Brussels, 16/06/2015 (Agence Europe) - The 'Outright Monetary Transactions' programme (OMT), announced by the European Central Bank in 2012 but never implemented, which allows sovereign bonds to be purchased on the secondary markets by the European System of Central Banks (ESCB), is compatible with the Treaty on the Functioning of the EU. It does not exceed the competences of the ECB as regards monetary policy and does not infringe the prohibition on monetary financing by the member states.
This is the substance of the judgment returned on Tuesday 16 June by the Court of Justice of the EU, which followed the conclusions returned in January of this year in the same case (C-62/14 - Gauweiler et al) by Advocate General Pedro Cruz Villalon (see EUROPE 11230).
The Court was replying to questions put by the German Constitutional Court of Karlsruhe, to which several constitutional appeals had been brought in Germany over the support provided by the German Bundesbank to the implementation of the 'OMT' programme and the alleged negligence of the Federal Government and the Federal Parliament (Bundestag) to act with regard to the programme. The plaintiffs argue firstly that with the 'OMT' programme, the ECB is exceeding its mandate and infringing the prohibition on the monetary financing of the member states of the eurozone and, secondly, that the programme infringes the principle of democracy laid down in the German basic law, thereby infringing Germany's constitutional identity. Relaying these questions, the German court asked the European judges: - whether the treaties of the EU allow the ESCB to adopt the 'OMT' programme, and in particular whether this programme constitutes a non-conventional monetary policy measure, as the ECB claims, or an economic policy measure, which is not within the Frankfurt-based monetary institute's mandate; - whether the programme properly complies with the prohibition on the direct monetary financing of the member states (art.123 TFEU).
The European judges answered both questions in the affirmative.
On the first question, the Court replied that due to its objectives and the means used to achieve them, the 'OMT' programme is indeed a monetary policy matter and therefore falls within the competence of the ESCB.
Regarding its objectives, first of all, “in seeking to preserve the singlemess of monetary policy”, the 'OMT' programme contributes to this and, indirectly, to maintaining price stability, another principal objective of the ECB. Indeed, since disruption of the transmission mechanism used by the ESCB on the monetary market to the various sectors of the economy undermines the effectiveness of its decisions in part of the eurozone, there is a risk of compromising the singleness of its monetary policy and affecting its ability to maintain price stability. The fact that the OMT programme may also make an indirect contribution to the stability of the eurozone (which is an economic policy objective) does not call it into question as a monetary policy measure and does not mean that it is necessarily an economic policy measure falling outside the ECB's mandate.
As regards the means for the implementation of the programme, namely the ESCB's purchase of government bonds on secondary markets bought by other operators on the primary market, the Court observes that this entails the use, by the ECB and the central banks, of one of the monetary policy instruments provided for by the treaties. Here again, the judges argue, the 'OMT' programme is not acting as an economic policy measure simply on the grounds of the fact that its implementation could have the side-effect of reinforcing the incentive to respect the macro-economic adjustment programmes of the European Financial Stability Fund (EFSF) and of the European Stability Mechanism (ESM) by the countries governed by these and thereby contribute to achieving economic policy objectives.
Furthermore, the 'OMT' programme is proportionate as regards the objectives pursued by the ESCB, the judges found, as its possible implementation is governed by a raft of extremely strict conditions (certain types of bond of certain member states selected on the basis of specific criteria) and the ESCB has weighted the various interests in such a way as to avoid disproportionate disadvantages in relation to the objectives pursued.
As regards the prohibition of monetary financing of the member states, the Court argues that although the treaties prohibit all financial assistance from the ESCB to a member state, they do not preclude the possibility of the ESCB purchasing bonds previously issued by that state from its creditors, as long as this purchase does not have an effect equivalent to that of a direct purchase of such bonds on the primary market. Furthermore, the judges add, such purchases may not be used to circumvent the objective of prohibiting the monetary financing of the member states (which aims to encourage the member states to follow a sound budgetary policy and avoid excessively high levels of debt or deficit).
This is the case, the judges state, if the operators which acquire the bonds of that state on the primary market knew with certainty that the ESCB would buy them on the secondary market “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, in the case of the 'OMT' programme, the ECB had taken sufficient precautions to prevent this, by requiring the ESCB to observe a minimum period between the issuing of a bond on the primary market and buying it on the secondary markets and not to announce the date and volumes of these purchases in advance. The Court also rules out the possibility that the 'OMT' programme can be considered as being likely to discourage the member states from following a healthy budgetary policy and therefore as a measure liable to circumvent the objective pursued by the prohibition of monetary financing of the member states.
The president of the economic and monetary affairs committee of the EP, Roberto Gualtieri, expressed his hopes that this judgment of the court would “give the eurozone renewed determination to tackle the current challenges” and encourage “all participants of the Eurogroup meeting of 18 June to show the same determination in the same sense of responsibility the Court of Justice has demonstrated today”.
The reaction of the German Constitutional Court, which has reservations about the compatibility of the 'OMT' programme with the German Constitution and the involvement of the Bundesbank in the programme, is now awaited. (Francesco Gariazzo)