16 June 2015

Why has the ECJ found OMT to be legal?

For background on this entire issue, see our previous detailed blog. The full ruling is here and the press release here. For the referral from the German Constitutional Court see here and out take here.

The ECJ supported the ECB for a number of key reasons:

  • OMT contributes to “singleness” of single monetary policy, a requirement of the EU treaties.
  • By doing so the OMT helps contribute to price stability, the primary objective of the ECB.
  • While the programme may have indirect economic effects it cannot be seen as economic policy as its primary and direct objectives are monetary.

A monetary  policy  measure  cannot  be  treated  as  equivalent  to  an  economic  policy measure merely because it is likely to have indirect effects on the stability of the euro area.

  • The EU Treaties permit purchases of bonds on the secondary market as foreseen under the ECB OMT.
  • The programme is seen as proportionate as it is seen as appropriate to maintain price stability.
  • The ECJ also highlights that the OMT has some conditions built in, firstly the need for a bailout programme, but also:

Conditions include, in particular, the fact that it is strictly subject to the objectives pursued and is limited to certain types of bonds issued by Member States selected on the basis of precise criteria linked to those objectives.

  • The court does note that the purchase of bonds on the secondary market could become “equivalent” to purchases on the primary market if they are within a defined period and “under conditions” which allowed the secondary market players to act as “intermediaries” for the states. However, the court suggests it is satisfied by “safeguards” offered by the ECB in this respect, particularly the implementation of a “minimum period” between the issue of a bond and its purchase by the ECB.
  • One further important point in the ruling is that it reinforces the ability of the ECJ to oversee and rule on ECB related issues. As we noted before, some recent ECJ opinions and rulings have erred on the side of caution and hinted at an unwillingness to rule on ECB issues for fear of stepping on its independence. This ruling stresses that, since the ECB’s rules and conditions are laid out in the treaties, it is very much under the purview of the court.

ECJ lays out few conditions for the ECB’s OMT

As we noted before, one of the key issues in all of this was the conditions attached to ECB purchases. While the German Constitutional Court was probably realistic about the expected approval of the programme by the ECJ, there was a strong feeling that conditions should be attached.

However, the ECJ ruling seems to offer little in the way of conditions, even less so that the opinion by the ECJ Advocate General in January. Interestingly, the ECJ chose not to take on comments by the Advocate General which were seen to limit the ECB’s involvement in the EU/IMF/ECB Troika if and when the OMT is used. It also seems likely that the approach taken to Quantitative Easing (QE) which set limits on the amount of bonds from a single market which the ECB can own, along with the case put forward at the court, was sufficient to stop the ECJ requesting additional conditions.

Tough choices for the German Constitutional Court (GCC)

The case will now return to the GCC which will have to issue a final ruling on the original case brought to it. As we have said before, it was clear from the GCC’s original opinions and referral that it believed the OMT to be illegal. As such, it now has some tough choices to face up to.

One of the key concerns of the GCC was the potentially unlimited nature of the bond purchases.This concern seems to have been largely dismissed by the ECJ which suggests, despite the lack of a clear quantitative limit, the other conditions and limits (such as which bonds can be bought and when) result in a similar effect.

The German court also raised questions over whether the ECB would be a senior creditor or not and therefore whether it would need to take losses in a debt restructuring. While this issue is raised in the backgroun to the case it does not seem to be addressed directly in the ECJ ruling, suggesting it does not see it as relevant to the case.

The ECJ also dismissed concerns that the OMT is an economic rather than monetary policy. It’s not clear yet whether the ECJ’s argument, that the economic effects are indirect rather than a targeted objective, will fly with the GCC. Given that the clear target of the programme was to help keep the euro together, it seems the ECJ argument here might be a bit weak.

How might the German Constitutional Court respond?

Given its very tricky predicament, second guessing its actions is incredibly difficult. It will have to tread a fine line in order to both maintain its credibility but not undermine EU law or the ECB’s actions (whether or not the latter should be a concern of the court or not is a separate question, but it has previously seemed to acknowledge outside circumstances in its rulings).

  • It is important to note that the GCC cannot appeal the ECJ ruling so any response will have to be internal.
  • While it cannot rule on EU law or overturn what the ECJ has decided, it can rule on whether it believes Germany’s and the Bundesbank’s participation in this programme is legal under the German Constitution. That said, ruling that it was not would seriously question the legal underpinnings of the entire Eurosystem and Eurozone.
  • The GCC ultimately needs to decide if the OMT is in line with the German Basic Law (the German Constitution). But if it finds it not to be, the implication is that there are parts of the EU Treaties which are not in line with the Basic Law (German Constitution) since the OMT is seen as legal under the Treaties by the ECJ. The fallout from such a precedent could be significant. In fact this issue is hinted at in the ruling, and seems to be a point put forward by the Italian government in support of its view that the case should not be admissible.
  • It is hard to imagine such a ruling given the implications. But acquiescing is also not without consequence. This could set a precedent for the ECJ trumping national constitutional courts, something which the GCC may not want to encourage.