OMT Programme is OK, no Eurozone OMG moment (yet)

On 14 January, the Advocate General issued a legal opinion that is largely sympathetic to the European Central Bank’s (ECB) Outright Monetary Transaction Programme (OMT Programme).  The European Court of Justice is expected to deliver its judgment on the case later this year.

In July 2012 the ECB President, Mario Draghi said that “the ECB is ready to do whatever it takes to preserve the Euro“. This statement alone restored some confidence in the euro in financial markets. On 6 September 2012, the ECB followed up on this statement by issuing a press release announcing the OMT Programme, an announcement credited with restoring further confidence in the euro in financial markets in 2012.

If the OMT Programme was activated, the ECB would purchase government bonds of Member States on the secondary market from investment institutions. The Maastrict treaty prevents the ECB from purchasing government bonds directly from Member States.

Die LINKE, a German left leaning political group, a German NGO and a number of individuals commenced legal proceedings in Germany’s Federal Constitutional Court (the BVerfG) to challenge the legality of the OMT Programme.  Their concern is that that ultimate objective of the OMT Programme is to transform the ECB into “a lender of last resort” and that it puts some Member States, i.e. Germany, at risk of assuming the debts of other Member States.  For the first time in its history, the BVerfG referred the case to the ECJ for a preliminary reference.

The thrust of the legal challenge is that, as a matter of EU law, the OMT Programme goes too far. It is not a monetary policy measure, it is an economic policy measure and as a matter of EU law, the ECB’s mandate is confined to monetary policy measures. The OMT Programme would have a direct impact on the financing states of the Member States concerned. In particular, participation in the OMT Programme is conditional upon the Member State having a financial assistance programme. The financial assistance programme ensures that any Member State that participates in the OMT Programme keeps to its side of the bargain and adopts the structural reforms necessary to improve its economy.

The ECB’s position is that, in the summer of 2012, a number of exceptional circumstances converged in the euro area economy, including high volatility in government bond markets. Faced with the possible disintegration of the single currency, financial markets became increasingly nervous.  As a result, the interest rates that were being applied to the government bonds issued by some Member States did not reflect the underlying macroeconomic situation of those Member States.  Recognising that the conventional instruments of monetary policy were not working, the ECB designed the OMT Programme to first reduce the interest rates being demanded for Member States’ government bonds and then normalise the interest rate differentials. The ECB considers that the financial assistance programme is an essential part of the OMT Programme to avoid the risk of a “moral hazard”.

The Advocate General’s opinion begins by noting that cases involving extraordinary circumstances have long presented difficulties for public law. In summary the opinion:

  • considers that although the OMT Programme is an unconventional monetary policy measure, the ECB must be afforded a broad discretion for the purpose of framing and implementing monetary policy and that courts should be cautious when reviewing the activity of the ECB;
  • rejects the arguments that the OMT Programme is illegal by pointing to the fact that monetary policy forms part of general economic policy, A monetary policy measure does not become an economic policy measure merely because it may have indirect effects on the economic policy of the EU and the Member States;
  • states that if the ECB activated the OMT Programme to ensure that it remained a monetary policy measure it would be essential for the ECB to detach itself from all direct involvement in the monitoring of a Member State’s financial assistance programme;
  • states that it is essential that any decision to activate the OMT Programme must be justified by precise information showing that there has been a significant change in market conditions; and
  • states that the ECB’s reasoning for its decision must be fully transparent and made publicly available.

The ECJ usually follows the Advocate General’s opinions, but only time will tell if it will do so in this case.

In the 2015 UK elections, the UK’s relationship with Europe will be a key campaigning issue for all of the political parties. This case shows that, for different reasons, Germany is also asking important constitutional questions about the price of its on-going relationship with the rest of Europe.