The ECJ upholds the ECB’s bond buying programme: Preliminary reflections on the judgment of the Court in the Case C-62/14

  Darinka Piqani


On 16 June 2015 the Grand Chamber of the European Court of Justice (ECJ) issued its much awaited judgment in the Gauweiler case (Case C-62/14). The judgment was expected with great interest for at least two reasons: for the ECJ’s position on the validity of the ECB’s bond buying programme ‘OMT” and the interpretation of the Treaties in that regard, and secondly, for its potential implications for the relation between the ECJ and the German Constitutional Court (GCC) from which the reference originated in January 2014 (Order of 14 January 2014, BvR 2728/13).

The judgment did not surprise much: the European Court upheld the validity of the OMT decision of the Governing Council of the European Central Bank (ECB) of 6 September 2012 on a number of technical features of the Outright Monetary Transactions in secondary sovereign bond markets (hereinafter ‘the OMT decision’). The Court ruled that ‘Articles 119 TFEU, 123(1) TFEU and 127(1) and (2) TFEU and Articles 17 to 24 of Protocol (No 4) on the Statute of the European System of Central Banks and of the European Central Bank must be interpreted as permitting the European System of Central Banks (ESCB) to adopt a programme for the purchase of government bonds on secondary markets…’ 

The OMT Decision provides for the purchase in the secondary market –for an unspecified amount - by the ECB of government bonds of selected Member States that are subject to an adjustment programme in the context of assistance received from the European Financial Stability Facility or the European Stability Mechanism. The OMT Programme will be activated once the ECB decides that such intervention is necessary to address disruptions of the monetary policy transmission mechanism or the singleness of monetary policy. The Programme announced on 6 September 2012 has never been put into place, let alone incorporated in a formal legal act. Despite this, the communication between the GCC and the ECJ raises interesting points relevant for the constitutional dimension of the Euro crisis and more broadly for European constitutional law and the relation between highest courts in the EU. 

I would like to highlight the following reflections concerning the judgment:

Firstly, the judgment shows the artificial nature, from an economic point of view, of the divide between monetary policy and economic policy that the Treaties impose. Monetary policy is transferred to the Union level: according to Art. 3(1) (c) TFEU the Union has exclusive competence in that area. Economic policy is left with the Member States whose economic policies are merely coordinated at the EU level (Art. 119(1) TFEU). This division of tasks seems easy to maintain in legal theory but it does not seem that easy to uphold in practice, as the legal disputes in the context of the Euro crisis show. 

The ECB outlined the OMT programme in order to repair the transmission channels of its monetary policy with a view to maintain price stability. Due to the fragmentation of sovereign debt markets as evidenced, for instance, by the differences in yield spreads and due to the liquidity situation in several Euro zone member countries, the ECB was having difficulties in using the existing transmission channels to fulfil its task of safeguarding price stability. In order to improve the situation, the ECB devised the purchase in the secondary market of government bonds of selected Member States, namely those whose bonds were trading at excessive rates in the markets. However, according to the applicants in the main proceedings before the GCC, and the GCC itself, the OMT programme would impact the financing sources of the Member States, turning the programme into an economy policy measure. Hence, the ECB was allegedly acting beyond its conferred powers (monetary policy) or in the words of the GCC was acting ultra vires. Moreover, the fact that the programme would be attached to a conditionality programme of the EFSF and ESM and its selective nature (as opposed to the general nature that monetary policy measures usually have) would indicate that the OMT programme is a measure of economic policy (para. 69-83 of the GCC reference for a preliminary ruling).

Thus the issue here is whether the OMT programme, with the aim of safeguarding price stability and preserving the singleness of the Euro zone, but with possible effects on the economies of the Euro zone countries and therefore ultimately on the stability of the Euro zone, should be classified as a monetary policy measure or as part of the economic policies of the Member States. The ECJ seems not to exclude the fact that the programme ‘…might also be capable of contributing to the stability of the euro area, which is a matter of economic policy’ (para. 51). But according to the ECJ this would not question the fact that the OMT Programme would remain a measure of monetary policy. This brings us to the second observation whereby it is noted that objectives seem to supersede possible multiple effects.

Secondly, precisely because of this seemingly strict divide between monetary and economic policies and the difficulty flowing therefrom in situations in which a measure may have multiple effects, the ECJ in its judgment seems to give more weight to the objective of the measure rather than its effects. Instruments used are also relevant (para. 46). This approach allows the ECJ not to enter into specific considerations and decide which of the effects prevails: it rather takes the objective announced by a specialized and independent institution, the ECB – as the starting point of its analysis.

In the assessment of the ECJ the objective of the OMT programme, as announced by the ECB, makes it a monetary policy measure because it aims at safeguarding the singleness of the monetary policy and by ensuring that the ‘impulses’ or signals that the ECB sends with its monetary policy measures reach out to the various sectors of the euro area (para. 50). The disruption of these communication channels would make it impossible for the ECB to reach certain parts of the Eurozone and thus would threaten the singleness of the monetary policy, and ultimately the ability of the ECB to guarantee price stability. And here it comes: ‘a monetary policy measure cannot be treated as equivalent to an economic policy measure merely because it may have indirect effects on the stability of the euro area’ (para. 52). This is where Pringle (Case C-370/12) comes very handy for the ECJ. There the Court ruled that the ESM could not be considered as a measure of monetary policy for the only reason that it may indirectly affect the stability of the Euro; in this case the same logic applies to a measure of monetary policy. However, it is interesting to note how both the GCC and the ECJ use Pringle in order to reach different conclusions. For the GCC ‘purchases of government bonds may not qualify as acts of monetary policy for the sole reason that they also indirectly pursue monetary policy objectives’ (para. 64 of the GCC reference to the ECJ). For the GCC the effects of the OMT programme are primarily economic, hence the ECB would be acting ultra vires.

Another divide between the ECJ and the GCC concerns the instruments used for the OMT programme: whereas according to the ECJ the outright monetary transactions are authorised on the basis of article 18(1) of Protocol 4, for the GCC this programme constitutes a grant of financial assistance and as such it is a measure of economic policy (para. 65). What is striking in this argument of the GCC is the fact that it hardly refers to Protocol 4 which lies at the basis for this programme.

Furthermore, for the ECJ the selective nature of the programme and conditions, flowing from the EFSF or ESM framework, attached to it, are not arguments to put into question the announced objective and nature of the measures. Indeed, as problems in the transmission mechanisms may concern only some of the Eurozone members, it seems logical to me that also the response to those problems will concern only certain member states. As to conditionality to be applied to Eurozone countries benefitting from the OMT programme, the issue seems a bit more complicated. It is interesting to note that AG Cruz Villalón in his Opinion suggested that the OMT programme would be considered as part of the monetary policy only if the ECB, during the implementation period of the OMT, would refrain from getting involved in enforcing conditionality in the context of EFSF or ESM assistance. If the ECB would be involved in both programmes, namely EFSF or ESM assistance on the one hand, and OMT purchases on the other, the ECB would be influencing via a monetary policy instrument the economic policies of the Member States. It is even more interesting to note that the ECJ did not take this caveat proposed by the AG into consideration. However, it is difficult to reconcile the AG proposal with the legal responsibility of the ECB under the ESM Treaty to participate in negotiations and monitor the compliance with conditionality flowing from the assistance mechanisms. The ECJ gave many arguments, but what I find the most convincing is the one which says that compliance by Member States with obligations under EFSF and ESM does not automatically trigger the OMT and thus make them benefit from the purchases of government bonds (para. 62). Given that the OMT has as its objective maintaining price stability, it would be triggered only if there are disruptions in the transmission mechanisms of monetary policy. This is the sine qua non condition to be followed by the compliance of conditionality in order to avoid so called moral hazards.

Thirdly, the judgment raises the important issue of judicial deference in relation to acts of an independent executive institution, such as the ECB. The most obvious example, in this regard, is the assessment of proportionality of the OMT programme by the ECJ. It is worth recalling that proportionality is not an issue for the GCC as in its view the programme would be ultra vires, thus in transgression of competence. For the AG and the ECJ the OMT programme falls within the competence of the ECB (for the AG with the condition mentioned above), but the validity of the measure should be assessed from the perspective of proportionality. When assessing the proportionality of the OMT decision the ECJ recalled the broad discretion of the ECB due to the ‘choices of a technical nature and ….forecasts and complex assessments’ (para. 68). Thus the Court opted for a light proportionality review which would include the assessment of the following procedural requirements: firstly, a careful and impartial examination by the ESCB of all the relevant elements of the situation in question and secondly, an adequate statement of the reasons for its decisions (para. 69) The ECJ lightens its proportionality review: the examination by the ECB of all relevant elements of the situation is checked for manifest errors, and the obligation to state reasons – for an act which in fact was a press release hence the doubt about its completeness and transparency – does not require, according to the ECJ that the institution goes into every relevant point of fact and law (para. 70). According to the ECJ, this obligation should be assessed not only with reference to the wording of the measure but also its context and the whole body of legal rules governing the matters in question (para. 70).

Now, judicial deference may be desirable but that very much depends on the point of view. I doubt that the GCC, or more precisely those judges constituting the majority, will find this convincing and desirable especially when decisions of non-accountable institutions are at stake. From the perspective of any court judicial deference should be desirable, however, in the context of highly technical and complicated cases in which specialized analysis would be necessary. From a separation of powers perspective judicial deference would be desirable in the present context in which the ECB is an independent institution and in order to ‘…shield the ESCB from all political pressure in order to enable it effectively pursue the objectives attributed to its tasks…’ (para. 40) And last but not least, judicial deference would be desirable in such a delicate context for the Euro zone, or to put in the words of Judge Lübbe-Wolff ‘A judicial decision from which the future of the Euro may depend is per se an awkward matter, even if only consequences for the respective country are taken into account.’ (para 28 of her dissenting opinion).   

Fourthly, the judgment may have important implications for the relation between the ECJ and the GCC. It goes without saying that, the classification of the OMT programme as falling within the mandate of the ECB, the light proportionality review as well as the upholding of the measure in light of Article 123 TFEU (prohibition of monetary financing) are at stark contrast with the approach of the GCC. At least with what and how the GCC presented its point of view on the interpretation of the Treaties and the compatibility of the OMT decision with them. From reading the arguments of the GCC one may reach the conclusion that, despite the fact that the GCC asked the questions to the ECJ and despite repeating from time to time that it action would be ‘subject to interpretation by the ECJ’, the reference from the GCC is more a statement of its preliminary remarks rather than a set of questions. However, in the part of the reference entitled ‘possibility of an interpretation in conformity with Union law’, the GCC throws its formula of conform interpretation, meaning the ways in which the OMT decision could be interpreted in conformity with Union law and hence be considered valid.

Firstly the GCC states that the OMT decision might not be objectionable if it is interpreted or limited in its validity in a way ‘that it would not undermine the conditionality of the assistance programmes…’ of the EFSF or ESM. Here the ECJ, as mentioned above, did not accept the caveat proposed by the AG. It however confirmed that compliance with EFSF and ESM conditionality in the context of the OMT would ensure that ‘its monetary policy will not give the Member States whose sovereign bonds it purchases financing opportunities which would enable them to depart from the adjustment programmes to which they have subscribed’ (para. 60) It has to be seen whether this argument will count, for the GCC- as an interpretation that ensures the conditionality of the assistance programmes. To me this seems more as a convincing argument rather than a conform interpretation as suggested by the GCC. Secondly, another condition for the OMT to be considered as acceptable by the GCC is that it is only supportive to the economic policies of the Member States. According to the GCC, this requires that no debt cuts are allowed, that limits are put to the purchase of government bonds, and that interference with price formation on the market are to be avoided (para. 100 of the reference by the GCC). The issue of a debt cut, and whether or not the ECB should enjoy privileged creditor status, is especially important in view of the prohibition of monetary financing. I doubt whether the arguments of the ECJ on this point will satisfy the GCC: in a nutshell, the ECJ argues that the ECB as a central bank is obliged to take risks and that the risk ‘is inherent in a purchase of bonds on the secondary markets’ operation that the Treaties authorized without making it conditional upon the ECB having privileged creditor status (para. 126). Furthermore, as to the limits on the purchase of government bonds the ECJ answers by saying that these limits are inherent in the fact that certain types of bonds that, moreover, are issued only by Member States that undergo structural adjustment programmes will benefit from the programme. Most likely this will not convince the GCC which argues that, for instance, a limit linked to the maturity spectrum (1-3 years of bond maturity) would not be an appropriate limit as it could be circumvented by an increase in the volume of government bonds (para. 83 of the reference by the GCC). This issue reflects the GCC’s more general concern of unforeseeable losses for the Bundesbank and the assumption of unknown liabilities for third parties which, ultimately, are capable of affecting the capacity of the Bundestag to exercise its budgetary autonomy and Germany’s constitutional identity. Lastly, concerning the interference with price formation of bonds in the markets, the ECJ gives guarantees to the national court by saying that the ECB has made clear that there will be a minimum period between the issuance of the bonds in the primary market and their purchase by the ECB in the secondary market, and moreover, that the ECB will make no announcements concerning its intention to purchase government bonds in the secondary market (para. 106 & 107). It is interesting to note that the above arguments on the non-interference with price formation are presented as assurances deriving from the ECB rather than conditions to be fulfilled by the ECB. The ECJ seems to trust the ECB. The GCC in order to avoid conflict may decide to interpret these as conditions that the ECJ has put to the ECB and consider its concern exhausted. Only the future will tell what the approach of the GCC will be. 



Darinka Piqani is lecturer in EU law  at Leiden Law School/Leiden University College, The Hague

The views expressed above belong to the author and do not in any way represent the views of the HAS Centre for Social Sciences.