Ref. Ares(2014)2779179 - 25/08/2014
Date de réception
:
25/08/2014
TO THE PRESIDENT AND MEMBERS OF THE COURT OF JUSTICE OF THE EUROPEAN UNION
IN CASE C- 62/14
Gauweiler e.a. v German Bundestag and Federal Government
Referring Court: the German Constitutional Court (Second Chamber)
Written Observations of Ireland
Ireland, pursuant to Article 23 of the Protocol on the Statute of the Court of Justice,
qua Member State, represented by Eileen Creedon, Chief State Solicitor, Osmond
House, Little Ship Street, Dublin 8, acting as Agent, accepting service via e-curia,
assisted by Michael Cush, Senior Counsel and Mark J Dunne, Junior Counsel, both
Barristers and of the Bar of Ireland, has the honour of submitting the following
written observations to the Court of Justice on the questions referred for preliminary
ruling pursuant to Article 267 TFEU by the German Constitutional Court (Second
Chamber), by order of that Honourable Court of 14th January 2014 and received at
the Registry of the Court of Justice of the European Union on 10th February 2014
1
TABLE OF CONTENTS
1.
Introduction 3
2.
The Background to the OMT decision..........................................................4-6
3.
The ECB’s Securities Market Programme (SMP).......................................... 6-8
4.
Outright Monetary Transactions.................................................................8-14
5.
Key features of OMT...................................................................................14-16
6.
The effect of the announcement of the OMT decision.................................16-17
7.
EU Treaty provisions ...................................................................................17-21
8.
The ESM Treaty and the Decision in Pringle.................................................21-24
9.
The German Constitutional Court’s Decision...............................................24-33
10.
Conclusion..................................................................................................33-34
11.
Suggested responses to the questions asked by the referring court...........35
2
1.
Introduction
1.1 This case concerns a referral to the Court of Justice of the European Union of a
preliminary reference by the German Federal Constitutional Court as to the
compatibility of Outright Monetary Transactions (OMTs) by the European Central Bank
(ECB) with Articles 119, 123 and 127 of the Treaty on the Functioning of the European
Union (TFEU). The Federal Constitutional Court on 14 January 2014 expressed the
view that the OMT programme is incompatible with the TFEU but nevertheless
referred the question of whether the ECB Decision can be interpreted in a way that is
compatible with the TFEU. The Federal Constitutional Court sees "important reasons
to assume that it exceeds the European Central Bank's monetary policy mandate and
thus infringes the powers of the member states, and that it violates the prohibition of
monetary financing of the budget".
1.2 Ireland considers the ECB’s OMT programme to have been an essential and effective
instrument for maintaining the stability of the euro and price stability in the euro area.
Ireland underlines the ECB’s independence, as set out in the Treaties. Ireland
considers the ECB’s decision on OMT to have been taken in full respect of its mandate
as set out in the Treaties. Ireland considers that the ECB’s decision on OMT is
consistent with the Treaties, taking account of the ECB’s explanations in this respect.
The potential scale of OMT is critical to its effectiveness and publicly specifying limits
on this, beyond those implicit in the programme as set out in the ECB’s presentation to
the German Federal Constitutional Court, would impair this effectiveness in a way
which would impede the ECB from carrying out its Treaty mandated role. Further such
public limits could put the financial stability of the euro area in immediate jeopardy.
3
2.
The Background to the OMT decision
2.1 In order to understand the need for the OMT decision, it is necessary to consider the
economic environment of the time and the financial crisis facing the Euro zone. Since
2008 the euro area had been engulfed by a financial and economic crisis which many
believed threatened the survival of the euro and undermined the achievement of the
objectives of the Union as contained in Article 3 TEU. As a response to the crisis,
Member States and the institutions of the European Union adopted a succession of
measures to contain the crisis and prevent the disintegration of the euro area1. The
ECB played an active role in the efforts to contain the crisis by deploying a number of
monetary policy instruments including its Securities Markets Programme (SMP)2 and
Long Term Refinancing Operations. Despite reductions in the short term interest rate
to historically low levels in 2011/2012 re-denomination fears (based on the mistaken
view that the single currency was reversible) resulted in very high interest rates in
peripheral economies. During 2012, tensions in government bond markets reached a
point where financing conditions and sovereign yields were out of line with
fundamentals. The fear that the euro area would dissolve caused yields to rise and
created significant levels of financial market fragmentation, which significantly
hampered the transmission of the ECB’s monetary policy to certain parts of the euro
area.
2.2 Sovereign bonds and the sovereign debt markets play an important role in the
transmission of monetary policy to the real economy through a number of channels.3
The flight of capital from peripheral sovereign debt markets severely affected the
1 Council Regulation 407/2010 EC established the European Financial Stabilisation Mechanism (EFSM). The
intergovernmental agreement the EFSF Framework Agreement 2010 established the European Financial
Stability Facility (ESFS) and the Treaty Establishing the European Stability Mechanism in 2012 established the
ESM.
2 More information on the SMP can be found in the ECB’s press release of 10 May 2010, in the ECB’s Decision
of 14 May 2010 establishing a securities markets programme, and in the weekly financial statements of the
Eurosystem.
3 “Price channel” whereby bonds are used as a benchmark for the pricing of loans and other financial
contracts; “balance sheet channel” whereby changes in bond yields affect the value of holdings on banks’
balance sheets and can therefore impact the health of balance sheets and “liquidity channel” whereby
sovereign yields have an effect as they the primary source of collateral used by banks in the interbank market.
4
monetary transmission mechanism. The obstructions in this market, have serious
implications for how the policy of the ECB can feed through banks to the real economy
and achieve its objective of price stability.
2.3 The increase in yields and volatility in certain countries’ sovereign bond markets during
2012 was, in the view of most analysts, far beyond what would be merited given their
underlying macroeconomic situation. During July 2012, Italian and Spanish yields
reached over 500 and 600 basis points over German bond yields. Most commentators
felt that the spikes in Spanish and Italian yields were not accompanied by
deterioration in macroeconomic conditions or fiscal positions of a scale to warrant the
moves. However, at the time the perceived risks of dissolution of the currency union
became increasingly widespread and the markets were reflecting fear of a Euro area
breakup.4 These market expectations of dissolution looked as though they could
become self-fulfilling and monetary authorities were entitled and indeed, it can be
argued, obliged to act to restore the transmission mechanism, even if this required
measures to dispel market expectations of a possible collapse of the single currency.
2.4 There were many signs that the breakdown in the monetary transmission mechanism
caused by sovereign market tensions was impacting on the real economy. In July
2012, dispersion in interest rates on bank loans became very high (standard deviation
of interest rates on loans to non-financial corporates across euro area countries
increased by around 50% as compared to the middle of 2011). The cost of bank loans
to SMEs in Spain and Italy relative to those in Germany (as measured by the interest
rate on loans up to €1 million) increased by around 150 basis points between July 2011
and July 2012. The ECB’s standard and non-standard monetary policy measures were
4 Dabrowski, Marek. 2012.
The Need for Contingency Planning: Potential Scenarios of Eurozone Disintegration.
E-Brief no 11/2012 (June).
Warsaw: Center for Social and Economic Research (CASE).
Das, Arnab, and Nouriel Roubini. 2012. A Blueprint for an Amicable Divorce Settlement.
Financial Times, April
3.
Normand, John, and Arindam Sandilya. 2011. Answers to 10 Common Questions on EMU Breakup. JP Morgan,
December 7.
Portes, Richard. 2012. Market Forces Will Destroy the Euro If We Do Not Take Action Soon. Letter in
Financial
Times, July 10, 8.
5
not being transmitted evenly throughout the currency union. Serious credit
constraints were developing in parts of the Euro area and as a result, risks of a severe
contraction in economic activity increased, which threatened a deflationary spiral and,
therefore, presented a risk to price stability.
2.5 In a speech at the Global Investment Conference in Europe on 26th July 20125 the ECB
President Draghi signalled that
‘within our mandate, the ECB is ready to do whatever it
takes to preserve the euro’.
2.6 It was against this background that the OMT announcement was made by the ECB as a
crucial monetary policy instrument in order to fulfil its mandate of price stability. As
set out below, it is clear that the aim of the ECB in facilitating secondary market bond
purchases through OMTs was to reduce tensions on the bond market and ensure the
smooth functioning of monetary policy. If such circumstances were present, the ECB
could not maintain price stability across the euro area and it was primarily concerned
with disturbances in the monetary policy transmission mechanism, resulting from the
debt crisis.
3.
The ECB’s Securities Market Programme (SMP)
3.1 The Governing Council decided in May 2010 to establish the SMP. The objective of this
temporary programme was to address the malfunctioning of certain euro area debt
securities market segments and to restore an appropriate monetary policy transmission
mechanism.
3.2 The SMP allowed euro-area NCBs and the ECB to intervene if dysfunctional market
segments were disrupting the transmission mechanism or, put another way, if the ECB’s
rate signals were not being transmitted evenly to all parts of the euro area.
5 Speech by the President of the European Central Bank at the Global Investment Conference in London 26 July
2012
6
3.3 Interventions by euro-area NCBs and the ECB took the form of buying the sovereign
bonds of several countries – initially those of Greece, Ireland and Portugal (full
Programme countries) and from August 2011, Spanish and Italian bonds.
3.4 Purchases of bonds issued by euro-area governments were strictly limited to
secondary trading, i.e. from banks and against market prices. This was necessary so as
not to contravene EU Treaty provisions which prohibit monetary financing.
3.5 The impact of the interventions carried out under the SMP is sterilised every week. In
other words, the ECB conducts specific operations to re-absorb the liquidity injected
through the programme. This is done to ensure that the overall monetary policy
stance isn’t affected.
3.6 The last SMP purchases took place in February 2012 and the programme was
terminated in September 2012 with the announcement of the technical features of the
Outright Monetary Transactions (OMTs).
3.7 The ECB’s Annual Report for 2013 (Page 88) reported on the SMP programme as
follows:
“As in the past, the liquidity injected through the SMP continued to be
absorbed on a weekly basis in 2013. The securities bought under the SMP will
in principle be held to maturity. However, Eurosystem accounting rules allow
sales of held-to-maturity securities when the remaining time to maturity is
less than one month. The Eurosystem therefore participated in the public buy-
back offer initiated by the Irish National Treasury Management Agency on 17
December 2013 and sold all of its SMP holdings of the Irish security maturing
on 15 January 2014 at the offer price. At the programme’s peak, the
Eurosystem held SMP securities for a total settlement amount of €219.5
billion. By the end of 2013 the Eurosystem’s holdings of SMP securities had
been reduced to €178.8 billion owing to redemptions and participation in the
Irish buy-back operation. In February 2013 the Governing Council decided to
7
publish details of the Eurosystem’s holdings of securities acquired under the
SMP. This decision was taken in line with the transparency envisaged for the
OMTs.”
3.8 It is clear that the ECB was already implementing non-standard monetary policy
measures such as the Securities Market Programme. The announcement of OMTs
thus represented a development of existing policy, and as has been seen, has proven
to be more effective, not least because it has not yet been used.
4.
Outright Monetary Transactions
4.1 In August 2012 the European Central Bank’s Governing Council announced the setting-
up of the OMTs, the technical features of which were further specified in a press release
dated 6 September 2012. In the Introductory Statement to the ECB Press Conference
of 2 August 20126 it was explained that:
“The Governing Council extensively discussed the policy options to address the
severe malfunctioning in the price formation process in the bond markets of
euro area countries. Exceptionally high risk premia are observed in
government bond prices in several countries and financial fragmentation
hinders the effective working of monetary policy. Risk premia that are related
to fears of the reversibility of the euro are unacceptable, and they need to be
addressed in a fundamental manner. The euro is irreversible…..
The adherence of governments to their commitments and the fulfilment by
the EFSF/ESM of their role are necessary conditions. The Governing Council,
within its mandate to maintain price stability over the medium term and in
observance of its independence in determining monetary policy, may
undertake outright open market operations of a size adequate to reach its
objective.” [Emphasis added]
4.2 On 6 September 2012 the ECB took the decision on the technical features regarding
OMTs. In the Introductory Statement to the ECB Press Conference of 6th September
6 ECB Introductory Statement to the press conference Frankfurt am 2 August 2012
8
20127 ECB President Draghi clearly outlined the purpose of OMTs as being the
safeguarding of the monetary policy transmission mechanism and the singleness of
monetary policy stating:
“the Governing Council today decided on the modalities for undertaking
Outright Monetary Transactions (OMTs) in secondary markets for sovereign
bonds in the euro area. As we said a month ago, we need to be in the position
to safeguard the monetary policy transmission mechanism in all countries of
the euro area. We aim to preserve the singleness of our monetary policy and
to ensure the proper transmission of our policy stance to the real economy
throughout the area. OMTs will enable us to address severe distortions in
government bond markets which originate from, in particular, unfounded
fears on the part of investors of the reversibility of the euro. Hence, under
appropriate conditions, we will have a fully effective backstop to avoid
destructive scenarios with potentially severe challenges for price stability in
the euro area. Let me repeat what I said last month: we act strictly within our
mandate to maintain price stability over the medium term; we act
independently in determining monetary policy; and the euro is irreversible.”
[Emphasis added]
4.3 The purpose of the ECB’s decision on OMTs was also reiterated in a press release on
OMTs dated 6th September 20128 wherein the stated aim of OMTs was to:
“safeguard an appropriate monetary policy transmission and the singleness
of the monetary policy”
4.4 The key features of the framework within which OMTs would be conducted by the ECB
has been outlined in a number of statements and documents. In the press release on
OMTs dated 6th September 20129 the framework within which OMTs would be
conducted by the ECB was set out as follows:
“Conditionality
A necessary condition for Outright Monetary Transactions is strict and
effective conditionality attached to an appropriate European Financial
Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such
programmes can take the form of a full EFSF/ESM macroeconomic
adjustment programme or a precautionary programme (Enhanced Conditions
7 ECB Introductory Statement to the press conference Frankfurt am 6th September 2012
8 ECB Press Release 6th September 2012 on OMT
9 ECB Press Release 6th September 2012 on OMT
9
Credit Line), provided that they include the possibility of EFSF/ESM primary
market purchases. The involvement of the IMF shall also be sought for the
design of the country-specific conditionality and the monitoring of such a
programme.
The Governing Council will consider Outright Monetary Transactions to the
extent that they are warranted from a monetary policy perspective as long as
programme conditionality is fully respected, and terminate them once their
objectives are achieved or when there is non-compliance with the
macroeconomic adjustment or precautionary programme.
Following a thorough assessment, the Governing Council will decide on the
start, continuation and suspension of Outright Monetary Transactions in full
discretion and acting in accordance with its monetary policy mandate.
Coverage
Outright Monetary Transactions will be considered for future cases of
EFSF/ESM macroeconomic adjustment programmes or precautionary
programmes as specified above. They may also be considered for Member
States currently under a macroeconomic adjustment programme when they
will be regaining bond market access.
Transactions will be focused on the shorter part of the yield curve, and in
particular on sovereign bonds with a maturity of between one and three
years.
No ex ante quantitative limits are set on the size of Outright Monetary
Transactions.
Creditor treatment
The Eurosystem intends to clarify in the legal act concerning Outright
Monetary Transactions that it accepts the same (pari passu) treatment as
private or other creditors with respect to bonds issued by euro area countries
and purchased by the Eurosystem through Outright Monetary Transactions, in
accordance with the terms of such bonds.
Sterilisation
The liquidity created through Outright Monetary Transactions will be fully
sterilised.
Transparency
Aggregate Outright Monetary Transaction holdings and their market values
will be published on a weekly basis. Publication of the average duration of
Outright Monetary Transaction holdings and the breakdown by country will
take place on a monthly basis.
Securities Markets Programme
10
Following today’s decision on Outright Monetary Transactions, the Securities
Markets Programme (SMP) is herewith terminated. The liquidity injected
through the SMP will continue to be absorbed as in the past, and the existing
securities in the SMP portfolio will be held to maturity.”
4.5 In a speech to the Spanish lower house of Parliament in February 201310 ECB President
Draghi explained again the purpose of the OMT decision and how OMTs would work:
“OMTs are designed to focus on bonds with a remaining maturity of up to
three years, aiming to keep medium-term inflation expectations stable by
avoiding a highly damaging breakdown in the transmission of monetary
policy.
The ECB can only consider OMTs if there are major problems in the
transmission of monetary policy and if there is strict and effective
conditionality attached to an appropriate European Stability Mechanism
(ESM) programme.
There are two reasons for this conditionality framework. First, OMTs are a
backstop against destructive speculation. They are not a subsidy for
government financing. OMTs should remove only the part of the interest rate
at which governments borrow that is due to unfounded expectations of
destructive scenarios for the euro area. [Emphasis added]
But our interventions are conceivable only if the risk of fiscal dominance is
firmly excluded. This requires certainty that governments will maintain fiscal
discipline and that continuous reforms will correct underlying weaknesses.
Only strict and effective conditionality can generate that kind of assurance.
The second reason for conditionality is that an ESM programme is a catalyst
for reform. It can change the economic prospects of a country towards a
higher growth potential, complementing monetary policy in its efforts to
support the economy. [Emphasis added]
In the past few months, we have seen a gradual easing of financial conditions.
Credit spreads on sovereign and corporate bonds have fallen. Equity prices
have recovered. Banks have regained market access. And money has flowed
back into European debt markets.
ECB policies have played a pivotal role in this improvement, as has resolute
action by governments, parliaments and the private sector. All should
persevere in these efforts with confidence. The ECB, for its part, will continue
to safeguard price stability, as it has done over the past 13 years.”
10 Introductory Statement at the Congreso de los Diputados de Espana 12th February 2013
11
4.6 The framework within which OMTs would be conducted has been re-iterated in the
same terms in the ECB Annual Reports 2012 and 2013.11 As regards the management
of financial risk associated with OMTs the ECB has stated in its 2012 Annual Report12
that:
“as is already the case for the existing monetary policy portfolios, the
financial risks of the OMTs would also be closely monitored and measured.
The OMTs also incorporate two important risk-mitigating features, namely
the element of conditionality entailing that purchases would only be
conducted during limited time periods, subject to a successful implementation
of economic policies, and the focus of the purchases on instruments with a
residual maturity of between one and three years.”
4.7 In its Introductory Statement before the German Constitutional Court13 the ECB once
again set out the targeted framework within which OMTs would operate and highlighted
how the OMT programme differed from the ECB’s Securities Markets Programme as
follows:
“First, there is strict conditionality because the OMTs are attached to a
European Financial Stability Facility/European Stability Mechanism
(EFSF/ESM) programme, thereby ensuring that the Member States concerned
remain under considerable pressure to implement reforms and maintain fiscal
discipline. The OMT programme seeks only to reduce unwarranted interest
rate spikes. I would like to make it very clear at this point that the OMT
programme was not aimed at harmonising the financing conditions of the
Member States. The market mechanism will continue to operate.
Another important point in this regard is that an EFSF/ESM programme is a
necessary – but not a sufficient – condition for OMTs. There is no automatic
follow-on. The Governing Council of the ECB will decide independently in each
individual case, looking exclusively at the necessity of OMTs from a monetary
policy perspective.
11 ECB Annual Report 2012 page 83, & ECB Annual Report 2013 page 89
12 ECB Annual Report 2012 Chapter 2 page 89.
13 Introductory statement by the ECB in the proceedings before the Federal Constitutional Court, Jörg
Asmussen, Member of the Executive Board of the ECB, Karlsruhe, 11 June 2013
http://www.ecb.europa.eu/press/key/date/2013/html/sp130611.en.html
12
Second, our OMT programme is limited to the short end of the yield curve –
i.e. to maturities of between one and three years – as the Eurosystem’s other
monetary policy instruments have also traditionally been aimed at this period.
The third distinction between the OMTs and the SMP is the transparency of
our actions, through the publication of relevant information on OMT
interventions.
A fourth way in which the programmes differ from one another is that, under
the OMT programme, we are not only able to buy government bonds, but also
to sell them again, and their valuation is based on market prices rather than
on final maturity.
Fifth, we announced that our OMT interventions would be ex ante
“unlimited”. We have no doubt that this strong signal was required in order to
convince market participants of our seriousness and decisiveness in pursuing
the objective of price stability. At the same time, however, the design of OMTs
makes it clear to everyone that the programme is effectively limited, for one
by the restriction to the shorter part of the yield curve and the resulting
limited pool of bonds which may actually be purchased.
OMTs – in the event that they are conducted – will not give rise to any
inflationary risks. For every euro that the Eurosystem spends on government
bonds, one euro will be withdrawn from the money supply in the euro area.
We already did the same successfully under the SMP, which has now come to
an end."
4.8 In the introductory statement by the ECB in the proceedings before the Federal
Constitutional Court Jörg Asmussen, Member of the Executive Board of the ECB,
Karlsruhe, 11 June 2013 makes the following point
“We therefore also interpret the prohibition of monetary financing as being
comprehensive insofar as ways to circumvent it are addressed. It is not possible to
purchase newly issued government bonds at certain times. Furthermore, the central
banks of the Eurosystem observe the issuing behaviour of Member States, banks and
market players for signs of collusion. If, for example, a country were to convert all its
bond issues to a short maturity (of up to three years), we would react.” [emphasis
added]
4.9 Thus the frame work within which OMTs would be conducted was set out in terms of
conditionality, coverage, sterilisation and transparency. It was reiterated that the
decision on use of OMTs, and qualification for it is a matter for the ECB Governing
Council, acting in accordance with its monetary policy mandate. The ECB press
13
statement also notes that the ECB’s Governing Council will decide on the start,
continuation and suspension of OMT, following a thorough assessment, in full discretion
and acting in accordance with its monetary policy mandate. A necessary condition for
OMTs is strict and effective conditionality attached to an appropriate European Financial
Stability Facility/European Stability Mechanism (EFSF/ESM) programme. This
conditionality aims to ensure that governments will make the necessary reforms and
maintain fiscal discipline. The Governing Council will consider OMTs to the extent that
they are warranted from a monetary policy perspective as long as programme
conditionality is fully respected, and terminate them once their objectives have been
achieved or when there is non-compliance with the macroeconomic adjustment or
precautionary programme. OMTs will be considered for future cases of EFSF/ESM
macroeconomic adjustment programmes or precautionary programmes (such as an
enhanced conditions credit line). They may also be considered for Member States
already under a macroeconomic adjustment programme as they regain bond market
access. It was also stated that OMTs would not take place while a given programme is
under review and would resume after the review period once programme compliance
has been assured. Transactions would be focused on the shorter part of the yield curve,
and in particular on sovereign bonds with a maturity of between one and three years.
No ex ante quantitative limits are set on the size of OMTs. The Eurosystem intends to
accept the same (pari passu) treatment as private or other creditors with respect to
bonds issued by euro area countries and purchased by the Eurosystem through OMTs.
The liquidity created through the OMTs would be fully sterilised, while the transparency
of the OMT portfolio would be greater than that of the SMP portfolio.
5.
Key features of OMT
5.1
The OMT programme, as set out by the ECB, has a number of significant key features
in the context of the issues to be determined by this Court. They are:
(i)
The purpose of the OMT Programme is for the maintenance of price stability
and the safeguarding of the monetary policy transmission mechanism. The
OMT programme only seeks to reduce unwarranted interest rate spikes – it is
14
not aimed at harmonising the financing conditions of the Member States.
OMT is aimed at addressing systemic risks for the Euro area as a whole, so it
is not country specific.
(ii)
The OMT programme will only cover secondary market purchases – the ECB
will not purchase sovereign debt directly from governments.
(iii)
There is strict conditionality with OMTs, but an EFSF/ESM programme, while
necessary is not of itself a sufficient condition for the use of OMTs.
(iv)
The decision on the use of OMTs and the qualification for the same is a
matter to be decided independently by the Governing Council of the ECB
alone looking exclusively at the necessity of OMTs from a monetary policy
perspective.
(v)
The OMT programme is limited to the short end of the yield curve – bonds
with maturities of between 1 and 3 years.
(vi)
There are no quantitative limits set. The unlimited nature of OMTs was of
crucial importance given market concerns that existed at the time. Any
public limit on the scale of interventions could have led to uncertainties
regarding its success (the ECB had imposed limits on its purchases of
sovereign debt under the Securities Markets Programme (SMP)). Its
unlimited nature provided the appropriate backstop that markets deemed
necessary to counter re-denomination risks. However as pointed out by the
ECB in its presentation to the German Federal Constitutional Court, while the
OMT interventions are “unlimited” the design of OMTs makes it clear that
the programme is effectively limited by the restriction to the shorter part of
the yield curve and the resulting limited pool of bonds which may actually be
purchased.
15
(vii)
Under the OMT programme government bonds not only can be purchased on
the secondary market, but also can be sold again with their valuation based
on market prices rather than on final maturity.
(viii) OMTs have no direct inflationary implications – any sovereign debt purchases
will be fully sterilised so that there will be no increase in the money supply.
(ix)
The OMT programme is completely transparent as OMT holdings and their
market values will be published on a weekly basis and the average duration
of OMT transactions and the breakdown by country will be published on a
monthly basis.
(x)
The OMT programme has never been called upon – its very existence means
that the probability of it being called upon is minimal.
6.
The effect of the announcement of the OMT decision
6.1 OMTs have not in fact been utilised by the ECB since the date of their announcement
but the very fact of the announcement of the decision of the ECB on OMTs played a
key role in fostering the process of normalising the euro area sovereign bond markets,
enabling risk to be rationally evaluated across the different market segments. It has
caused a dramatic reduction in the yields of all Euro area short dated bonds and
consequential positive effects further out the respective yield curves. The spread
between the yields on Spanish and German ten-year government bonds fell from more
than 6 percentage points in July 2012 to just under 3 percentage points in May 2013.
At the same time, the premium on Italian bond yields was halved, down from more
than 5 percentage points. One further sign of the normalisation of developments is
that yields on German government bonds increased by around one-quarter of a
percentage point over the same period. TARGET balances (an important indicator of
fragmentation within the euro area) are now back at the 2011 level - down by €285
billion (circa 25%) compared with their peak in 2012. Investors clearly regarded the
announcement of OMT as removing the redenomination risk for the euro area
16
sovereign bond market as a whole. This contributed to stabilisation within the
financial markets and helped improve the transmission of monetary policy.
7
EU Treaty provisions
7.1 The Treaties provide for the establishment of an economic and monetary union, and its
currency – the euro (TEU Article 3 (4)). They also provide that the Union shall have a
monetary policy (TFEU 119 (2)), assign responsibility for that policy to the ECB and
provide that it shall have full independence in the conduct of this policy (TFEU Articles
127 and 130). It is important to recall the prohibition of monetary financing set out in
Article 123 TFEU.
7.2 As an institution of the EU, the ECB has a responsibility to uphold its laws, aims and
policies, in accordance with the Treaties. It is clearly stated that the currency of the
Union is the euro. Responsibility for monetary policy is assigned to the European
System of Central Banks (ESCB), governed by the decision making bodies of the ECB. In
this context, the adoption by the ECB Governing Council, on its own initiative and in full
independence, of policies to defend the monetary transmission mechanism of the euro
can be seen as appropriate and in accordance with its mandate.
7.3 Ireland submits that the decision of the Governing Council of the ECB of 6th September
2012 on the Technical Features of OMTs is compatible with the Central Bank’s
mandate and Articles 119, 127(1) and 127(2) TFEU and Articles 17 to 24 of the Protocol
on the Statute of the European System of Central Banks and the European Central
Bank.
7.4 The fundamental objectives of the European Union are contained in Article 3 of the
Treaty on European Union. Amongst those objectives are the promotion of the well-
being of the peoples of the Union, the sustainable development of Europe based on
balanced economic growth and price stability, a highly competitive social market
economy aiming at full employment and social progress, the promotion of economic,
17
social and territorial cohesion and solidarity among Member States and the
establishment of an economic and monetary union whose currency is the euro.
7.5 Title VIII of the Treaty on the Functioning of the European Union deals with the
economic and monetary policy of the European Union. Pursuant to Article 119 TFEU
the primary responsibility for economic policy rests with the Member States and the
Union, although the ESCB is given a secondary objective in Articles 127(1) and 282(2)
TFEU of supporting the general economic policies of the Union as laid down in Article 3
TEU.
7.6 There can be no dispute but that the primary objectives of the ESCB and ECB is the
maintenance of price stability and one of its basic tasks in that regard is defining and
implementing the monetary policy of the Union. The ESCB and ECB are also tasked
“without prejudice to the objective of price stability” with supporting the general
economic policies of the Union.
7.7 The European Central Bank , together with the national central banks of those Member
States whose currency is the euro, is tasked, pursuant to Article 282(1) TFEU with
conducting the monetary policy of the European Union. In doing so the ECB acts with
full independence (Article 130 TFEU).
7.8 Article 282(2) TFEU tasks the European System of Central Banks (ESCB) with the
primary objective of maintaining price stability. Article 282 (2) goes on without
prejudice to that primary objective to task the ESCB with supporting the general
economic policies of the Union so as to contribute to the achievement of the Union’s
economic policy objectives.
7.9 This is reinforced by Article 127 TFEU which also sets the primary objective of the ESCB
as being to maintain price stability and without prejudice to that objective to support
the general economic policies in the Union with a view to contributing to achieving the
Union’s objectives as laid down in Article 3 TEU.
18
7.10 Article 127(2) TFEU set out one of the basic tasks of the European System of Central
Banks (comprising the European Central Bank and the national central banks of all
Member States) as being to define and implement the monetary policy of the Union.
7.11 Article 129 TFEU provides for the governance of the ESCB including the ECB and
provides for the Statute of the European System of Central Banks and of the European
Central Bank as a Protocol to the Treaties.14
7.12 Article 132 TFEU provides that in order to carry out the tasks entrusted to the ESCB
the ECB shall inter alia take decisions necessary for the carrying out of the tasks
entrusted to the ESCB under the Treaties and the Statute of the European System of
Central Banks and of the European Central Bank.
7.13 Article 2 of the Statute reiterates the primary objective of the ESCB as being the
maintenance of price stability and the secondary objective of supporting the general
economic policies in the Union with a view to contributing to the achievement of the
objectives of the Union as laid down in Article 3 TEU. This includes the task of defining
and implementing the monetary policy of the Union.
7.14 Article 18 of the Statute sets out the powers of the ECB to achieve the objectives of
the ESCB and allows it to:
(i)
operate in the financial markets by buying and selling outright (spot and
forward) or under repurchase agreement and by lending or borrowing
claims and marketable instruments, whether in euro or other currencies,
as well as precious metals;
(ii)
conduct credit operations with credit institutions and other market
participants, with lending being based on adequate collateral.
14 Protocol No. 4 to the Treaty on European Union and to the Treaty on the Functioning of the European Union
19
7.15 Article 20 of the Statute also provides that the Governing Council of the ECB may by
a two thirds majority decide on the use of other operational methods of monetary
control as it sees fit.
7.16 Article 123 TFEU imposes a ban on credit facilities of the ECB and national central
banks that favour Member States. According to Article 123(1) direct purchases of debt
instruments from Member States by the ECB are also prohibited. Indirect purchases of
bonds on the secondary market are not subject to this prohibition, although they may
not be used to circumvent its objectives.15 Accordingly, the central banks may purchase
government bonds on the secondary market at any time, subject to the latter proviso.
The purpose for this limitation on the prohibition is to allow the ESCB to purchase
bonds on the secondary market as an instrument of monetary policy, in particular, to
influence interest rates and market liquidity. Where these types of secondary bond
market purchases take place they should be undertaken with the intention of
implementing monetary policy. They should not have the intention of directly financing
the public sector. So for example, a normal monetary policy of lowering interest rates
can benefit government finances but is not in contravention of Article 123 TFEU since
the intention is related to monetary policy and is not related to government finance.
The aim should not be that Member States benefit from refinancing through the ESCB.
Article 123 endorses the same intention as the ban on bailouts set out in Article 125
TFEU: to use market-based bond spreads to maintain disciplinary pressure on Member
States.16 Therefore, it is only where secondary market interventions are not focused on
supporting the Eurosystem's monetary policy of price stability and are instead aimed at
lowering the interest rates for bonds of financially distressed member states, these
interventions can be considered to run contrary to the objective of Article 123.17 In the
case of OMT, it should be emphasised that that intention and aim is to facilitate
monetary policy and OMT is only for that purpose.
15. Council Regulation (EC) No 3603/93 of 13 December 1993 specifying definitions for the application of
the prohibition referred to in Articles 104 [now Article 123 of TFEU] and 104b(1) [now Article 124 of
TFEU] of the Treaty (OJ L 332, 31.12.1993).
16 Steinbach, A. (2013), "The Legality of European Central Bank's Sovereign Bond Purchases",
Yale Journal of
International Law, vol. 39, pp.15-31.
17 Borger, V. (2013), "How the debt crisis exposes the development of solidarity in the euro area",
European Constitutional Law Review, 7, pp.1-20.
20
7.17 It is clear from the foregoing that the ECB’s independence in the area of monetary
policy is legally entrenched and immune to interference from the Union’s political
institutions, national governments and interest groups. That said, the ECB’s
independence is not exempt from every rule of Union law. In the case of
Commission –
v- European Central Bank (OLAF).18 the Court of Justice considered the ECB to have a
limited functional independence that ensures the proper execution of its monetary
tasks whilst also placing the ECB in the framework of EC law and thus, subjecting the
ECB to all relevant primary and secondary Community law.
8
The ESM Treaty and the Decision in Pringle19
8.1 The ECB has stated that it is a necessary but not sufficient, precondition for OMT that a
country should be either in an EFSF/ESM programme, emerging from one, or availing
of a precautionary facility such as the ESM’s Enhanced Conditions Credit Line (ECCL).
As the EFSF has ceased new lending from 1 July 2013, the ESM precondition is the
relevant one.
8.2 The following provisions of the ESM Treaty should therefore be considered.
8.3 Article 3 of the ESM Treaty states that:
“The purpose of the ESM shall be to mobilise funding and provide stability
support under strict conditionality, appropriate to the financial assistance
instrument chosen, to the benefit of ESM Members which are experiencing, or
are threatened by, severe financing problems, if indispensable to safeguard
the financial stability of the euro area as a whole and of its Member States.”
8.4 Article 12(1) ESM provides:
“If indispensable to safeguard the financial stability of the euro area as a
whole and of its Member States, the ESM may provide stability support to an
18 (C-11/00) [2003 ECR I-7147.
19
Thomas Pringle –v- Government of Ireland, Ireland and the Attorney General (C-370/12) [2013] 2 C.M.L.R. 2.
21
ESM Member subject to strict conditionality, appropriate to the financial
assistance instrument chosen. Such conditionality may range from a macro-
economic adjustment programme to continuous respect of pre-established
eligibility conditions.”
8.5 Article 13(1) ESM provides:
"An ESM Member may address a request for stability support to the Chairperson of
the Board of Governors. Such a request shall indicate the financial assistance
instrument(s) to be considered. On receipt of such a request, the Chairperson of the
Board of Governors shall entrust the European Commission, in liaison with the ECB,
with the following tasks:
(a)
to assess the existence of a risk to the financial stability of the euro
area as a whole or of its Member States, unless the ECB has already
submitted an analysis under Article 18(2);
(b)
to assess whether public debt is sustainable. Wherever appropriate
and possible, such an assessment is expected to be conducted
together with the IMF;
(c)
to assess the actual or potential financing needs of the ESM Member
concerned."
8.6 Article 13(3) ESM provides:
“3.
If a decision pursuant to paragraph 2 is adopted, 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 (“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. In parallel, the Managing Director of
the ESM shall prepare a proposal for a financial assistance facility agreement,
including the financial terms and conditions and the choice of instruments, to
be adopted by the Board of Governors.
The MoU shall be fully consistent with the measures of economic policy
coordination provided for in the TFEU, in particular with any act of European
Union law, including any opinion, warning, recommendation or decision
addressed to the ESM Member concerned.”
22
8.7 Article 14 ESM provides for precautionary financial assistance under either a
precautionary conditioned credit line (PCCL) or an enhanced conditions credit line
(ECCL). For OMT purposes, the ECB has stated that the ECCL is the relevant one. Either
of these precautionary lines are provided in accordance with ESM Treaty Article 12 (1)
and the conditionality is determined in accordance with ESM Treaty Article 13(3).
8.8 The modalities for granting a PCCL or an ECCL are set out in guidelines adopted by the
ESM Board of Directors. For these purposes, it is sufficient to note that the ECCL is the
more restrictive form of credit line, and can have conditions requiring identified
weaknesses to be addressed.
8.9 It is therefore clear that ESM funding can only be provided where there is a threat to
the stability of the euro area or of its member states. The ECB has a key role in the
determination of the existence of a problem of this magnitude, as it does in the
determination of the appropriate conditionality. On this basis, the existence of an ESM
programme is already indicative of unusual conditions. The ECB’s involvement in the
determination process is a further safeguard in this respect.
8.10 Paragraph 2 of Article 13(3) ESM ensures that any conditionality established is
consistent with existing EU Treaties, laws, regulations, recommendations or decisions
addressed to the Member State.
8.11 The stipulation of the ECCL as the precautionary credit line which could enable
application of OMTs is important, as it is the more restrictive and can involve detailed
conditionality.
8.12 In
Pringle the Court of Justice drew a distinction between provisions relating to
economic policy (Articles 120 to 126 TFEU) and those governing monetary policy
(Articles 127 to 133 TFEU). The Court emphasised that the TFEU "contains no
definition of monetary policy" and in addition refers "in its provisions relating to that
policy, to the objectives, rather than to the instruments, of monetary policy". The
Court further stressed that the "primary objective of the Union's monetary policy is to
23
maintain price stability" while the objective pursued by the ESM "is to safeguard the
stability of the euro area as a whole", which must be regarded as "clearly distinct from
the objective of maintaining price stability, which is the primary objective of the
Union's monetary policy". For this reason, the Court concluded that the ESM "clearly"
falls within the economic policy and not the monetary policy of the Union
notwithstanding the fact that "the stability of the euro area may have repercussions on
the stability of the currency used within that area", yet "an economic policy measure
cannot be treated as equivalent to a monetary policy measure for the sole reason that
it may have indirect effects on the stability of the euro" (see paragraphs 53 to 56
Pringle judgment). In relation to the objective of the ESM – it is in fact more narrow
than “to safeguard the stability of the euro area as a whole" (See Article 3 ESM).
8.13 The OMT decision has been effective in its monetary effect on the euro. The OMT
decision is not a formal decision as such of the ECB directed to a member state or to a
financial entity within the EU. As such the precise legal status of the OMT decision may
be the subject of debate. It is submitted that the legality of the OMT decision must,
because of its content and potential economic and monetary effect, be capable of
review under the TFEU as an act of an institution of the EU. However, since the OMT
decision made by the ECB falls within the exclusive monetary policy competence of the
ECB it is submitted that it is not reviewable by the CJEU. The inter-governmental
nature of the ESM, as described in
Pringle, is to be distinguished from the OMT
decision which is a decision taken within the framework of TFEU by the ECB.
9
The German Constitutional Court’s Decision
Section A
9.1 In relation to the challenge to the OMT decision as being in violation of Articles 119 &
127 TFEU, the referring court has advanced five arguments or statements of fact to
support or substantiate its conclusion that the OMT decision was likely to exceed the
ECB’s mandate and was in violation of both the primary objective (price stability) and
24
the secondary objective (supporting the general economic policies of the union) of the
ECB.
Argument 1: The objective of the OMT decision
Issue:
9.2 The referring court takes the view that the immediate objective of the OMT decision
was the neutralisation of spreads on government bonds of selected Member States
that adversely affected the refinancing of these State. In neutralising these spreads,
the ECB was accordingly acting in breach of its mandate and thus in breach of the
Treaty since such OMTs did not constitute acts of monetary policy but economic policy.
Safeguarding the current composition of the euro area was not a task of monetary
policy but one of economic policy which remains within the remit of the Member
States. See Articles 139 and 140 TFEU. The referring court took the view that it was
for Member States to prevent the reversibility of the euro through measures such as
EFSM and ESM.
Response:
9.3 When addressing this issue, it is important to note that safeguarding the currency is
not exclusively an economic task, but may also be a legitimate objective of the ECB
acting within its mandate.
9.4 It is not unusual for countries to experience both economic and monetary policy
difficulties at the same time. In such situations, economic policy measures can be
complemented by appropriate monetary policy measures, and vice versa. The ECB’s
OMT programme addresses a specific characteristic of financial markets whereby
adverse conditions not supported by fundamentals can develop very quickly. There is
a precondition, which is necessary but not sufficient, that any Member State wishing to
avail of OMT should be in a full or precautionary EFSF or ESM programme with
appropriate conditionality set out in an MoU. Such a programme would address the
25
economic policy defects, if any, that may exist. OMT by contrast seeks only to address
the monetary policy issues that may arise.
9.5 Further, the objective of the OMT programme is to "safeguard an appropriate
monetary policy transmission and the singleness of monetary policy". Contrary to
view of the referring court, the objective is not to neutralise spreads on government
bond yields in the euro area. The focus, in introducing OMT, was on reducing yields
where they were far beyond what was merited given the underlying macroeconomic
conditions. It is not reasonable to characterise this as neutralising yields. Given the
important role of government bonds in the monetary transmission mechanism, it was
incumbent upon policymakers to address the breakdown in transmission which was
already manifesting itself in the cost of finance to the real economy.
Argument 2: The selectivity of the OMT
Issue:
9.6 The referring court argues that the conclusion that the OMT decision has no monetary
policy objective is further suggested by its selectivity. It states that under the guidelines
adopted by the European Central Bank, the monetary policy framework of the
European System of Central Banks does generally not have a targeted approach, which
would necessarily differentiate between individual Member States. It points out that
monetary measures such as the fixing of key interest rates or the reserve ratio are
applicable to all Member States and the resident commercial banks alike. Different
effects that derive from these measures are a consequence of the open market
economy, which Union law presupposes (Article 127(1) sentence 3 TFEU), and an
indirect effect that can be controlled by the European System of Central Banks only to
a limited degree. The Court takes the view that because the OMT decision envisages a
targeted purchase of government bonds of selected Member States, however, the
spreads on government bonds issued by these states are levelled by changes in market
conditions, and the government bonds of other Member States are eventually placed
at a disadvantage.
26
Response:
9.7 The aim of OMT is to ensure appropriate monetary policy transmission and the
singleness of the monetary policy, which clearly represents a monetary policy
objective.
9.8 The ECB has full independent discretion over the programme. Many standard
monetary policy measures have differing effects on Member States. For instance, the
effect of changes in interest rates are different across Member States. Also, changes in
the ECB collateral framework, which apply to all, clearly can be more relevant to some
Member States than others.
9.9 OMTs, if they occur, will take place on the secondary market and not directly with
sovereign borrowers. As such, they would not add to the sum of credit already
extended to national governments by the private and public sector (relevant for those
countries that were in a financial assistance programme).
Argument 3: The parallelism of the OMT with assistance programmes agreed with
Member States
Issue:
9.10 According to the referring court, OMT is the functional equivalent to an assistance
measure such as the EFSF or ESM assistance programmes. The referring court takes
the view that since the OMT decision links the purchase of bonds to the economic
policy conditionality of assistance programmes of the EFSF or the ESM (parallelism) this
points against counting the OMT decision among the powers assigned to the ESCB by
Article 119(2) and Article 127(1) and (2). The referring court points out that pursuant
to the OMT decision, a purchase of government bonds shall only be undertaken under
the condition that the Member State that benefits, fully complies with the obligations
of an assistance programme of the EFSF or the ESM, which envisages the purchase of
government bonds of that Member State on the primary market. The respective
27
obligations of the assistance programme relate not only to the general economic and
social policy, but especially to the fiscal policy of the Member States which is the remit
of the Council and Commission.
9.11 The referring court also makes the point that the ECB plans to engage, with the
intended purchases by way of OMT, in an activity which both the EFSF and the ESM
perform and which is, as the Court of Justice has held in
Pringle, an activity that
belongs to the field of economic policy. The Court takes the view that by tying the
purchase of government bonds of selected Member States to full compliance with the
requirements of the assistance programmes of the EFSF and the ESM and thus
retaining its own conscientious examination, the ECB makes the purchase of
government bonds on the basis of the OMT decision an instrument of economic policy.
Response:
9.12 The OMT is not an assistance measure and is based purely on monetary policy
considerations. The Governing Council of the ECB has full discretion in acting in
accordance with its mandate, regardless of EFSF or ESM. The ESM Treaty is not being
bypassed. The ECB has stated that an ESM programme or precautionary facility, with
appropriate conditionality, is a precondition of OMT. The ECB has a role, set out in the
ESM Treaty, in the process of determining if ESM assistance is warranted, and also in
the design of conditionality. In relation to the conditionality attaching to ESM
programmes, it must be fully consistent with EU law (Article 13(3) ESM Treaty). In
addition, the programme must be approved by the ESM Board of Governors. The
requirement for a programme can be seen in this context as a safeguard.
Argument 4: The by-passing of the narrow limits that the ESM imposed on the
purchase of bonds (circumvention)
Issue:
9.13 The argument put forward by the referring court is effectively that the ECB’s OMT
approach is likely to bypass the conditions and conditionality of the EFSF and ESM.
28
Secondary market purchases are envisaged by the ESM Treaty but only in the case of
“exceptional financial market circumstances and risks to financial stability.” Therefore
purchases under OMT may be possible under a wider scope of circumstances than
under the ESM Treaty resulting in the by-passing of the latter facility. This, according
to the referring court, shows that the OMT programme is an instrument of economic
policy.
Response:
9.14 OMT is not assistance. It is a measure to ensure the effectiveness of monetary
policy. The Governing Council of the ECB has full discretion in acting in accordance with
its mandate, regardless of EFSF or ESM. It can be considered that setting an ESM
programme as a necessary, but not sufficient, precondition for OMT ensures the ESM is
not bypassed.
Argument 5:
In relation to the secondary objective of supporting the general economic
policies of the Union, OMT does not qualify because:
The volume of financial assistance through OMT could potentially multiply the
assistance provided for by ESM and thus thwart the agreed upon volume and
imposed conditions. The ECB declared it would decide the continuation and
suspension of OMT in full discretion.
9.15
In relation to the volume issue, the referring court argues that the volume of
assistance measures, could
de facto be considerably broadened, and potentially
even multiplied, through parallel purchases of government bonds by the
Eurosystem. If the members of the ESM agree on a certain volume of assistance
and its conditions, this decision could be thwarted if the Eurosystem unilaterally
increased the assistance volume significantly through OMT and this cannot be
qualified as “support”.
29
9.16
In relation to the second argument, the referring court points out that the
ECB must act independently in deciding on the start and duration of OMTs.
Response:
9.17
The ECB has the right to purchase in the secondary market under the TFEU
and it is fully independent in its decision making. Both of these powers are set
out under the TFEU, and apply whether the EFSF or ESM exist or not. It is not
clear how the existence of the ESM affects the ECB. In relation to OMT
multiplying ESM assistance it should be noted that the ESM has decision
procedures in place in relation to disbursement of assistance. Further, the aim of
OMT is monetary policy, not assistance.
Section B
9.18
The referring court sets out seven aspects of the OMT decision which it says
suggest that the OMT decision violates Article 123 TFEU. It is proposed to
address each aspect separately.
(1) Neutralisation of interest rate spreads
9.19
The referring court argues that by attempting to neutralise interest rate
spreads the ECB is violating the prohibition on monetary financing.
Response
9.20
The aim of OMT is to safeguard the appropriate monetary policy transmission
and not to neutralise spreads. The ECB has stated that it was necessary to react
to misalignments with fundamentals that were severely disrupting transmission
of monetary policy. The ECB has stated clearly, in public statements (e.g.,
Draghi, January 2013) and in its submission to the referring court, that the focus
30
of OMT would be on reducing yields where they were far beyond what was
merited given the underlying macroeconomic conditions. It is submitted that it
is not reasonable to characterise this as neutralisation.
(2) The selectivity of purchases
9.21
The referring court appears to be making the point that market interventions
by way of OMTs are likely to amount in practical terms to the extension of credit
by the ECB to national governments, contrary to Article 123.
Response
9.22
No primary market purchases are permitted. Full ECB discretion and strict
conditionality is applied to avoid monetary financing concerns.
9.23
The ECB has clearly stated that OMT will take place on the secondary market
and not directly with sovereign borrowers. As such, it will not add to the sum of
credit already extended to national governments by the private and public
sector. Secondary market purchases of government and other bonds are a
common practice among central banks.
(3) The risk of OMT running in parallel with and undermining ESM and EFSF
programmes.
Response
9.24
It is not clear from the Judgment how the referring court sees this as contrary
to Article 123.
9.25
In any event, the Governing Council of the ECB has full discretion in acting in
accordance with its monetary policy mandate, regardless of EFSF or ESM.
31
Previous comments on the ECB’s role in the ESM are relevant also. Further, the
ESM has clearly defined decision making processes which it would be expected,
would address any such risk, were it to arise.
(4) The lack of a preferred creditor status for the ECB in relation to the bonds
purchased and the increased risk of sovereign default of the Euro Zone countries
in question
9.26
The referring court suggests that purchases of bonds on the basis of the OMT
decision amounts to monetary financing because of the failure of the ECB to
maintain preferred creditor status and this includes the participation in a haircut
on debt in the event of a sovereign default. In the referring court’s opinion this
is unlikely to be compatible with Article 123. The argument appears to be that
taking large risks in respect of losses is tantamount to waiving repayment
obligations which amounts to monetary financing or alternatively advancing
funds without any real repayment obligation amounts to monetary financing.
Response
9.27
The ECB does not have preferred creditor status. A distinction needs to be
made between i) the ECB voluntarily accepting a write-down and ii) a write-down
that occurs as a result of a vote by general bond holders.
(5) The possibility for the ECB to hold the government bonds to maturity
The referring court argues that holding bonds to maturity prevents a market based
price determination for these bonds and if a substantial amount of government
bonds issued by selective Member States were permanently removed from the
market this would contribute to the financing of the budgets of the Member States
in question and thus would amount to monetary financing. Furthermore holding
32
such bonds to maturity would result in a shortage in the secondary market which
may amount to a circumvention of Article 123.
Response
9.28
Under the TFEU, the Eurosystem is allowed to purchase in the secondary
market and is therefore entitled to hold these bonds to maturity.
9.29
Many investors hold bonds to maturity for mandate or liability-matching
purposes – it is not unusual and does not prevent an active secondary market
continuing.
(6) The interference with market price formation
9.30
The referring court argues that if the Eurosystem were to purchase
government bonds on the secondary market on a large scale and a short time
after their issue this would be tantamount to direct acquisition of government
bonds and as such would be a circumvention of the prohibition on monetary
financing.
Response
9.31
Secondary market purchases are permitted. Further, it is clear from the
ECB’s statements that OMT will be carried out strictly within its Treaty mandated
role on monetary policy.
10
Conclusion
10.1
In order to fulfil its primary objective of price stability (under, inter alia,
Articles 119 and 127 TFEU) the ECB has stated and demonstrated that it had to
take further action to restore the effectiveness of the monetary transmission
mechanism (MTM). The effects of the announcement of OMT contributed to
33
stabilisation within financial markets and repaired some of the damage to the
MTM. The OMT, as was the case with the ESM, is indispensable to safeguard
financial stability of the euro area as a whole, within the monetary policy
mandate of the ECB.
10.2
Activation of OMTs is strictly conditional on the implementation of an
EFSF/ESM programme. Any decision on such programmes is decided by the
Board of Governors of these facilities on the basis of mutual agreement. The
ESM Governors will make such decision in accordance with national procedures –
including parliamentary approval where required. Furthermore, the ECB
Governing Council has stated that it will independently consider conducting
OMTs to the extent that they are warranted from a monetary policy perspective
in the event of market fragmentation and a threat to the singleness of monetary
policy.
10.3
According to primary EU law, the ECB and the national central banks of the
Eurosystem are already permitted to purchase government bonds in the financial
markets in the context of their monetary policy tasks (Article 18.1 of the Statute
of the European System of Central Banks and of the European Central Bank).
10.4
The decision of the ECB on OMT falls within the monetary policy mandate of
the ECB under Article 119 and Article 127(1) of TFEU and the ESCB Protocol for
reasons already set out by the ECB and described in the submission.
10.5
The decision of the ECB on OMT which on its face may be unlimited in nature
contains limits in the announced information made available by the ECB
concerning the OMT programme and how the ECB may operate the OMT
programme contained inter alia in its press release dated 6 September 2012 and
in its annual reports for 2012 and 2013. It is not incompatible with the
prohibition of monetary financing in Article 123 TFEU.
34
11
Suggested responses to the questions asked by the referring court
1(a) The OMT decision made by the ECB falls within the exclusive monetary policy
mandate of the ECB and is therefore not reviewable by the CJEU. The decision of the
ECB on OMT falls within the monetary policy mandate of the ECB under Articles
119 and Article 127(1) of the TFEU and the ESCB Protocol.
1(b) The decision of the ECB on OMT which is unlimited in nature but also contains
limits announced in information made available by the ECB concerning the OMT
programme and how the ECB may operate the OMT programme
inter alia in its press
release dated 6 September 2012 and in its annual reports for 2012 and 2013, is not
incompatible with the prohibition of monetary financing in Article 123 TFEU.
2(a) The OMT decision of the ECB is not a reviewable act of an EU institution under
Article 267 point (b) first paragraph. Should the Court find that the OMT decision is
not an act of an EU institution or is not reviewable by the CJEU, Articles 119 and 127
TFEU, and Articles 17 to 24 of the ESCB Protocol do permit the ECB to provide the
OMT programme.
2(b) The OMT programme does not involve the ECB in a breach of the prohibition on
monetary financing in Article 123 TFEU.
Dated: 9 June 2014
Signed: Gemma Hodge
Agent for Ireland
on behalf of Eileen Creedon, Chief State Solicitor
Signed: Tony Joyce
Agent for Ireland
on behalf of Eileen Creedon, Chief State Solicitor
35