framing and implementing the EU’s monetary policy, and the courts must exercise a considerable degree of caution when reviewing the ECB’s activity, since they lack the expertise and experience which the ECB has in this area.”
The opinion, published by the ECJ Advocate General Cruz Villalónon 14 January 2015, writes Professor John Ryan, finds that “the Outright Monetary Transactions (OMT) programme is in line with EU law and that the programme decided upon by the ECB does not infringe the principle of proportionality and may be considered lawful, provided that, in the event of the programme being implemented, the obligation to state reasons and the requirements deriving from the principle of proportionality are strictly complied with”.
Importantly the opinion notes that the ECB must be given significant discretion on monetary policy matters: “ECB must have a broad discretion when framing and implementing the EU’s monetary policy, and the courts must exercise a considerable degree of caution when reviewing the ECB’s activity, since they lack the expertise and experience which the ECB has in this area.”
This could be an important legal precedent and may be seen as a veiled message to the German Constitutional Court (GCC). Ultimately, it suggests that the ECJ and the GCC should be wary of ruling on monetary policy issues. However, this would then raise the question of the level of oversight of the ECB. While it is independent, it should still be subject to oversight, especially since it has taken on a very active role in the crisis, amassed significant power and influence as well as taking on new roles such as financial market supervision.
The ECJ has not answered some important questions referred to it by the German Constitutional Court (GCC). It is hard to imagine that the GCC will be satisfied with the ECJ opinion. There seems to be little discussion over some crucial issues raised by the GCC including – whether bond purchases can be unlimited or not, and whether the ECB should be senior to other investors if it ever came to a restructuring of bonds purchased. The potential acceptance of the OMT as a form of economic policy is also likely to be an issue for the GCC, which suggested in its ruling that the programme is ‘ultra vires’ suggesting the ECB has exceeded its mandate.
The GCC cannot rule on EU law and must accept the final ruling of the ECJ. However, as it pointed out in its original response to the case, if it feels the OMT is illegal, then it has an obligation to “refrain from implementing it” at least for German “constitutional organs”. It would then face a stark choice of dropping its objections almost entirely or asking for the Bundesbank not to participate in any OMT programme. The latter could be enforced by the Bundestag refusing to approve any bailout linked to the OMT and could well therefore make the OMT invalid.
But such a legal and political dispute between the largest EU member and the ECJ could be a huge problem. It seems likely the ECB would challenge the prohibition of the Bundesbank taking part in the OMT at the ECJ – thereby setting up a direct conflict between the ECJ and the GCC. These discussions and rulings will be of crucial importance for German sovereignty and as a legal precedence in the EU. Similarly, if the GCC does overturn its concerns, it could de facto be seen as having given into the ECJ. The German Constitutional Court asked the European Court of Justice for an opinion. And it did not ask it whether or not the outright monetary transmission (OMT) mechanism is legal, but about what measures the ECJ would suggest to make it legal.
In fact, the German Court has made it utterly clear that the ECB overstepped its mandate with the OMT programme, and that this programme violates EU primary law. The GCC raised six major issues in relation to the OMT. First, the OMT programme may lead to a significant redistribution of wealth among the states of Europe if the bonds acquired are held until maturity. The GCC says that the ECB is not empowered to bring about such a redistribution of wealth.
Second, the selective purchase of the government bonds of crisis-afflicted countries is an economic policy measure. The GCC says that the ECB is not authorized to participate in economic policy measures. Third, a procedure that differentiates between individual EU member states is fundamentally alien to the ECB system. Fourth, he OMT programme is the functional equivalent of the corresponding European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) bailout programmes, but is not subject to any democratic controls.
Fifth, the ECB’s intention to reduce differences in interest rates on government bonds supports the contention that the OMT constitutes monetary state financing, which is prohibited by article 123 of Treaty on the Functioning of the European Union (TFEU). Sixth, interest differentials are essential ingredients of a functioning capital market and should therefore not be mitigated by the ECB. The GCC said very clearly, and with considerable emphasis, that the German parliament, the German government, and the Bundesbank are not only forbidden to participate in actions of European institutions that overstep their mandates, but must actively oppose the abuse of power by such institutions.
Moreover, it gave every German citizen the right to appeal to the Constitutional Court should these institutions not take the required actions. The Bundesbank therefore cannot be expected to participate in the OMT programme should the ECB Governing Council decide to activate it. It has been argued that this would not matter, as other central banks could in this case buy the government bonds, and the Bundesbank would still be participating in any write-off losses in the ECB system.
The ECJ judges will not rule for months. When they do, they cannot safely ignore the prior findings of the German court. The ECJ will aim to find a compromise and negotiate with the GCC. It knows that if a major constitutional conflict was to erupt in Europe, it could escalate in a way that could be detrimental to the Euro.
Professor John Ryan is Research Associate at the Von Hügel Institute of St Edmund’s College, University of Cambridge
