Advocate general: European Central Bank bond purchasing proposals "compatible in principle" with EU law

Out-Law News | 16 Jan 2015 | 3:57 pm | 3 min. read

Plans that would allow the European Central Bank (ECB) to purchase bonds issued by the governments of member states in the eurozone as a means of securing financial stability appear "compatible in principle" with EU law, according to a legal adviser to the EU's highest court.

Politicians and academics in Germany had challenged the proposed outright monetary transactions (OMT) programme in that country's courts, claiming that it falls outside the scope of the ECB's powers as well as breaching a prohibition on 'monetary financing' contained in the Treaty of Functioning of the European Union (TFEU). However, advocate general Cruz Villalón said that the proposals were "legitimate and consonant with monetary policy" provided that its implementation met certain conditions.

The ECB announced its OMT proposals in September 2012 to address investors' concerns about the continued survival of the euro. Although the programme has not yet been implemented, the ECB is expected to announce some sort of quantitative easing programme in the coming weeks, according to press reports.

Opinions of advocate generals are not binding on the Court of Justice of the European Union (CJEU). However, they tend to be followed in the majority of cases.

The ECB is the central bank for the euro, and is responsible for monetary policy in the Eurozone. Monetary policy is distinct from economic policy; which is the sole responsibility of individual member states but which should be geared towards the EU's common objectives. The term generally refers to action taken by a central bank independently of the political process that is supportive of economic policy; for example, by maintaining price stability.

OMT had its roots in the 2008 international financial crisis and the sovereign debt crisis that followed in various member states in the eurozone. The proposal was intended to address "apparently unstoppable" increases in the prices for bonds issued by those member states in order to reflect their perceived risk. In its 2012 press release, the ECB said that it was ready to use the programme to purchase potentially unlimited amounts of secondary market government bonds issued by eurozone states that had applied for help and committed to structural reform through the European Financial Stability Facility (EFSF) or the European Stability Mechanism (ESM).

In its first ever referral to the CJEU, the German constitutional court questioned the legality of the OMT programme firstly on the grounds that it was an economic, rather than monetary, policy measure; and secondly, on the grounds that the ECB is prohibited by the TFEU from providing funding to member states. In more general terms, the advocate general said that its referral concerned "the limits to which the powers of the ECB are subject in exceptional circumstances".

In his opinion, Cruz Villalón said that in order to effectively carry out its monetary policy remit, the ECB had to have "a broad discretion when framing and implementing" that policy. In addition, national courts had to "exercise a considerable degree of caution when reviewing the ECB's activity, since they lack the expertise and experience which the ECB has in this area", he said.

However, the arguments of the challengers were "not without merit" due to the role played by the central bank in the administration of the various assistance programmes, in particular the ESM, he said. Because of this, the OMT risked becoming "something more than a monetary policy measure" if certain safeguards were not in place. He noted that as the programme had not been implemented full details were not available, but said that if it was activated a "functional distance" must be maintained between the OMT and those assistance programmes.

"Looked at objectively, a programme like the OMT programme, which is centred on the purchase of government bonds, is, to my mind, appropriate for achieving a reduction in the interest rates on the government bonds of the states concerned," he said. "The reduction in question permits the states concerned to return to some degree of financial normality and, as a result, the ECB is able to carry out its monetary policy in conditions of greater certainty and stability."

In addition, he said that the ECB would have to provide "a proper account" of its reasons for doing so before it could adopt "unconventional" monetary policy measures such as the OMT. Given that it had not done so as part of the September 2012 press release, the ECB would have to do so within "both the legal act which gives it form, and its implementation" before it could put the programme into practice, he said.

On the monetary financing point, Cruz Villalón said that the ECB would have to implement any OMT programme in such a way as to "permit the actual formation of a market price in respect of the government bonds" in order to comply with the prohibition.