Year LVII, 2015, Single Issue, Page 80

 

 

The new role of the ECB
in the European sovereign debt crisis*

 

LUCA LIONELLO

 

 

“If the euro fails, Europe fails”.[1] With these words, German Chancellor Angela Merkel summed up the political, even more than the economic, importance of the single currency for the process of European integration. In recent years, the risk of the Economic and Monetary Union (EMU) imploding under the weight of a series of defaults by one member state after another has necessitated the adoption of a series of measures to ensure the financial stability of the euro area. In this context, the European Central Bank (ECB), due to its federal vocation, has emerged as the institution best equipped to tackle the economic and financial emergency, and it has used all the appropriate instruments at its disposal in order to ensure the survival of the monetary union.[2] In shouldering this responsibility, the ECB has necessarily broken free from the role originally assigned to it by the Treaties and become a new driving force of the process of European political integration. 
 

The action of the ECB during the first phase of the crisis.

 At the outbreak of the sovereign debt crisis, the ECB was already busy dealing with the effects of the global financial crisis that had begun in the US in 2007. The extraordinary measures it had taken to inject liquidity into the financial system suddenly became insufficient when some member states, due both to previous bad management of their public finances and to the considerable cost of rescuing their banking systems, lost the ability to borrow on the international markets. The risk of multiple defaults due to the close interdependence between the member states led to a general destabilisation of the euro area. As levels of interest on the national debts of weaker states rose to unsustainable levels,[3] the European banking sector, which had invested heavily in the bonds of states at risk of default, found itself plunged into an even more acute liquidity and confidence crisis. In this way, a vicious cycle started between the sovereign debt crisis and the banking crisis, which international financial speculation, exploiting the structural fragility of European economic governance, helped to fuel. Basically, the absence of a European treasury able to intervene in support of the EU financial system as a whole left the monetary union vulnerable to the weaknesses of the individual member states.

 Faced with the deficiencies of the economic union, the ECB stepped in, introducing various measures of a conventional and an unconventional nature in order to mitigate the effects of the crisis. As well as gradually reducing the interest rate on the euro,[4] it approved a set of “enhanced credit support” measures for the banking and financial sector in the euro area in order to support financing conditions[5] and credit flows.

 At the same time, in response to the speculative attacks on the sovereign debts of several member states, the ECB launched an extensive programme of government bond purchases on the secondary market. In May 2010 the ECB approved the Securities Market Programme (SMP)[6] worth 209 billion euros. Even though the objective of this programme was, officially, “to address the malfunctioning of securities markets and restore an appropriate monetary policy transmission mechanism”,[7]its main effect was to curb refinancing costs for countries whose bonds were sold at unsustainable interest rates on international markets.[8]

 
The second phase: Outright Monetary Transactions and quantitative easing.

Following the introduction, in March 2012, of the European Stability Mechanism (ESM), whose role is to offer conditional financial assistance to countries in difficulty, the ECB was able to develop a more structured policy of bond purchasing on the secondary market. In his famous speech at the Global Investment Conference in London on 26 July 2012, Mario Draghi, the President of the European Central Bank, reiterated the irreversibility of the single currency and declared that the ECB, within its mandate, was prepared to do whatever it takes in order to preserve the euro.[9] The significance of these words, which immediately had the effect of reducing speculation and lowering interest rates on government debt, became clear in September 2012,[10] when the ECB set up a new government bond purchasing programme, called Outright Monetary Transactions (OMT). This programme marks a qualitative leap in the role that the ECB is prepared to play in the face of the sovereign debt crisis. Whereas the SMP had been a temporary measure with an upper limit on the resources available, the OMT programme, on the other hand, made provision for the unlimited purchasing of government bonds[11] of countries receiving conditional financial support in the framework of the ESM.[12] Essentially, the ECB declared that it was ready to provide unlimited monetary support as long as the country receiving the assistance was implementing a programme of macroeconomic adjustment under European and international supervision. Once again, the ECB justified this programme as a response to the need to restore correct functioning of the monetary policy transmission mechanism, which is influenced considerably by the government securities market.[13] Officially, then, the purchasing of bonds of different countries serves as a means of guaranteeing the basic financial conditions necessary to carry out ordinary monetary policy operations. In reality, however, the ECB’s choices now seem to be guided by more fundamental considerations on the causes of the debt crisis and the responsibility that the central bank must shoulder in order to ensure the survival of the single currency. The ECB and its president realise, in fact, that the causes of the sovereign debt crisis are essentially endogenous, in other words, they are linked to the internal fragmentation of the economic union, which still lacks common debt guarantees and effective coordination of budgetary policies. Therefore what is at stake, as a result of the crisis, is not only the smooth management of monetary policy, but also the very survival of the single currency, which has been seriously endangered by financial speculation against the sovereign debts of weaker states. Of course, if the single currency were to disappear, so would any possibility of implementing a monetary policy oriented towards price stability. It is with this in mind that the ECB has intervened to reduce financial instability of the euro area by using all the legitimate instruments at its disposal.

The quantitative easing (QE) measures adopted in January 2015 seem to bear out this new interpretation of the ECB’s mandate. The QE progamme is a new plan to purchase, each month until September 2016, 60 billion euros’ worth of bonds issued by all the eurozone countries and by the European institutions. The ECB will assume a 20% share of the risks associated with this operation, while the rest will be borne by the national central banks of the Eurosystem. The programme is designed to pursue the objective of price stability in a context that sees the European economy stuck in a prolonged state of stagnation accompanied by dangerous deflationary effects, which could trigger a new recession.Considering that, for the ECB, price stability consists of keeping the annual inflation rate just below 2%, the massive purchases of bonds by the ECB should ease the current financing situation, making it easier for companies and families to borrow, and thus supporting a recovery of investments, consumption and prices. In this case, too, the objective of the action, in first instance to avoid a deflationary spiral detrimental to price stability, must also be interpreted in consideration of the causes and risks of Europe’s ongoing economic crisis. Indeed, if the eurozone relapsed into an acute crisis phase, thefinancial stability of the monetary union and the stability of the single currency could once again be under threat. Because European governments have not yet succeeded in restoring growth at continental level and the process of fiscal consolidation has not been completed in many member states, the ECB wanted to create the best monetary conditions for bringing about a steady increase in the stability of the eurozone through economic growth underpinned by greater availability of liquidity and lower interest rates. As pointed out by Mario Draghi at the launch of the QE programme,[14] it is up to the governments to take advantage of the situation created by the ECB in order to boost the economy through structural reforms and, at the same time, consolidate their public finances.
 

The legality of the work of the ECB.

The new responsibilities taken on by the ECB in the management of the debt crisis have resulted in a transformation of its role, and this has inevitably led to numerous criticisms, particularly in relation to the less conventional measures, namely the OMT and QE programmes. The main objection to the work of the ECB is that it does not pursue genuine monetary policy objectives, but is intended, rather, to support the finances of some member states, given that the central bank in fact bears some of the risk associated with national government insolvencies within the monetary union.[15] The debate on the legality of the work of the ECB is not confined to the academic field, but has now drawn in the constitutional courts, too. Indeed, in January 2014 the German Constitutional Court (Bundesverfassungsgericht), for the first time in its history, raised a preliminary question before the European Court of Justice (ECJ) after receiving a complaint from a group of German citizens (Gauweiler and others) who questioned the legality of the OMT scheme.[16] The judges in Karlsruhe put two fundamental questions to the European court.[17] The first was whether the OMT programme can be considered an economic rather than a monetary policy measure, and on this basis in conflict with the ECB’s mandate.[18] The second was whether these transactions infringe Art. 123 TFEU which prohibits the ECB from providing member states with monetary financing.[19] The German court put these questions in order to establish whether the work of the ECB undermines the Stabilitätsgemeinschaftof the monetary union, given that this is a necessary condition for Germany’s membership of the single currency. 

In January 2015, Advocate General (AG) Cruz Villalón delivered his Opinion on the question referred for a preliminary ruling in the Gauweiler case. In principle, he confirmed the compatibility of OMT with the EU Treaties. Aware of previous case law of the Bundesverfassungsgericht in matters of European integration and of its concerns over the legitimacy of the measures taken by the ECB, the AG recalled the principle of sincere cooperation on the basis of which the ECJ should listen carefully to the doubts raised through the referred question, while the national courts must respect the ruling of the European judge.[20] Hoping that, in this way, the German court would comply with the decision of the ECJ, the AG adopted an eclectic argumentative strategy, making use of both literal and teleological interpretation of the Treaty rules in order to declare the setting up of the OMT programme legitimate.

First, the AG confirmed that the instruments adopted by the ECB are monetary and not economic policy measures and that, in line with what had previously been stated by the ECJ in the Pringle case, the objectives ascribed to different policies are the only criterion that can be used to distinguish between them.[21] In the case of the OMT programme the ECB wanted to restore correct functioning of the monetary policy mechanism which had been undermined by the speculative attacks against the sovereign debts of some of Europe’s member states. Therefore, according to the AG the real objective of the OMT programme was to ensure the conditions that would allow the ECB to pursue a monetary policy geared at achieving price stability,[22] and not to provide economic support to states hit by the financial crisis. The only spilling over of OMT into the sphere of economic policy would derive from the ECB’s role in the adoption of the conditionality policy demanded by the ESM. Indeed, under the Treaty establishing the European Stability Mechanism, the international institutions (European Commission, ECB and IMF) and the government needing financial support are required to sign a memorandum of understanding that sets out a plan of macroeconomic adjustment upon which the provision of the aid is conditional.[23] For this reason, in the AG’s view, in the case of implementation of the OMT programme, the ECB should, in any case, distance itself from the actions of the Troika.[24] Finally, even though the Treaty acknowledges that the central bank should enjoy broad discretion in the pursuit of its monetary policy objectives, the ECB must still introduce detailed regulations on the conditions and modalities of application of the OMT programme in order to comply with the principle of proportionality. 

As for the second question regarding the prohibition of the provision of monetary financing to euro area countries under Art.123 TFEU, the AG confirmed that this remains a fundamental rule of European economic governance as it ensures the stability of the monetary union.[25] For this reason, it must be applied in a strict and not a formalistic way, and its application should require more than simple ascertainment that the purchasing of securities was made on the secondary market and not on the primary one, which is prohibited by the Treaty.[26]The AG, despite being aware of the potential incompatibility of the OMT programme with Art. 123 TFEU, argued that no conflict with the Treaty exists as long as the bonds are purchased after a market price has naturally developed: “any implementation of the OMT programme must, if the substance of Article 123(1) TFEU is to be complied with, ensure that there is a real opportunity, even in the special circumstances in issue here, for a market price to form in respect of the government bonds concerned, in such a way that there continues to be a real difference between a purchase of bonds on the primary market and their purchase on the secondary market”.[27]In this way,thework of the ECBwould not undermine thefiscal discipline of the states, as the bond purchases would not be made under conditions excessively favouring states needing to borrow on the markets.[28]Accordingly, the OMT programme would retain its character as a monetary policy geared at restoring the financial conditions necessary for the pursuit of price stability, and avoid turning into true monetary financing of public finances in the member states.
 

Towards a more precise definition of the responsibility of the ECB in safeguarding the single currency.

The AG’s argument is convincing only up to a point. Just as the ECJ did in the Pringle case, the AG upheld the soundness of the European legal system by subjecting the action of the ECB to a number of conditions designed, in any case, to ensure its legitimacy. Therefore, this opinion, too, fits into the process of jurisprudential legitimation of EMU reform on which the further strengthening of the eurozone depends. However, the effectiveness of the support that the European court and the Advocates General are lending to the process of reform is determined by the strength of their legal arguments. In the case in question, although most of the AG’s points of analysis can be shared, he failed to take into consideration the scope of the ECB’s action as a whole, in other words, the real risks that the monetary union is running. Instead of merely mending the snags inevitably appearing in the European legal framework as a result of the ongoing process of transformation, the European judge should adopt a more substantive approach, taking into consideration the fundamental objectives of the EU Treaty and the unsustainable asymmetry between the economic union and the monetary union. 

As we have already said, the shockwaves created by the outbreak of the sovereign debt crisis undermined the stability of the whole EMU. In fact, the real aim of the financial speculation was to weaken not the single member states, but rather the single currency as a political project. Even though the ECB’s official line was that it was acting to guarantee the correct functioning of the monetary policy transmission mechanism,[29] its real objective was actually more ambitious. Since the system of economic governance currently in place made it impossible to intervene sufficiently rapidly and through adequate policies, the ECB took it upon itself to act, using all the instruments at its disposal, in order to protect the single currency. This assumption of responsibility certainly required it to abandon its rigid adherence to the terms of the EU Treaty.[30] Whereas the AG’s opinion confirming the nature of the OMT programme as a monetary measure is satisfactory, the arguments he used to refute the presence of occultmonetary financing are rather weak. Indeed, the ECB would be unlikely to purchase government bonds that have first been allowed to reach a market price. After all, the OMT scheme was invented precisely because bond purchase prices established by the market had become excessive and an unbearable cost for the states. Moreover, in a situation of severe financial instability and speculation, the market would be unlikely to establish a balanced price that takes into account both the risk of the investment and the level of availability of bonds. Clearly, then, bond purchases by the ECB are designed to correct distortions in the market, and guarantee the member states access to funding. The parallels between the action of the ECB and that of the ESM confirm the existence of a common objective: indeed, in their different ways, both these subjects want to provide financial support to states in crisis in order to guarantee the stability of the EMU. Whereas the ESM pursues the financial stability of the EMU as a whole, as already stated by the ECJ in the Pringle case, the ECB is interested in monetary stability. This, however, must no longer be understood simply as price stability, but as the safeguarding of the single currency.

In the light of these remarks, the AG’s analysis must be completed with two caveats. First of all, a more convincing solution to the apparent incompatibility of the OMT programme with Art.123 TFEU needs to be found. The purchasing of government bonds on the secondary market, given the size and the modalities of these operations, is in fact an indirect and limited form of monetary financing, independent of market logic. This conflict can probably be solved only through the adoption of a teleological interpretation of Art. 123 TFEU. Considering that the ban on monetary financing is meant to strengthen fiscal discipline in the member states, obliging them to seek resources on the international markets under the same conditions as other economic operators, this result is in any case ensured by subjecting the OMT programme to the implementation of the conditionality policy demanded by the ESM.[31] Even though OMT produce a partial risk sharing of sovereign debts, recourse to them does not weaken the fiscal discipline of member states given that it still requires the application of a macroeconomic adjustment programme under European supervision. In this way, the monetary union remains a Stabilitätsgemeinschaft, as required by the German Constitutional Court. Second, it is necessary to identify a more appropriate legal basis for the introduction of the extraordinary operations of the ECB. On the basis of a systematic interpretation of the EU Treaty, rather than the objective of price stability set out in Art. 130 TFEU, the most appropriate legal basis for the work of the ECB can be found in Art. 3.4 TEU, which states that “the Union shall establish an economic and monetary union whose currency is the euro”. The safeguarding of the single currency is, in fact, the ECB’s real objective, which in turn gives rise to all the other monetary policy objectives. The survival of the euro is the raison d'être of the European Central Bank: a monetary policy that respected this Treaty rigidly and to the letter while failing to do everything within its power to save the endangered currency would be inadequate and constitute an infringement of Art. 3.4 TEU. Clearly, these considerations derive from the fact that the EMU does not have an economic government – the body that, in times of crisis, normally acts in order to guarantee the stability of the financial system. This is precisely why the role assumed by the monetary pillar, although not strictly orthodox, may be considered justified on the basis of the ultimate goal that drives its actions. This interpretation of the interventions of the ECB opens the way for less rigid application ofthe Treaty provisions, including Art. 123 TFEU, in view of the extraordinary crisis situation in which the eurozone still finds itself.
 

Concluding remarks.

There are two general considerations that can be drawn from the above analysis.

First of all, the need to guarantee the survival of the single currency during the sovereign debt crisis has transformed the role of the ECB; once the guarantor of price stability, now it has become the guarantor of the stability of the monetary union as a whole. The ECB has thus earned itself a new role as conditional lender of last resort within the eurozone banking system and sovereign debt market.[32] This role is clearly provisional. The ECB is prepared to provide unlimited liquidity to the states and to the banks, but must insist on compliance with certain conditions, in particular, in the case of member states, the signing of a memorandum of understanding within the framework of the ESM. The ECB cannot, on the other hand, become a full lender of last resort because of the weakness of the economic union. The availability of unconditional monetary support could, in fact, lead the states into moral hazard phenomena and could expose the ECB to an excessive risk of losses, creating new threats to the financial stability of the eurozone and the very survival of the single currency.

 Second, even though the efforts of the ECB so far have served to keep the worst at bay, they have nevertheless not been sufficient to bring the eurozone out of the crisis. This, as we have said, is because the ECB has acted only as a substitute for an economic union that is still structurally weak, and because it is not equipped to compensate, effectively and definitively, for the absence of an economic government. Growth policies, risk sharing, enhanced competitiveness and the consolidation of public finances can be guaranteed only through the establishment of a European treasury able to flank the ECB and relieve it of the additional responsibilities it has assumed during the crisis. It is therefore urgent to continue the process of transforming the EMU along the lines traced by European Commission’s blueprint and the 2012 report by the four presidents,[33] both of which envisage completion of the monetary union through the creation of a banking, fiscal, economic and therefore political union. While the establishment of the banking union already represents a decisive step forward in terms of achieving risk sharing and financial stability of the eurozone, the real challenge is still the creation of the fiscal union. This, in particular, requires the euro area to adopt an additional budget of its own and acquire its own fiscal capacity on the basis of a transfer of sovereignty to European level.[34] If the eurozone countries delay any further the creation of an economic government, the crisis could enter a new acute phase, at which point the risks taken on by the ECB in order to guarantee the stability of the financial system could cause it heavy losses and result in a general weakening of its monetary policies.

 


* This essay was written in April 2015.

[1]Scheitert der Euro, dann scheitert Europa”, address by Angela Merkel to the Bundestag, 19 May, 2010.

[2] According to D. Wilsher, there are several reasons why the ECB was able to play a key role in the management of the sovereign debt crisis. “First, it is relatively immune from political or legal challenges to its decisions; second, core member states, unable to secure political agreement through parliamentary processes for large-scale transfers to peripheral states, were content to allow the ECB to provide funds that did not feature in their national debt figures and third, its legal remit has turned out to be rather more flexible than previously imagined, allowing it to become, uniquely, a non-sovereign lender of last resort to maintain financial stability”. D. Wilsher, Law and the Financial Crisis: Searching for Europe’s New Gold Standard, European Law Journal, 2014, p. 254.

[3] In the wake of the outbreak of the crisis in Greece in 2009, the cost of national debt rose to unsustainable levels in other countries: in Ireland and Portugal in 2010, followed by Italy and Spain in 2011, and finally Cyprus in 2012. To a lesser extent, speculation also affected the sovereign debt in France and Belgium.

[4] Since July 2011, the ECB has gradually reduced the interest rate on the euro from 1.50% to 1.25%, 1.00%, 0.75%, 0.50%, 0.25%, 0.15%, and finally 0.05% in September 2014.

[5] The ECB has ensured the availability of credit for the European banks in several different ways. First of all, it provided them with liquidity through fixed-rate full allotment auctions, which resulted in the immediate availability of huge amounts of resources. Second, the ECB approved longer-term refinancing operations in order to increase capitalisation of the financial sector. Third, the requisites for receiving credit from the Eurosystem were relaxed. Finally, the ECB authorised the national central banks to provide liquidity to solvent financial institutions or financial groups experiencing temporary liquidity problems.

[6] See Decision 2010/281/EU of the European Central Bank of 14 May 2010 establishing a securities market programme. Text available at: https://www.ecb.europa.eu/ecb/legal/pdf/l_12420100520en00080009.pdf.

[7] Press release from the European Central Bank, “ECB decides on measures to address severe tensions in financial markets”, 10 May 2010. The monetary policy transmission mechanism is  the process through which the monetary policies of the central bank affect the real economy. Cf. P. Sester, Plädoyer für die Rechtmassigkeit der EZB-Rettungspolitik, Recht der internationalen Wirtschaft, 2013, pp. 454-455.

[8] Indeed, when demand for bonds on the market increases, interest rates fall. Since massive purchasing of government bonds can increase the money supply and consequently the level of inflation, the ECB decided to neutralise its previous monetary policy operations by re-absorbing from the market all the liquidity that it had injected into the system.

[9] “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro, and believe me, it will be enough”. Address by Mario Draghi at the Global Investment Conference in London, 26 July 2012.

[10] Press release by the European Central Bank, Technical features of Outright Monetary Transactions, 6 September 2012.

[11] The ECB purchases government bonds under the same conditions as private investors (pari passu). Even though this constitutes a risk for the ECB, which would suffer hefty losses in the event of a state defaulting on its sovereign debt, the presence of a preference on credit could discourage other purchasers from investing in the debt of the states involved in the purchase plan. Cf. R. Bardy, Le mécanisme européen de stabilité et la BCE, RAE-LEA, p. 745; P.J.J. Welfens., Die Zukunft des Euros, Berlin, 2012, p. 128. It is to be remarked that, to date, the ECB has recorded good earnings from its purchases of government bonds.Cf. C. De Sousa, F. Papadia, Has the European Central Bank transformed itself into a hedge fund?, 8 March 2013, www.bruegel.org.

[12] The ECB did not specify, however, how the support programme would be monitored by the Troika and whether purchased bonds could be got rid of asa means of penalising a state failing to respect the terms of the agreement.

[13] In fact, Art. 18 of the Statute of the European System of Central Banks (ESCB) establishes that the ECB can purchase government bonds on the secondary market in order to guarantee the ordinary management of its monetary policy. The ECB’s intervention on the secondary market is envisaged by Council Regulation (EC) No. 3603/93 of 13 December 1993. The current debate on the legitimacy of the OMT programme could make it necessary to specify more precisely the monetary operations that the ECB can carry out. Cf. F. Cromme, Von ESM und Fiskalpakt zu einem makroökonomischen Rechtssystem der EU, Die Öffentliche Verwaltung, 2013, p. 596.

[14] Press conference with the President of the ECB, Mario Draghi, 22 January 2015. The text is available at: www.ecb.europa.eu/press/
pressconf/2015/html/is150122.en.html#qa.

[15] Cf. J. Weidmann, (2013) Eingangserklärung anlässlich der mündlichen Verhandlung im Hauptsacheverfahren ESM/EZ. The text is available at:
www.bundesbank.de/Redaktion/DE/Kurzmeldungen/Stellungnahmen/
2013_06_11_esm_ezb.

[16] The unconventional monetary policy measures taken by the ECB have been harshly criticised by a broad section of the German legal doctrine which argued that the ECB’s true objective was to supply monetary financing to member states in breach of the European Treaties. In short, the adoption of the OMT programme would have led to a sharing of the risk of default within the euro area. See, in this regard, M. Seidel, Europäische Währungsunion und rule of law, ZEI Working Papers; M. Seidel, European Currency Union and Rule of Law, CESifo DICE Report 10 (3) (2012), p. 39; A. Winkler, EZB – Krisenpolitik: OMT-Programm, Vollzuteilungspolitik und Lender of Last Resort, Wirtschaftsdienst, 2013, p. 282; M. Vogel, Die europarechtliche Bewertung der Euro-Rettung, Zeitschrift für Staats- und Europawissenschaften, 2012, pp. 487-488.

[17] Decision of the German Constitutional Court, 14 January 2014. In the Gauweiler case, the German court exercised its jurisdiction ultra vires, reaching the non-definitive conclusion that the ECB had in fact operated outside the limits established by the Treaty. On the basis of the Honeywell case law, the judges in Karlsruhe, before taking a final decision, nonetheless raised a preliminary question before the ECJ. Cf. A. Hinarejos, The Legality of the OMT Programme: The AG Opinion in Gauweiler, text available at: http://eulawanalysis.blogspot.co.uk/2015/01/
is-ecbs-omt-programme-legal-advocate.html.
The German Constitutional Court has developed a consistent body of case law on the relationship between European integration and the constitutional identity of the Federal Republic. In particular, Germany’s decision to join the monetary union was conditional upon compliance with adequate guarantees of stability.
“Diese Konzeption der Währungsunion als Stabilitätsgemeinschaft ist Grundlage und Gegenstand des deutschen Zustimmungsgesetzes”. Judgement of the German Constitutional Court, 12 October 1993, par. 148. What is more, Art. 88 of the German Constitution states that the functions and powers of the Bundesbank “can be transferred, within the framework of the European Union, to the European Central Bank, which is independent and is bound to pursue the primary purpose of safeguarding price stability”. An evolution of the Economic and Monetary Union towards a transfer union in which the ECB could effectively finance countries in difficulty, pooling the risks associated with their debts, would be incompatible with the German Constitution for two reasons: because it would affect the conditions necessary for monetary stability, and because it would interfere with the exclusive sovereignty of the Bundestag in economic and budgetary policy matters. Cf. Judgement of the German Constitutional Court on the compatibility of the Treaty of Lisbon with German Basic Law, 30 June 2009, par. 249.

[18] According to the German judges, these doubts were substantiated by the fact that implementation of the OMT programme was to be conditional upon, and go hand in hand with, the activation of a support programme within the framework of the ESM, the fact that the programme was to involve the bonds of only some member states, and the fact that, through the provision of additional monetary support, the limits and conditions of the ESM aid programmes would effectively be circumvented.

[19] According to the German court, these doubts were substantiated by the fact that, in the case of the OMT programme, no provision was made for a quantitative limit on the purchase of government bonds, or for the need to allow a specific interval of time to elapse between the emission of government bonds on the primary market and their purchase on the secondary market by the ECB; neither was it stipulated that all government bonds purchased should be held until their expiry, in contrast with the logic of the market; that no specific requisites should be required regarding the reliability of the government bonds for sale, or that the ECB should not be treated as a preferential creditor for the purchase of securities.

[20] Opinion of Advocate General Cruz Villalón delivered on 14 January 2015, Case C 62/14, par. 64-66.

[21] Court of Justice, Judgement of 27 November 2012, Case C-370/12, Thomas Pringle v Government of Ireland, (2012) ECR 1 – 413, par. 54-56. According to the ECJ, whereas the monetary union is responsible for pursuing objective of price stability, in accordance with Art. 127 TFEU, the ESM, which is an economic policy instrument, must instead ensure the stability of the euro area as a whole.

[22] “In view of the situation mentioned above, the OMT programme has, so the ECB continues, a two-fold objective, the first direct or immediate and the other indirect: in the first place the aim is to reduce the interest rates demanded for a Member State’s government bonds in order, subsequently, to ‘normalise’ the interest rate differentials and thus restore the ECB’s monetary policy instruments”. Opinion of Advocate General Cruz Villalón, op. cit., par. 136.

[23] Art. 13.3 Treaty establishing the European Stability Mechanism “the Board of Governors shall entrust the European Commission – in liaison with the ECB and, wherever possible, together with the IMF – with the task of negotiating, with the ESM Member concerned, a memorandum of understanding (an “MoU”) detailing the conditionality attached to the financial assistance facility. The content of the MoU shall reflect the severity of the weaknesses to be addressed and the financial assistance instrument chosen”.

[24] Opinion of Advocate General Cruz Villalón, op. cit., Case C-62/14, par. 150.

[25] The Treaty prohibits the ECB from providing monetary support to member states both because this phenomenon, in itself, produces inflationary effects incompatible with the objective of price stability, and because, in this way, the states’ fiscal discipline would be weakened, encouraging them to engage in moral hazard behaviours.

[26] Opinion of Advocate General Cruz Villalón, op. cit., Case C-62/14, par. 225. Note that the preamble to Council Regulation (EC) n. 3603/93 states specifically that “purchases made on the secondary market must not be used to circumvent the objective of Art. 123 TFEU”.

[27] Opinion of Advocate General Cruz Villalón, op. cit., Case C-62/14, par. 252. The AG also specifies that it is up to the ECB to evaluate when a market price has actually been formed. In this way, the ECB is guaranteed a wide margin of discretion in the implementation of the OMT.

[28] Opinion of Advocate General Cruz Villalón, op. cit., Case C-62/14, par. 262. The objection that, as the ECB had not requested to be treated as a preferential creditor, the OMT could cause losses in the event of sovereign default was rejected by the AG on the basis that it nevertheless concerned a hypothetical scenario. Opinion of Advocate General Cruz Villalón, op. cit., Case C-62/14, par. 233-246.

[29] The ECB has justified its action also recalling the secondary objective of monetary policy, notably to lend support to the economic policies in the Union in accordance with Art. 127 TFEU. Cf. Opinion of the European Central Bank of 16 February 2011 on economic governance reform in the European Union.

[30] Cf. S. Cafaro, L’azione della BCE nella crisi dell’area dell’euro alla luce del diritto dell’Unione europea, op. cit., p. 65.

[31] According to F. Allemand and F. Martucci, a relaxation of Art. 123 TFEU was necessary in order to ensure the survival of the monetary union, which is one of the objectives of the Treaty. Cf. F. Allemand, F. Martucci, La nouvelle gouvernance économique européenne, Cahiers de droit européen, 2012, p. 430.

[32] Cf. P. De Grauwe, The European Central Bank as Lender of Last Resort in the Government Bond Markets, CESifo Economic Studies, No 59, 3/2013, 520-535; W.H. Butther, E. Rahbari, The ECB as Lender of Last Resort for Sovereigns in the Euro Area, CEPR Discussion Paper, n. 897. This is a function typically fulfilled by national central banks that are the ultimate holders of cash reserves and can therefore meet the needs of the market. The lender of last resort is responsible for avoiding financial panic and avoiding defaults by financial institutions that might trigger chain reactions liable to lead to the collapse of the entire market. A country’s central bank is able to fulfil this function because its ultimate source of financing is the power of taxation of the state. In short, a central bank cannot default unless the state to which it belongs also defaults. Cf. D. Wilsher, Law and the Financial Crisis: Searching for Europe’s New Gold Standard, European Law Journal, 241-283 (2014), pp. 255-256.

[33] Communication from the Commission, A Blueprint for a Deep and Genuine Economic and Monetary Union Launching a European Debate, Brussels, 30 November 2012, COM(2012) 777 final/2. Text available at:
http://ec.europa.eu/commission_2010-2014/president/news/
archives/2012/11/pdf/blueprint_en.pdf.
The Blueprint was developed in accordance with the Report by the President of the European Council, Hermann Van Rompuy, in close collaboration with the President of the European Commission, the President of the Eurogroup and the President of the European Central Bank, Towards a genuine economic and monetary union, Brussels, 5 December 2012, available at: http://www.consilium.europa.eu/
uedocs/cms_Data/docs/pressdata/en/ec/134069.pdf.

[34] On the creation of a separate budget for the eurozone, see: G. Rossolillo, Enhanced Cooperation and Economic and Monetary Union: a Comparison of Models of Flexibility, Il Federalista, this issue.

Share with