CJEU finds purchase of Member State government bonds by ESCB to be compatible with EU law

By its decision on 16 June 2015 in the Gauweiler case,¹ the Court of Justice of the European Union (“CJEU”) found the Outright Monetary Transactions programme (“OMT”), which had been announced by the European Central Bank (“ECB”) in September 2012, to be compatible with the EU Treaties.

The case was brought up before the CJEU for a preliminary ruling requested by the German Constitutional Court – the first preliminary ruling of the CJEU ever requested by that constitutional court – in which it referred several questions regarding the compatibility of the aforementioned programme with the range of powers granted to the European System of Central Banks (“ESCB”), as determined in the Treaties, the prohibition on monetary financing of the Member States and the principle of proportionality.

The OMT programme grants the ESCB the possibility to purchase government bonds from Eurozone Member States in the secondary market, provided that certain conditions are verified. The programme was announced following the statement by Mario Draghi that the ECB, within its mandate, was ready to do whatever it took to preserve the euro.²

This programme for the purchase of government bonds is intended to promote a better functioning of the mechanisms for the transmission of the monetary policy’s impulses to other sectors of the economy. According to the ECB, the difference in the interest rates associated with the government bonds of each Eurozone country, as well as their volatility, would undermine the monetary policy transmission and hinder the singleness of the policy in the EU.

As it is stated by the CJEU, even though the OMT programme may have effects on the stability of the Eurozone, which, according to the Treaties, is an issue for the EU’s economic policy, the primary objective of the programme is of a monetary nature, aiming to safeguard the singleness of this policy as well as the transmission of its impulses. According to the CJEU, “a monetary policy measure cannot be treated as equivalent to an economic policy measure merely because it may have indirect effects on the stability of the euro area”. Therefore, as a measure within the monetary policy of the EU, it is considered to be under the scope of powers of the ESCB.

With regard to an alleged violation of the monetary financing of Member States’ prohibition, the CJEU reasoned that such prohibition does not inhibit the adoption of the OMT programme, under its proposed terms, given that the programme does not entail the acquisition of government bonds directly from the Member States but rather only allows their purchase in the secondary market.

The CJEU warns that the purchase of government bonds in the secondary market may, nonetheless, produce an equivalent effect to the purchase in the primary market, and therefore circumvent the prohibition of monetary financing of Member States, in the event the potential purchasers in the primary market “knew for certain that the ESCB was going to purchase those bonds within a certain period and under conditions allowing those market operators to act, de facto, as intermediaries for the ESCB for the direct purchase of those bonds from the public authorities and bodies of the Member State concerned.” However, the CJEU considered that the specific conditions established by the ECB for the use of this purchase mechanism, namely concerning the minimum interval period between the issuing of government bonds in the primary market and its repurchase, constitute adequate safeguards to deter such potential equivalent effect.

Lastly, the measure also passed the proportionality test, insofar as it is restricted to a limited amount of government bonds issued only by Member States which have been selected according with predetermined criteria. On the other hand, in accordance with the ECB, this mechanism would only be implemented if the economic situation in the Eurozone so required.

This decision of the CJEU places the German Constitutional Court in a delicate position given that the questions referred for preliminary ruling indicated that court’s position towards the incompatibility of the OMT programme with EU law. Considering the favourable ruling to the ECB by the CJEU, we shall now wait to see how the German Constitutional Court will apply this decision to the case under its assessment.

It should also be noted that, with this decision, the CJEU appears to be inverting its seemingly previous unwillingness to take a firm stand on issues regarding the ECB and its competence, hereby reinforcing its role in the application and interpretation of the Treaties.

This article was co-authored by lawyer Leonor Bettencourt Nunes.

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