The Court of Justice of the European Union has ruled that the Outright Monetary Transaction programme does not: (i) exceed the powers of the European Central Bank in relation to monetary policy; (ii) infringe the principle of proportionality, or; (iii) breach the prohibition of monetary financing of EU Member States.
On September 6th, 2012, the European Central Bank issued a press release announcing that it had adopted certain decisions concerning the Outright Monetary Transaction programme. The Programme permits the European System of Central Banks to purchase government bonds of Member States on the secondary market subject to certain conditions: (i) the States concerned must participate in a financial assistance programme of the European Financial Stability Facility or the European Stability Mechanism; (ii) transactions would focus on the shorter part of the yield curve; (iii) quantitative limits would not be set in advance; (iv) the European Central Bank would receive the same treatment as a private creditor, and; (v) liquidity would be fully sterilised.
The case originated in Germany, where a number of concerned parties brought a case before the Federal Constitutional Court against the Federal Government. The parties argued that the Programme: (i) is not covered by the mandate of the European Central Bank and breaches the prohibition on monetary financing of Member States, and; (ii) that those decisions breach the principle of democracy, which is enshrined in German Basic Law.
For the first time in its history, the Federal Constitutional Court requested a preliminary ruling from the Court of Justice.
The case originated in Germany, where a number of concerned parties brought a case before the Federal Constitutional Court against the Federal Government. The parties argued that the Programme: (i) is not covered by the mandate of the European Central Bank and breaches the prohibition on monetary financing of Member States, and; (ii) that those decisions breach the principle of democracy, which is enshrined in German Basic Law.
For the first time in its history, the Federal Constitutional Court requested a preliminary ruling from the Court of Justice.
In view of the Programme's objectives and the instruments provided for achieving those objectives, the Court found the Programme falls within the monetary policy.
First, the Programme contributes to achieving the objectives of the monetary policy by seeking to preserve the singleness of that policy.
Second, the Programme is likely to preserve the singleness of the monetary policy and contribute to maintaining price stability - its primary objective.
The Court found that the ability of the ESCB to influence price developments through its monetary policy decisions largely depends on the transmission of the impulses. The impulses are sent out by the ECB across the money market to various sectors of the economy. Thus, if the monetary policy transmission mechanism is disrupted, it would likely render the decision of the ESCB ineffective in a part of the Euro area. This would undermine the effectiveness of the measures adopted by the ESCB, affecting its ability to guarantee price stability.
The Court concluded that a monetary policy cannot be treated as equivalent to an economic policy simply because the monetary policy is likely to have indirect effects on the stability of the Euro area. The fact that Programme is made conditional upon full compliance with the European Financial Stability Facility or the European Stability Mechanism does not change that conclusion.
The Programme, the Court held, does not infringe on the principle of proportionality for three reasons.
The first reason is, considering the economic conditions described by the ECB in the press release in September 2012, the ESCB could take the view that the Programme was appropriate for the purpose of maintaining price stability.
The second reason is, in view of the conditions that would apply in the event of the Programme being implemented, it does not manifestly go beyond what is necessary to achieve those objectives.
The third reason is because the ESCB considered the various interests in question in order to prevent disadvantages from arising. Those disadvantages are manifestly disproportionate to the Programme's objectives.
The Court held that the prohibition on monetary financing does not prevent the ESCB from adopting or implementing the Programme under conditions that do not result in intervention by the ESCB as having the same effect as that of a direct purchase of bonds from public authorities and bodies member states.
Moreover, the prohibition does not preclude the possibility of the ESCB purchasing bonds from creditors previously issued by that state.
However the Court warned that in purchasing government bonds on the secondary market, "sufficient safeguards" must be put in place to ensure that the Programme does not "fall foul" of the prohibition.
Three safeguards were put forward by the ECB to the Court. The first safeguard, contained in the draft decision and draft guideline, indicates that the Governing Council will be responsible for deciding on: (i) the scope; (ii) the start; (iii) the continuation, and; (iv) the suspension of the intervention envisaged by the Programme on the secondary market. The second safeguard, the ESCB intends to ensure the observation of a minimum period between the issue of security on the primary market and its purchase on the secondary market. While the third safeguard, the ESCB intends to refrain from making prior announcement about either its decision to: (i) carry out such purchases, or; (ii) the volume of purchases envisaged.
The Court held that the prohibition on monetary financing does not prevent the ESCB from adopting or implementing the Programme under conditions that do not result in intervention by the ESCB as having the same effect as that of a direct purchase of bonds from public authorities and bodies member states.
Moreover, the prohibition does not preclude the possibility of the ESCB purchasing bonds from creditors previously issued by that state.
However the Court warned that in purchasing government bonds on the secondary market, "sufficient safeguards" must be put in place to ensure that the Programme does not "fall foul" of the prohibition.
Three safeguards were put forward by the ECB to the Court. The first safeguard, contained in the draft decision and draft guideline, indicates that the Governing Council will be responsible for deciding on: (i) the scope; (ii) the start; (iii) the continuation, and; (iv) the suspension of the intervention envisaged by the Programme on the secondary market. The second safeguard, the ESCB intends to ensure the observation of a minimum period between the issue of security on the primary market and its purchase on the secondary market. While the third safeguard, the ESCB intends to refrain from making prior announcement about either its decision to: (i) carry out such purchases, or; (ii) the volume of purchases envisaged.
