Our latest Saar Expert Paper is now online: Prof. Dr. Giegerich discusses the recent judgment of the German Federal Constitutional Court on the Public Sector Asset Purchase Programme of the European Central Bank. The article is directly available here.
The Long Road Towards a Genuine Central Bank – ECB and its OMT Program
Reflections and analysis of ECJ case C-62/14 – Gauweiler and Others
Taking the cue from the opinion of Advocate General Villalon, the European Central Bank (hereinafter ‘ECB’) decided to go ahead with its version of quantitative easing through a Governing Council decision on the 22nd January 2015, despite the likelihood of a prohibitory ruling of the Court of Justice of the European Union (hereinafter ‘CJEU’) hanging over its head. AG Villalon narrowly turned the tables towards the ECB, although not without reservations, and in the process rightfully deferred to the ECB in its role as a central bank to the Eurozone. While the appropriate nature and scope of a judicial body’s enquiry into monetary or economic affairs will remain a perennial controversy, it is undeniable that considerable discretion is to be afforded to monetary and economic authorities. Critics of the OMT program invariably argue that irrespective of the nature and function of central banks in general, the treaties have in structural terms limited the role of the ECB. As will be argued below, neither a reading of the treaties nor a perusal of the ECB statute however, supports the above proposition. It is in the context of reinforcing the credibility and legitimacy of the ECB and as an extension, the monetary integration of the EU, that the present case before the CJEU assumes critical importance. If the CJEU declares the OMT program to be incompatible with the powers assigned to the ECB under the treaties, it would conclusively obliterate ECB’s claim as the rightful monetary authority in the Euro-zone. On the other hand, the AG’s opinion, despite is moderated disquiet, presents an undesirable and in certain respects an unwarranted path for future monetary policy transmission in the Union. This piece attempts to unshackle the ECB from unmindful perceptions regarding the limitations imposed by the treaties, and additionally dissents from the AG’s suggestion on disengaging the ECB in its supervisory role under the ESM/ESFS financial assistance programs.
I. The Treaties do not come in the way of Monetary Policy
The Treaty on the Functioning of the European Union (hereinafter ‘TFEU’) in very broad terms entrusts the European System of Central Banks (hereinafter ‘ESCB’), headed by the ECB, to not only implement the monetary policy of the Union but also to ‘define’ the same. Further, the primary objective of the ESCB under the treaties has been determined as maintenance of price stability, without however, providing for any definition of what the term entails, thereby leaving it to the prudence of the ECB alone. In addition to that, the treaties have not limited the choice of policy instruments, which the ECB may deploy to attain such an objective. In recognition of the same the ECJ in the Pringle case remarked, “…it must first be observed that the FEU Treaty, which contains no definition of monetary policy, refers, in its provisions relating to that policy, to the objectives, rather than to the instruments, of monetary policy…” The court considered key interest rates as one of the components of monetary policy and held that “…the ESM is not entitled either to set the key interest rates for the euro area…” and hence does not encroach upon monetary policy of the Union. Likewise, AG Villalon rightly emphasizes judicial restraint and prescribes caution while undertaking an assessment of ECB policies so as to “…avoid the risk of supplanting the Bank…”.
Of equal significance is that Art. 18.1 of the ECB statute in laying out the tools of monetary policy transmission specifically alludes to the power of the ECB to buy ‘marketable securities’. Sovereign bonds clearly fall under ‘marketable securities’ and one could argue, solely on the basis of Art. 18.1 alone that the OMT program falls within the contours of the same. However, the AG considered the OMT program as having a basis under Article 18.1 and simultaneously, going beyond the same, in terms of its selectivity, objective and quantitative limit. He termed OMT program ‘unconventional’ in as much as the program was not in itself a monetary policy tool, but was a mechanism to ‘unblock’ the channels of monetary policy tools. In essence, the ECB’s position was that, in addition to having the competence to define monetary policy and the discretion to apply appropriate tools, it should also have the power to adequately effectuate that competence. In fact, it will not be an exaggeration to argue that under such extreme circumstances, ECB does not simply have the competence, but necessarily has the obligation under the treaties to effectuate its monetary policy responsibilities, a dereliction from which may attract legal proceedings. It is argued that, if the ECB is to be recognized as a genuine central bank, it needs to be afforded the flexibility to deploy a whole range of monetary policy instruments, conventional or otherwise, to discharge the above objective, especially when the treaties have not expressly limited the choices available to the ECB.
II. Dual role of the ECB – Wearing more than one hat?
The ECB press release notes that, the OMT program is to be pursued only against participating MS to the ESM/EFSF duly fulfilling all the attending conditions imposed by such ESM/ESFS financial assistance programs. In this respect, AG Villalon mirrors the apprehension of the German Federal Constitutional Court, “…the fact that the ECB plays an active part throughout the course of financial assistance programmes may make the OMT programme, in as much as it is unilaterally linked to those programmes, into something more than a monetary policy measure…” and as a consequence “…may become another instrument for enforcing the conditions of the financial assistance programmes…” At the outset, one fails to understand how the linkage between the OMT program and the ESM financial package conditionality, on one hand, belies the objective of the OMT program and on the other, how the suggestion of the AG alleviates such concerns. The fact that an inherently monetary policy measure is linked to an economic measure, does not of itself, renegade the essence and distinctiveness of the former as a monetary policy measure. Moreover there is nothing to indicate that the objective of the OMT program is to exhort member states (hereinafter ‘MS’), covertly so, in remaining committed to the ESM conditions, compliance of which can be adequately secured by the ESM itself. In the second instance, the fact that the OMT program, inadvertently operates as an additional instrument for enforcing conditions attached to the assistance programmes, does not, in the absence of that, as the AG himself admits, prevents the ECB from exerting “…pressure to bear on a State subject to a financial assistance programme by making, albeit unilaterally, the OMT programme subject to compliance with the conditionality agreed under the ESM…”. For instance the ECB in 2011 had strenuously called upon the Italian government to undertake certain structural adjustments in pursuance of its Italian bond buying initiative, however, only as a means to ensure that its interventions are effective and truly responsive to its objectives. Nonetheless, the AG opined that the ECB should absolve itself of all responsibilities under the ESM treaty, with respect to the monitoring of conditionality attached to ESM/ESFS financial assistance programs, at the onset of its OMT program. It is argued that the above suggestion neither ally concerns as regards the perception of the OMT program as an addendum to further economic policy, nor does it provide a reassuring approach towards the role of the ECB in the context of the ESM treaty. Discharging the ECB from its monitoring role under ESM financial assistance programmes, does not in any manner discard the conditionality that may nonetheless be imposed on the participating MS. In fact the AG permits a possibility of the ECB being “kept informed” and “being heard” by other members of the troika, in pursuance of which the ECB may decide to terminate the OMT program. Divesting the ECB from its monitoring responsibilities only prevents the ECB, from engaging in a “Dual Role” both as a holder of government bonds and monitor of financial assistance programmes. That alone, however, would not vary the nature and import of the OMT program. The OMT program will not readily transform into a wholly monitory policy measure, simply by ECB’s recusal from its monitoring responsibilities under the ESM. Since ECB’s supervisory role does not in effect characterize the OMT program as either a monetary or an economic measure, a stand-alone criterion in the opinion of the AG, it is difficult to reconcile the AG’s insistence on detaching the ECB from the ESM.
The AG is further confounded by his impression that the ECB in its supervisory capacity plays a “significant, not to say decisive” role. In this regard, the AG’s relies on Beukers’s article to bolster his own proposition on the burgeoning influence of the ECB in its monitoring activities. It is submitted that such assuming reliance is an exercise in futility, since Beukers himself does not advance any tangible or pertinent evidence as regards the monitoring role of the ECB, to support his claim. On the contrary, a perusal of the ESM treaty suggests a rather supplementary role for the ECB. Under the ESM treaty the “…European Commission in liaison with the ECB…” is to monitor compliance, which only goes to show that the primary obligation rests with the European Commission and not the ECB. The AG acknowledges the same when he remarks, “…The ECB shares this task with the Commission, although it is the latter on which the ESM Treaty confers even more important functions…”. Further, decisions regarding either the adoption of the monitoring report or proposed action in pursuance of the same, lies exclusively with the Board of Directors under the ESM. In recognition of this the ECJ in the Pringle case had noted, “…the duties conferred on the Commission and ECB within the ESM Treaty, important as they are, do not entail any power to make decisions of their own…” The above analysis indicates that the ECB functions within clearly demarcated boundaries and does not wield any more authority, otherwise than what is prescribed under the treaties.
On a related note, grave concerns surface regarding the vulnerability and effectiveness of the monitoring process under ESM/ESFS financial assistance programs, in the absence of ECB’s robust financial and monetary expertise, especially in the backdrop of its increasing responsibilities under the Single Supervisory Mechanism. Similarly, by the AG’s own admission that economic policy and monetary policy are in essence two sides of the same coin; it is inconceivable how the troika could remain in isolation from the ECB. Moreover, ECB’s recusal from the troika casts aspersions on the European dimension of the troika itself, and would involve a substantial reworking of the current framework.
The AG’s opinion, notwithstanding its careful attempt at expending the cross sections of economic and monetary policy, is bereft of any reliable assistance to the CJEU. Apart from its drastic suggestion to distance the ECB from the troika, several other aspects of the opinion border on dangerous terrain. One wonders whether the ‘judicial hands off’ approach endorsed by the AG disappears into nothingness, especially in the light of forty-four paragraphs in the opinion being worded on the examination of whether the OMT program conforms to the ‘proportionality’ test. Further, prescribing an obligation for the ECB to state reasons while pursuing its OMT program opens the doors to a wide-ranging and intrusive judicial examination of the circumstances leading up to the OMT program. There is no doubt in the author’s mind that an ostensibly lighter scrutiny of the ECB decision was undertaken, in the instant case, since the measures had not been implemented as of the date of the opinion.
It is argued that, whereas the effectiveness and continued vigor of the OMT program is a matter prone to varying degrees of divergent opinions, the competence and authority of the ECB and its role as a central bank to the Eurozone should be beyond reproach. In this regard, AG Villalon’s opinion ought not steer the CJEU in the direction that it prescribes and should not serve as either as a template for future judicial intervention nor as a reasonable alternative for the ECB’s intervention through its OMT program.
 Kanad Bagchi (email@example.com) was a research assistant at Europa-Insitut, Universität des Saarlandes, Germany. Views of the author are his own and should not be imputed to the institution he represents.
 ECB Press Release, ‘ECB announces expanded asset purchase programme’, 22nd January 2015. Can be accessed here.
 Case C 62/14, Opinion of the Advocate General Villalon, delivered on 14 January 2015 (Hereinafter referred to as ‘AG opinion’). Can be accessed here.
 Goldmann, Matthias, ‘Adjudicating Economics? Central Bank Independence and the Appropriate Standard of Judicial Review’, German Law Journal, Vol. 15 No. 02, pp. 265-280. Can be accessed here.
 Article 127 (2), Treaty on the Functioning of the European Union (hereinafter referred to as ‘TFEU’).
 Article 127 (1), TFEU.
 Thomas Pringle v. Ireland, Case C 370/12, para 53. (Hereinafter referred to as ‘Pringle case’). Can be accessed here.
 AG opinion, para 111.
 AG opinion, para 120.
 Article 263, TFEU.
 AG opinion, para 145.
 AG opinion, para 146.
‘European Central Bank to ‚actively‘ buy bonds to fight eurozone debt crisis’, The Telegraph 8th August 2011. Can be accessed here.
 AG opinion, para 150.
 It was on the sole criteria that the argument regarding selectivity was rejected by the AG stating “I do not find that objection convincing since it does not demonstrate that selectivity in itself makes the OMT programme an economic policy measure”, para 153. The same standard was adopted for the argument relating to circumvention, para 157.
 AG opinion, para 143.
 Beukers, T., ‘The new ECB and its relationship with the eurozone Member States: Between central bank independence and central bank intervention’, Common Market Law Review (2013) 50, Issue 6, p. 1588 et seq. Can be accessed here.
 Article 13 (7), Treaty Establishing the European Stability Mechanism.
 AG opinion, para 144.
 Pringle case, para 161.
 The AG notes in his opinion, “…but in economic terms it may be stated that any monetary policy measure is ultimately encompassed by the broader category of general economic policy…”, para 129.
 Miguel Otero Iglesias, ‘We should be wary of removing the ECB from the troika to facilitate the use of outright monetary transactions’, LSE Comment, 19th January 2015. Can be accessed here.
 In this regard the AG remarks, “…it is clear that they are far from achieving the degree of completeness that would be appropriate if they were regulated in a legal act. A full review of proportionality will be possible only in the light of any such regulation…” . para 162.
Suggested Citation: Bagchi, Kanad, The Long Road Towards a Genuine Central Bank: ECB and its OMT Program, jean-monnet-saar 2015, DOI: 10.17176/20220308-164444-0