Year LVII, 2015, Single Issue, Page 94
A Clash of Courts:
German and European Judges Dispute
the New Role of the ECB
(and the Future of the Integration Process)
The present paper is a continuation of my analysis of the new role of the ECB. I here consider the question in the light of the judgement delivered by the European Court of Justice (ECJ) on the Gauweiler case in June 2015.
As I recalled in my first article, also published in this issue of the review, the Gauweiler case concerns a preliminary question raised by the German Constitutional Court (Bundesverfassungsgericht) after Gauweiler and other plaintiffs complained to the Bundesverfassungsgericht that theOutright Monetary Transactions (OMT) programme, which entitles the ECB to unlimited purchases of government bonds of countries receiving conditional financial support in the framework of the European Stability Mechanism, violated the sovereign prerogatives of the Bundestag.The judges in Karlsruhe, after an initial appraisal, deemed the complaint founded, but before declaring the action of the ECB ultra vires (i.e. falling outside the competences transferred, under the terms of the Treaties, to the European institutions) they decided to seek confirmation of their interpretation from the ECJ.
Specifically, the German court considered the OMT programme to breach the ECB’s mandate to deal exclusively with monetary policy, and also saw it as an infringement of Art. 123 of the Treaty on the Functioning of the European Union (TFEU), which prohibits the ECB from providing member states with monetary financing.
Echoing some of the arguments formulated by the Advocate General Cruz Villalón and developing others, the European court rejected the position of the German judges, ruling that the OMT programme, in fact, complies with the TFEU. As regards the alleged breach, by the ECB, of its mandate to focus solely on monetary policy, the ECJ rejected the German court’s claim that OMT constitute covert economic policy measures.
Although the two courts reached opposite conclusions, their analysis of these issues started from essentially the same legal premise. Indeed, they both accept that the nature of a given measure should be inferred primarily from its objectives, as well as from the instruments used to pursue it in practice. In the case of the OMT programme, the main effect of the transactions is that they reduce interest rates on the bonds of states that are beneficiaries of programme. However, the two courts interpreted this phenomenon differently: for the German court, OMT are an instrument intended to help finance the debt of struggling countries, whereas in the ECJ’s view they are meant to serve as a means of restoring correct functioning of the monetary policy transmission mechanism. The problem is that neither interpretation is supported by a true legal argument; both are, rather, the based on the analyses provided by the different expert authorities that intervened in the legal debate on the Gauweiler case. The German court based its opinion on the “convincing expertise” of the Bundesbank, which argues that spreads on sovereign debt interest rates reflect countries’ different levels of reliability risk, and that it is not possible to “divide interest rate spreads into a rational and an irrational part”. On the basis of the argument that all the financial markets do is fulfill the regulatory role assigned to them by the European Treaties, it was concluded, by the German court, that interfering with the formation of interest rates would have fiscal implications, making OMT an economic and not a monetary policy measure. The ECJ, on the other hand, espoused an entirely different analysis based on the opinion of the ECB, which instead considers the introduction of the OMT programme to have been prompted by the economic situation in the euro area, where the bonds of some member states were subject to high volatility and large spreads. The latter were attributable not only to macroeconomic differences between the member states, but above all to financial speculation linked to the numerous fears over the stability of the euro area as a whole.For this reason, the ECJ felt that the OMT programme could be deemed to have been implemented not primarily as a means of bypassing the market’s regulatory function, but rather for the entirely acceptable purpose of correcting the distortions and excesses caused by financial speculation, thereby restoring, on the bond market, the normal conditions necessary to ensure correct functioning of the monetary policy transmission mechanism.
As regards the matter of the compliance of the OMT programme with Art. 123 TFEU, the two courts once again based their respective analyses on the same premise, namely that the ECB, in accordance with Art. 18 of its statute, may legitimately purchase government bonds on the secondary market, but cannot use these as a means of circumventing the ban on direct purchases. However, they failed to agree on the question of whether, in practice, the ECB’s programme amounts to a form of monetary financing. The view of the judges in Karlsruhe was that OMT, in the way they are designed at least, circumvent Art. 123 TFEU insofar as they do not allow natural price formation on the bond market and could cause the ECB itself to suffer losses, especially as it is not treated as a preferential creditor for the purchase of securities. The ECJ dismisses these arguments. First of all, OMT can have an only limited impact on the formation of bond market prices, given that the ECB is required to allow a minimum period of time to elapse between the emission of government bonds and their purchase on the secondary market. Moreover, this purchase may not be either announced or quantified in advance. Instead, as regards the possible risks taken on by the ECB in purchasing government bonds of a country at risk of default, the European court points out that the ECB routinely takes decisions involving the risk of losses. From a legal point of view, the acceptability of a risk must be established primarily on the basis of the marketability of the government bonds purchased. Even though the ECB’s lack of preferential creditor status exposes it to the risk of the other creditors opting for a debt reduction, this cannot be considered sufficient proof that these transactions amount to a form of monetary financing, given that this risk is, in any case, an inherent part of bond purchasing on the secondary market, which is an activity explicitly provided for in the ECB statute.
In its judgement, the ECJ did not merely to respond to the German judges’ single objections, but tried to put together a more complex legal argument, dwelling on the objectives of Art. 123 TFEU and on the possible threats to correct economic policy management posed by the application of the OMT programme. Clearly, the prohibition of monetary financing, which deprives countries of the support of their central banks, is designed to encourage member states to pursue sound budgetary policies. In the opinion of the European court, the ECB’s application of the OMT programme should be subject to certain conditions, serving to ensure that member states are not induced to reduce their efforts to achieve fiscal consolidation. First of all, government bond purchasing on the secondary market should be allowed to continue only for as long as is necessary to restore proper functioning of the monetary policy transmission mechanism, and should therefore cease immediately upon the achievement of this objective. In addition, these transactions should not serve as a means of giving states the security of knowing that they can, in any case, count on the purchase of securities by the ECB on the secondary market, and that the interest rates of national government bonds will be harmonised without taking into account the macroeconomic differences between the different countries.Indeed, the programme should concern only marketable bonds of countries that are required to implement a structural adjustment plan in the framework of the European Stability Mechanism, and that are actually complying with this requirement. In addition, the ECB should retain the possibility of selling, at any time, the bonds it purchases, so as to be able to adapt the OMT programme to the behaviour of the member states and the evolving economic situation. These conditions, which effectively mean that member states cannot count on unconditional monetary support, serve to prevent the OMT system from encouraging states to reduce their commitment to achieving fiscal consolidation.In conclusion, the unlimited purchases of government bonds that the ECB undertakes to make are not to be understood as “unconditional” purchases, merely as purchases for which there are “no ex ante quantitative limits”. As the Court of Justice rightly points out, unlimited purchases of bonds that fail to respect the conditions outlined above would conflict with the rules of the European Treaties, for at least two reasons: first, the transactions could have the effect of giving some member states excessively favourable financing conditions, which could be entirely independent of their macroeconomic situation; and second, the programme would effectively result in instances of indirect pooling of the member states’ sovereign debts.
This debate between the European Court of Justice and the German Constitutional Court is extremely important not only because it provides an opportunity for assessing whether the OMT programme really is compatible with the European Treaties, but also because it allows us to see how national and European case law is reacting to the transformations taking place within the Economic and Monetary Union. Clearly, these two courts both realise that the need to manage the emergency created by the ongoing economic and financial crisis has resulted in a gradual centralisation of powers at EU level. In this context, the ECB, as one of the new holders of sovereignty at supranational level, has assumed political responsibility for protecting the single currency, being prepared to do everything within its power to achieve this. In the exceptional situation that saw every EU member state in danger of being overwhelmed by the financial collapse of the monetary union, the ECB stepped in to avert this risk; to this end it introduced a series of extraordinary measures, the boldest of which was the OMT programme. Considering that the Maastricht Treaty had not envisaged the Union ever having to face a crisis like the one Europe is currently experiencing, thisundertaking clearly demanded a broad interpretation of the ECB’s mandate. In the case in point, therefore, the ECB deemed it acceptable, in order to bring down sovereign debt interest rates,to adopt a plan of unlimited purchases of government bonds. Given the close interdependence that exists between economic and monetary policy, it is not easy to demonstrate that this measure infringes the limits set by the TFEU; similarly, it is difficult to reach an unambiguous interpretation of economic phenomena. Clearly, a system like the OMT programme produces multiple effects together, insofar as it plays a role both in restoring correct functioning of the monetary policy transmission mechanism, and in alleviating the costs of funding member states hit by speculation. In other words, the programme produces hybrid effects that help to guarantee the sustainability of the national debts of European member states, but also to ensure the effectiveness of the European monetary policy. However, when it comes to identifying the main effects of the transactions and deciding whether they are acceptable in the light of the European Treaties, the two courts do not see eye to eye. Referring back to the analysis just presented, it is possible to identify two main reasons for their disagreement.
First, the European and German judges chose to base their conclusions on the arguments presented by two different but equally authoritative institutions, respectively the ECB and the Bundesbank. There were no legal reasons for this choice, which in reality was motivated by trust: whereas the German court decided to trust the Bundesbank, the European court preferred to accept the ECB’s economic analysis. From a legal standpoint, neither of these choices can be said to carry more weight than the other. As remarked German judge Lübbe-Wolff in her dissenting opinion in respect of the decision to refer the question to the ECJ for a preliminary ruling, whenever the legitimising power of the law is weak due to a lack of clarity, judges should refrain from deciding. Since the judges, in this case, lacked appropriate knowledge for interpreting economic phenomena and the law does not provide elements allowing an adequate evaluation of the question of the OMT programme, the judgement issued is at risk of reflecting mere opinion rather than application of the law. In the Gauweiler case, it would probably have been more appropriate if the German court had deemed the reference inadmissible.
Second, the ECJ and the German court interpreted European law using two quite different approaches. The judges in Karlsruhe adopted a literal interpretation, namely that the EU institutions and member states are bound to avoid conduct prohibited by TFEU, and on this basis any interference of monetary policy with fiscal discipline is illegal. Accordingly, a monetary policy measure is not admissible if it has the effect of helping, even indirectly, to finance the sovereign debts of the member states. The European court, on the other hand, applied a teleological interpretation of EU law, supporting the idea that ECB should be allowed a broad margin in the exercise of its mandate, as long as the objectives of the Treaty rules are guaranteed. For this reason, the formal interference of the OMT programme with the rules of fiscal discipline set out in the Treaty, particularly in Art. 123 TFEU, is not a priori illegal, but acceptable to the extent that the rationale of these rules is preserved.
Moving on to a comparison of the two approaches, the German court’s literal interpretation is open to criticism for two reasons: first, because it sees the law as inapplicable to changing realities, and second, because it fails to accept the natural process of transfer of sovereignty from national to European level. On this basis, the teleological interpretation applied by the ECJ is preferable as it allows European law to be used to manage current problems, while nevertheless ensuring that the objectives of the legal provisions continue to be respected. In concrete terms, it is indeed entirely possible that one of the reasons the ECB wanted to reduce the spread between government bonds was to drive away the risk of default by some of the eurozone member states. From a legal point of view, this is acceptable to the extent that it can be justified by the real need to fix the monetary policy transmission mechanism; furthermore, it does not undermine the rules of fiscal discipline set out in the Treaty. Clearly, it is impossible for the German Court to accept this interpretation because it clashes with its reading of EU primary law, which is that the ECB must deal exclusively with monetary policy, while it is the responsibility of the national governments to bail out member states in difficulty.
As I see it, it would be better, rather, to acknowledge the reality of the current situation, in which the pursuit of price stability hinges on the survival of the single currency. An ECB monetary policy that focuses stubbornly and rigidly on efforts to reduce inflationary risks, but proves unable to do all that is legitimately within its power to do in order to eliminate the threats to the survival of the single currency, would fail in its mandate, which is (even before pursuing price stability) to safeguard the stability (and the very existence) of the single currency. The ECB can and must play its part in ensuring this objective, for example by adopting measures (like the OMT programme) designed to contain spreads, and thus to restore correct functioning of the monetary policy transmission mechanism and limit speculative attacks on struggling countries. Clearly all this must be accompanied by a set of guarantees, for example that there will be no violation of the rules of fiscal discipline set out in the TFEU and that the ECB will not assume any direct obligations for the debts of member states.
It is very likely that the stance adopted by the Bundesverfassungsgericht stems not only from a legal culture characterised by stricter (or more rigid) interpretation of rules, but also (above all) from the desire to continue to exert a certain influence over the evolution of the European legal order, by vetoing all acts liable to result in implicit transfers of sovereignty to the European level, beyond a level deemed acceptable. The BCE’s shouldering of new responsibilities, in order to safeguard the monetary union, is incompatible with this stance, as it requires a pragmatic approach to the application of the Treaty rules and rejects a rigid and intransigent one.
In now remains to be seen whether the German court will, in fact, be prepared to accept the preliminary ruling issued by the ECJ. Since the difference between the viewpoints of the two courts depends on factors such as their different analyses of economic phenomena and the opposite interpretation techniques they chose to use, the outcome of this issue will, in the end, depend not so much on the strength of legal arguments, but on the relationships between the various authorities involved and the competences of the two courts. In relation to the Gauweiler case, the German judges have already declared that they will not regard the ruling of the ECJ as either definitive or binding, given that ultimately, responsibility for judging compliance with the German Constitution lies with them. In response to this declaration, the European court preferred not to remind the German judges directly of the duty of national courts to comply with its judgement, merely recalling, in its ruling, the different roles and responsibilities of courts involved in a preliminary reference. For its part, the national court is required to verify the facts and establish whether there are any question marks over the interpretation of EU law that must be ironed out in order to decide whether there is a case to answer. It falls to the ECJ, on the other hand, to judge the interpretation or validity of EU law only on the basis of the facts reported by the national court. That being said, whereas the decisions of the Court of Justice on referrals under Art. 267 TFEU are binding on referring courts, national courts do not have the faculty to annul or declare invalid an act of an EU institution. Obviously, if the judges in Karlsruhe were to refuse to respect the ruling of the European judges, declaring the OMT programme ultra vires, the consequences would be tragic: the German court, in the name of German sovereignty, would deprivethe BCE of a necessary tool for tackling the ongoing crisis and therefore prevent it from acting; in addition, by rebelling against the authority of the ECJ, it would be the author of a grave infringement of EU law and be responsible for creating a rift between the national and European legal orders.
This possible breakdown in relations between the courts is clearly the fruit of the current phase in the process of European integration, where, in order to safeguard hard-won achievements, like the single currency, there is a need for new transfers of sovereignty to European level — something that can be achieved through, for example, the kind of extensive and flexible application of the ECB’s mandate illustrated by the OMT programme. As these developments unfold, the national governments still have to make the decision to embark upon a constituent phase through an amendment of European and national law. In the current transitional phase, every court is still endeavouring to fulfil its role as best it can: the European judges want to preserve the authority and unity of Europe’s evolving legal framework, while the national ones are trying to avoid conspicuous changes to their respective constitutions. The only way forward, in the face of this clearly untenable situation, is to seek a political solution through a process of treaty change aimed at resolving the current legal aporias created by measures introduced in order to address the sovereign debt crisis.
 L. Lionello, The New Role of the ECB in the European Sovereign Debt Crisis, The Federalist, 57 (2015), p.
 The plaintiffs argued that the OMT programme violates the principle of democracy laid down in the German Constitution (Art. 20 of the German Basic Law) and the constitutional identity of Germany, whose fundamental features are protected by the eternity clause (Art. 79 of the German Basic Law) and cannot be undermined by the process of European integration.
 In the Honeywell case, the German Constitutional Court ruled that when EU institutions commit ultra vires acts it is necessary to raise a preliminary question before the ECJ through a referral under Art. 267 TFEU. Cf. Decision of the German Constitutional Court, 6 July 2010, Honeywell, 2 BvR 2661/06, par. 303, par. 304.
 The ECJ first developed this argument in the Pringle case. Cf. ECJ, 27 November 2012, C-370/12, Thomas Pringle v Government of Ireland, (2012) ECR 1-413, para. 56; ECJ, 16 June 2015, C-62/14, Gauweiler (and Others) v. Deutscher Bundestag, (2014) ECR 1, par. 46; Decision of the German Constitutional Court, 14 January 2014, 2 BvR 2728/13, par. 69.
 Restoration of correct functioning of the monetary policy transmission mechanism is not an end in itself (Selbstzweck), but serves to guarantee the ECB the conditions it needs to develop a monetary policy geared towards price stability. “The ability of the ESCB [European System of Central Banks] to influence price developments by means of its monetary policy decisions in fact depends, to a great extent, on the transmission of the ‘impulses’ which the ESCB sends out across the money market to the various sectors of the economy. Consequently, if the monetary policy transmission mechanism is disrupted, that is likely to render the ESCB’s decisions ineffective in a part of the euro area and, accordingly, to undermine the singleness of monetary policy. Moreover, since disruption of the transmission mechanism undermines the effectiveness of the measures adopted by the ESCB, that necessarily affects the ESCB’s ability to guarantee price stability”. ECJ, 16 June 2015, C-62/14, Gauweiler (and Others) v. Deutscher Bundestag, (2014) ECR 1, par. 50. Various economists agree that the monetary policy transmission mechanism was not functioning correctly during the crisis and that the ECB’s intervention on the bond market played a fundamental role in rectifying this situation. Cf., Z. Darvas, S. Merler, The European Central Bank in the Age of Banking Union, Bruegel Policy Contribution, 2013, p. 3; G. Wolff, The ECB’s OMT Programme and German Constitutional Concerns, Think Tank 20, 2013.
The ECB’s opinion drawn up by Prof. Schorkopf was submitted to the ECJ on 17 January, 2013. Cf. F. Schorkopf, Stellungnahme gegenüber dem Bundesverfassungsgericht in den Verfassungsbeschwerden, 2 BvR 1390/12, 2 BvR 1439/12 und 2 BvR 1824/12 Organstreitverfahren 2 BvE 6/12. The Bundesbank presented its opinion on OMT in December 2012. Cf. Stellungnahme gegenüber dem Bundesverfassungsgericht zu den Verfahren mit den Az. 2 BvR 1390/12, 2 BvR 1421/12, 2 BvR 1439/12, 2 BvR 1824/12, 2 BvE 6/12, 21.12.2012.
 Decision of the German Constitutional Court, 14 January 2014, 2 BvR 2728/13, par. 71.
 ECJ, 16 June 2015, C-62/14, Gauweiler (and Others) v. Deutscher Bundestag, (2014) ECR 1, par. 72. Thus, compared with Germany, Spain was paying a higher interest rate on its debt not only because of the fragility of its public finances, but also because it was considered a weak country that would be an easy target in the event of a speculative attack against the euro area as a whole. For this reason the spread between the interest rates on the different countries’ sovereign debts no longer reflected only the macroeconomic differences between them, but also their degree of vulnerability to speculative attack against the euro zone.
 “Having regard to the information placed before the court in the present proceedings, it does not appear that the analysis of the economic situation of the euro area as at the date of the announcement of the programme in question is vitiated by a manifest error of assessment”. ECJ, 16 June 2015, C-62/14, Gauweiler (and Others) v. Deutscher Bundestag, (2014) ECR 1, par. 74.
 The ECJ clarified in the Pringle case that Art. 123 TFEU, unlike Art. 125, does not have a restrictive nature. Cf. ECJ, 27 November 2012, C-370/12, Thomas Pringle v Government of Ireland, (2012) ECR 1-413, par. 132.
in the event of debt restructuring, the ECB, not having preferential creditor status, would be treated in exactly the same way as the other creditors.
 These criteria were introduced by the ECJ. On the conditions regulating concrete implementation of the OMT programme, see infra.
 The intervention of the ECB could, in practice, produce the same effect as direct purchases of government bonds: if the bond buyers on the primary market knew for certain that the ECB would buy the same bond within a certain period of time on the secondary market, this would effectively transform these buyers into mere intermediaries. Cf. ECJ, 16 June 2015, C-62/14, Gauweiler (and Others) v. Deutscher Bundestag, (2014) ECR 1, par. 104.
 ECJ, 16 June 2015, C-62/14, Gauweiler (and Others) v. Deutscher Bundestag, (2014) ECR 1, par. 116. The conditions determining the marketability of bonds are established in Directive 2004/39/EC. Under Art. 40, “financial instruments admitted to trading in a regulated market are capable of being traded in a fair, orderly and efficient manner”. According to the ECJ, it falls not to the German judges, but to the ECB to assess whether a government bond meets these conditions. Some authors have argued that the bonds subject to the OMT programme are not really marketable since no investor is willing to buy them. Cf. M. Rüffert, The European Debt Crisis and European Union Law, Common Market Law Review, 2011, pp. 1777-1806, specifically p. 1788.
 ECJ, 16 June 2015, C-62/14, Gauweiler (and Others) v. Deutscher Bundestag, (2014) ECR 1, par. 113. “The adoption and implementation of such a programme thus do not permit the Member States to adopt a budgetary policy which fails to take account of the fact that they will be compelled, in the event of a deficit, to seek financing on the markets, or result in them being protected against the consequences, which a change in their macroeconomic or budgetary situation may have in that regard”, ibidem, par. 114.
 In this way the ECB, in fact, restricted the volume of government bonds available for purchase under the OMT programme, and consequently limited the effects that this programme on the financing conditions of the eurozone member states. Cf. ECJ, 16 June 2015, C-62/14, Gauweiler (and Others) v. Deutscher Bundestag, (2014) ECR 1, par. 116.
 The German judges, on the other hand, believed that the ECB would hold on to the bonds purchased until they matured, and interpreted this as further confirmation of the existence of a violation of Art. 123 TFEU. Cf. Decision of the German Constitutional Court, 14 January 2014, 2 BvR 2728/13, par. 126, par.127.
 At the same time these guarantees also reduce the risk of losses for the ECB. Cf. ECJ, 16 June 2015, C-62/14, Gauweiler (and Others) v. Deutscher Bundestag, (2014) ECR 1, par. 125, par. 126.
 Precise quantification of the bonds available for purchase would reduce the effectiveness of the programme.
 Cf. ECJ, 16 June 2015, C-62/14, Gauweiler (and Others) v. Deutscher Bundestag, (2014) ECR 1, par. 88.
 In his conclusions, the Advocate General stated that the OMT programme should not reduce interest rates on bonds in order to put them on a par with those of the other countries, but must take into account the market situation and the macroeconomic situation of the state involved. Cf. Opinion of Advocate General Cruz Villalón delivered on 14 January 2015, C-62/14 Peter Gauweiler (and Others) v. Deutscher Bundestag, par. 198.
 This would be the case, in particular, if the transactions covered most of the states’ debts and if non-marketable bonds were also accepted and kept until they matured.
 Dissenting opinion of Judge Lübbe-Wolff, Decision of the German Constitutional Court, 14 January 2014, 2 BvR 2728/13, par. 7.
 In order to declare these transactions valid, the German judges have requested compliance with a series of conditions that effectively distort the programme. Specifically, any form of reduction of the debts of the states involved should be excluded, bond purchases should be limited ex ante, and there should, as far as possible, be no interference in the formation of their price.
 The ECJ has clarified that application of the OMT programme does not completely exclude the possibility of losses for the ECB.Cf. ECJ, 16 June 2015, C-62/14, Gauweiler (and Others) v. Deutscher Bundestag, (2014) ECR 1, par. 116. This clearly means that the programme may, to an extent at least, produce fiscal effects and have the inevitable consequence of mutualising part of the member states’ sovereign debts. This effect, natural in a monetary union, complies with EU Treaty regulations to the extent that these effects are limited and, in any case, reversible.
The Advocate General underlined the ambiguity of the situation facing the court. “[T]here is a national constitutional court which, on the one hand, ultimately accepts its position as a court of last instance for the purposes of art. 267 TFEU, and does so as the expression of a special ‘cooperative relationship’ and a general principle of openness to the so-called ‘integration programme’ but which, on the other hand, wishes, as it makes clear, to bring a matter before the Court of Justice without relinquishing its own ultimate responsibility to state what the law is with regard to the constitutional conditions and limits of European integration so far as its own state is concerned. That ambivalence runs all through the request for a preliminary ruling, so that it is extremely difficult to disregard it entirely when analysing the case”. Opinion of Advocate General Cruz Villalón delivered on 14 January 2015, C-62/14 Peter Gauweiler (and Others) v. Deutscher Bundestag, par. 49.
 Cf. ECJ, 16 June 2015, C-62/14, Gauweiler (and Others) v. Deutscher Bundestag, (2014) ECR 1, par. 15.
 “Since Article 173 gives the Court exclusive jurisdiction to declare void an act of a Community institution, the coherence of the system requires that where the validity of a Community act is challenged before a national court the power to declare the act invalid must also be reserved to the Court of Justice”. ECJ, 22 October 1987, C-314/85, Foto-Frost v. Hauptzollamt Lübeck-Ost, (1987) ECR 1- 4199, par. 17.