A Legal Analysis of the Gauweiler Case and Outright Monetary Transactions

Table of Contents

I. Introduction

II. Demarcation of Courts’ Competences

III. Competences of the ECB, its Role in the Financial Crisis and the OMT Programme

IV. Decision of the ECJ in Contrast to the Decision of the BVerfG
a. Admissibility
i. Perspective of the BVerfG
ii. Perspective of the ECJ
b. Economic and Monetary Policy under Art. 127 TFEU
i. Perspective of the BVerfG
ii. Perspective of the ECJ
c. Prohibition of Monetary Financing under Art. 123 TFEU
i. Perspective of the BVerfG
ii. Perspective of the ECJ
d. Reaction of the BVerfG

V. Consequences of the Ruling
a. Role of the ECB
b. The Relationship between the ECJ and the BVerfG

VI. Summary and Outlook

I. Introduction

On the 26th July 2012, a time characterised by uncertainties about the future of the Eurozone, Mario Draghi, President of the European Central Bank (ECB) declared “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”^[1] The announcement detached historic political, economic and especially legal incidents. Only two months later, the ECB published a press release, which proclaimed the introduction of Outright Monetary Transactions. These operations allowed for the purchase of government bonds form Member States (MSs), which take part in the ESFS or ESM and conquer macroeconomic structural adjustment programmes. Despite the fact that the press release was hardly ever followed by a binding legal act or instrument to implement OMT, the mere pronouncement had the power to reassure the financial markets. From that date on, there were no more such extreme spreads in interest rates for government bonds.^[2] But the announcement caused a judicial tremor, known as the Gauweiler case. In response to Gauweiler and others’ complaint against the OMT, the German Federal Constitutional Court (BVerfG) asked the Europan Court of Justice (ECJ) the first time in history for a preliminary ruling (Art. 267 TFEU) on the legality of the OMT programme.^[3] According to the BVerfG the ECB has exceeded its role provided by the Treaties of the European Union ultra vires by initiating a measure that a) has an economic and not a monetary nature (Art. 127 TFEU) and b) violates the prohibition of monetary financing (Art. 123 TFEU).^[4] The ECJ’s judgement was very different from that of the BVerfG, in the way that the OMT programme is compatible with EU law in the light of the European Court.^[5] Gauweiler had extensive implications on the powers of the ECB, the relationship between the ECJ and national courts (especially the BVerfG) and the constitutional framework of the European Economic and Monetary Union (EMU).^[6] In addition, the case made important contributions to the distinctions between economic and monetary policy.^[7]

Following this, the paper will provide a discussion on the new role for the ECB and the relationship between the ECJ and the BVerfG that arise from Gauweiler, both reveal the move from a rule-based approach to a more policy-oriented conception of the EMU.^[8] The previous paragraphs, on the demarcation between the courts’ competences, the power of the ECB and its role during the financial crisis and the respective judgements of the BVerfG and the EJC, will provide a valuable background for the discussion.

II. Demarcation of Courts’ Competences

The ECJ is entrusted with the task to enforce the EU law and to ensure the legal interpretation and application of the Treaties.^[9] The BVerfG, as the highest German supervisory authority of state power is responsible for the compliance of acts with the constitution. But its power is limited to German organs and institutions (Art. 93 (1) TFEU and Art. 100 GG).^[10] In spite of the absence of a formal hierarchy of courts on national and EU level, OMT and other EU policy instruments are not part of BVerfG’s competence in theory.^[11] Nevertheless, the BVerfG softens this clear demarcation and declared in 2010 “if a violation is manifest and that the challenged act entails a structurally significant shift in the allocation of powers to the detriment of the Member States”^[12], it claims to have the last word in such situations in order to preserve the “core content of the constitutional identity”^[13].^[14] In Gauweiler, the BVerfG asked the ECJ for a preliminary ruling procedure but used this self-declared right to define whether the OMT decision is an ultra vires act.^[15] Thereby the German Court left the backdoor open if the ECJ would not rule according to the BVerfG - an approach that seems to be highly conflict seeking.^[16]

III. Competences of the ECB, its Role in the Financial Crisis and the OMT Programme

The primary objective of the ECB is “to maintain price stability” and “support the general economic policies in the Union” under Art. 127 TFEU. Thereby it pursues a policy designed to guarantee a “single policy” for the EU (Art. 119(2) TFEU). This constitutes a transfer of massive political power to the ECB as an independent institution.^[17] The architecture of the ECB is characterised by its close cooperation with the national central banks and its two main organs, the Governing Council and the Executive Board.

From 2007 on, when the crisis came up, the ECB introduced several “non-standard” policy instruments to defer the Eurozone sovereign debt crisis.^[18] Through this crisis the EMU moved from a situation where only a small number of legal provisions were implemented in economic policy, to a totally different one with much more cooperation in economic policy.^[19]

One of these “non-standard” policy measures was OMT. Normally, the ECB engages in so called “open market operations” by providing the banking sector with loans to keep them solvent. The ECB influences price stability via interest rates; this is the so called transmission mechanism. During the crisis the mechanism was flagging and monetary incentives by the ECB lost effectiveness.^[20] In response to the dysfunction, the ECB would use the OMT to buy government bonds from Eurozone states in financial trouble that had no access to loans and were at risk of bankruptcy. Because the ban of monetary financing of governments under Art. 123 TFEU prohibits the direct purchase on primary markets, the ECB would purchase bonds indirectly in the secondary market.^[21] If implemented, the instrument would have retrieved the monetary transaction mechanism and secured the monetary singleness in the Eurozone.^[22]

IV. Decision of the ECJ in Contrast to the Decision of the BVerfG

In the preliminary ruling procedure the BVerfG referred two main questions to the ECJ: First, is the OMT programme a measure of economic and not monetary policy and thus an ultra vires act of the ECB in respect to Art. 127 TFEU? Second, does the OMT programme respect the ban of monetary financing of Eurozone states under Art. 123(1) TFEU? The subsequent paragraphs provide a summary of the judgements of the BVerfG and the ECJ with regard to the admissibility, the economic or monetary nature of the OMT programme and the prohibition of monetary financing.

a. Admissibility

i. Perspective of the BVerfG

The admissibility of the Gauweiler reference covers two related aspects: the reviewability of the OMT programme with respect to the legal nature of the press release, and the circumstances under which the reference was submitted by the BVerfG.

The BVerfG handed in the complaints against the OMT programme in spite of the fact that the measure has never been legally implemented and is based on a press release.^[23] According to the court, the admissibility “does not depend on whether the OMT Decision can already be understood as an act with an external dimension within the meaning of Art. 288 sec. 4 TFEU, or only as the announcement of such an act”. In contrast, it argues “the requirements for granting preventive legal protection are met” because the “execution of the OMT Decision could lead to [...] consequences that could not be corrected”.^[24] Therefore the objective need for judging the case before the BVerfG was given.^[25]

ii. Perspective of the ECJ

Concerning the legal nature of the press release, the ECJ declared that no further legal acts were required because the announcement of the OMT programme was preventive in character and not a merely preparatory act. The announcement of the OMT included the clear intention to take specific actions in financial markets. Additionally, the ECB highlighted its competences and ability to implement the policy to reinforce its intention.^[26] The assessment of the ECJ is in line with previous rulings^[27], where the ECJ states that a person is allowed to charge the invalidity of EU acts before national courts in order to prevent a possible illegal compliance of national authorities with this EU legislation, regardless of the fact whether the measure has been adopted in national law or not.^[28] Following this chain of arguments, the reference was admissible according to Art. 263 TFEU since the BVerfG asked in a preliminary ruling procedure whether the OMT programme is compatible with Art. 127 TFEU and Art. 123 TFEU.^[29]

b. Economic and Monetary Policy under Art. 127 TFEU

i. Perspective of the BVerfG

The BVerfG followed the approach presented by Gauweiler and others against the OMT programme. The prosecutors argued towards an infringement of the ECB’s mandate under Art. 127 TFEU. Thus, the OMT decision constitutes a transgression of the demarcation between MSs autonomous economic policy and EU monetary policy - the ECB abuses its power. The scheme is viewed not as a monetary policy measure as presented by the ECB, but rather as an economic policy measure that aims at saving the Eurozone’s persistence and goes far beyond the ECB’s supporting role granted in the Treaties. The BVerfG outlines three main characteristics responsible for the violation: OMT’s conditionality and parallelism with the states’ participation in ESM and EFSF financial assistance programmes, its circumvention (the possibility of undermining the conditions of these programmes), and its selectivity (which means the purchase of bonds of merely selected MSs).^[30]

ii. Perspective of the ECJ

Since the Treaties provide no clear definition on economic and monetary policy, the ECJ differentiates between both in term of a policy’s aim and its instruments. This object-oriented approach is in line with previous judgements, such as in Pringle. ^[31] The ECJ follows ECBs line of argumentation: the aim “[...] is not to facilitate the financing conditions of certain Member States, or to determine their economic policies, but rather to “unblock” the ECB’s monetary policy transmission channels”.^[32] The ECJ assessed the recovery of the functioning of the transmission mechanism as a monetary action because it serves the purpose of price stability and singleness of the monetary policy under Art. 127 (1) TFEU.^[33] By implication, a malfunctioning transmission mechanism would hazard the non-implementation of ECB’s monetary impulses and a threat to price stability and singleness of the monetary policy.

[...]

^[1] ECB. ‘Speech by Mario Draghi, President of the European Central Bank at the Global Investment Conference in London’, 26 July 2012, https://www.ecb.europa.eu/press/key/date/2012/html/sp120726.en.html (accessed 21 August 2017).

^[2] H. C. Hofmann, ‘Gauweiler and OMT: Lessons for EU Public Law and the European Economic and Monetary Union’, Working Paper Version from 19 June 2015, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2621933, (accessed 21 August 2017).

^[3] P. P. Craig, and M. Markakis, ‘Gauweiler and the Legality of Outright Monetary Transactions’, 2016.

^[4] BVerfGE, judgement of 12 January 2014, case: 2 BvR 2728/13, margin no. 1-24.

^[5] ECJ, judgement of 16 June 2015, case: C-62/14 Gauweiler and Others v. Deutscher Bundestag, EU:C:2015:400.

^[6] A. Hinarejos, ‘Saving the single currency? Gauweiler and the legality of the OMT programme’, EU Law Analysis, Version from 17 June 2015, http://eulawanalysis.blogspot.de/2015/06/saving-single-currency-gauweiler-and.html (accessed 21 September 2017); T. Tridimas and N. Xanthoulis, ‘A Legal Analysis of the Gauweiler Case: Between Monetary Policy and Constitutional Conflict’, Maastricht Journal of European and Comparative Law, vol. 23, no. 1, 2016, p. 17-39.

^[7] T. Tridimas and N. Xanthoulis, 2016.

^[8] A. Hinarejos, 2015.

^[9] H. Siekmann, ‘The Legality of Outright Monetary Transactions (OMT) and the European System of Central Banks’, in F. Rövekamp, M. Bälz, H. G. Hilpert (ed.), Central Banking and Financial Stability in East Asia, Cham et al., Springer Verlag, 2015, p. 101.

^[10] H. Siekmann, 2015.

^[11] Ibid.

^[12] BVerfG, judgement of 6 July 2010, case: 2 BvR 2661/06, margin no. 1-116.

^[13] BVerfG, judgement of 30 June 2009, case: 2 BvE 2/08, margin no. 1-421.

^[14] H. Siekmann, 2015.

^[15] M. Wendel,‚ Exceeding Judicial Competence in the Name of Democracy: The German Federal Constitutional Court’s OMT Reference’, European Constitutional Law Review, vol. 10, no. 2, 2014, p. 263-307.

^[16] J. Snell, ‚Gauweiler, ‘Some Institutional Aspects‘‚ European Law Review, vol. 40, no. 2, 2015, p.133-134.

^[17] H. C. Hofmann, 2015.

^[18] A. Hinarejos, 2015; P. P. Craig, et.al., 2016.

^[19] H. C. Hofmann, 2015.

^[20] P. P. Craig, et al., 2016.

^[21] A. Hinarejos, 2015.

^[22] P. P. Craig, et al., 2016.

^[23] H. Siekmann, 2015.

^[24] BVergG, judgement of 1 4 January 2014, case: 2 BvR 2728/13, margin no. 34-35.

^[25] T. Tridimas et al., 2016.

^[26] Ibid.

^[27] See ECJ, judgment of 10 December 2002, case: C-491/01 British American Tobacco (Investments) and Imperial Tobacco, EU:C:2002:741; ECJ, judgement of 3 June 2008, case: C-308/06 Intertanko and Others, EU:C:2008:312.

^[28] T. Tridimas et al., 2016.

^[29] Ibid.

^[30] BVergG, judgement of 14 January 2014, case: 2 BvR 2728/13, margin no. 70–83.

^[31] ECJ, judgement of 16 June 2015, case: C-62/14 Gauweiler, margin no. 46; ECJ, judgment of 27 November 2012, case: C-370/12, Pringle, margin no. 53 and 55.

^[32] Opinion of Advocate General Cruz Villalón, Gauweiler (C-62/14), margin no. 104.

^[33] ECJ, Case C-62/14 Gauweiler, margin no. 48.