Saving the single currency? Gauweiler and the legality of the OMT programme

Alicia Hinarejos, Downing College, University of Cambridge; author of The Euro Area Crisis in Constitutional Perspective 

On the 16^th of June the Court of Justice delivered its decision in the Gauweilercase, concerning the legality of the Outright Monetary Transactions (OMT) programme of the European Central Bank (ECB). The Court considered the programme compatible with EU law. The decision has important implications for the powers of the ECB, the constitutional framework of the EU’s Economic and Monetary Union, and for the relationship between the Court of Justice of the EU and the referring court, the German Federal Constitutional Court. This was the first time that the German court asked for a preliminary ruling, and it remains to be seen whether the reply given by the Court of Justice will be to the national court’s liking. (See my earlier comments on the Advocate-General's opinion in this case here).

Background

The ECB is in charge of conducting monetary policy for the euro area and its role is very narrowly defined in the Treaties. This role, however, has evolved and expanded substantially in recent years, as the ECB has announced or adopted various ‘non-standard’ measures in response to the euro area sovereign debt crisis. The OMT programme is one of these measures: it was announced in September 2012 in a press release and, so far, it has never been used.

The idea is that the ECB will buy government bonds from euro countries in trouble, i.e., when nobody else buys these bonds, or their yield is becoming so high that the Member State will not be able to cover interest payments on newly issued bonds, thus having no more access to credit and risking default. Crucially, the Treaty prohibits the ECB from acquiring government bonds directly (Art 123 TFEU) as this would amount to monetary financing, or becoming a direct lender of last resort to a Member State. Instead, the ECB would buy government bonds in the secondary market—that is, from a party that has bought these bonds first from a Member State—rather than from a Member State directly. While the ECB has already done this before, with the OMT programme there would be an added formal element of conditionality, as the Member State in question would need to obtain financial assistance from the European Stability Mechanism or the EFSF and comply with its conditions (i.e. macroeconomic reforms negotiated between the Member State and the troika: the Commission, the ECB, and the IMF).

The applicants before the German Court argued that the ECB had overstepped its Treaty role by creating a programme that should be viewed as a tool of economic, not monetary, policy; it was also alleged that the programme violated the prohibition of monetary financing. In an exercise of ultra vires jurisdiction, the German Constitutional Court’s preliminary response was to consider the OMT programme illegal under EU law. For the first time ever, the national court then referred the case to the CJEU. In the referring court’s view, the Court of Justice might either declare the OMT scheme contrary to EU law, or provide a more limited interpretation of the programme that is in accordance with the Treaties. The German Court provided certain indications as to what those limits should be, and it went on to state that whether the OMT scheme could eventually be held to violate the constitutional identity of the German Basic Law would depend on the CJEU’s interpretation of the scheme in conformity with EU primary law.

The case was sensitive for various reasons: although not yet used, the mere announcement of the OMT scheme played an important role in getting the euro area out of the acute phase of the crisis, and offers a credible defense against similar future scenarios. A declaration of illegality, or the placing of substantive limits on the programme, could have jeopardised post-crisis recovery. Additionally, the reference was the first ever submitted by the German Constitutional Court, and its tone was quite bold; there was, and is, clear potential for conflict between the two courts, with consequences unknown for EMU. Moreover, the case touches on the nature and legitimacy of the role of the ECB as an independent expert, and on the dichotomy between the original, rule-based conception of EMU and the evolving, more policy-oriented EMU that rose out of the crisis.

The Court of Justice’s Decision

(1)  Preliminary questions

Various arguments had been put forward against the admissibility of the reference. Some of them went to the nature of the ECB’s announcement of the OMT programme and its reviewability; others to the circumstances under which the reference had been made by the national court.

First, it was argued that the ECB’s announcement was not a legal act, but a preparatory act without legal effects. The Court of Justice rejected this view. Second, the Court similarly rejected arguments to the effect that the conditions under which the reference had been made were not compatible with the preliminary ruling procedure, because the questions at stake were too abstract and hypothetical, because the German court would not consider itself bound by the resulting preliminary ruling, or because the national proceedings could be said to create the possibility for German citizens to bring a direct action against the validity of an EU act without having to use Art 263 TFEU (and without complying with its conditions for admissibility). In dealing with these arguments, the Court relied on the division of competences between itself and the national courts within the framework of the preliminary ruling procedure, refusing to second-guess the German court’s assessment of the need for a preliminary ruling or the rules of national law governing judicial review and the organization of legal proceedings. Unsurprisingly, the Court reasserted the binding force of its preliminary rulings upon national courts.

(2)  The legality of the OMT programme

Broadly speaking, the German court had raised two main concerns: that the OMT programme was a measure of economic, not monetary, policy, thus beyond the powers of the ECB; and that the programme was incompatible with the prohibition of monetary financing of Member States enshrined in Art 123(1) TFEU.

Is it monetary policy?

The Court started by assessing the nature of the OMT scheme and whether it should be classified as a measure of monetary or economic policy. The applicants had argued that the scheme should be viewed as an economic policy measure adopted with the aim of saving the euro by changing certain flaws in the design of monetary union, i.e. by pooling the debt of euro countries. They also emphasized the effects of the attached conditionality on Member States’ economic policies. All this, they argued, placed the OMT scheme beyond the merely supporting role that the ECB may have in economic policy, according to the Treaties. The German Constitutional Court agreed, based on various features of the OMT scheme: its conditionality and parallelism with ESM and EFSF financial assistance programmes (as well as its ability to circumvent them) and its selectivity (in that OMT bond-buying would only apply to select countries, whereas measures of monetary policy typically apply to the whole currency area).

The ECB, on the other hand, argued that the aim of the scheme ‘is not to facilitate the financing conditions of certain Member States, or to determine their economic policies, but rather to “unblock” the ECB’s monetary policy transmission channels’ [104]. In other words, the crisis was making it impossible for the ECB to pursue monetary policy through the usual channels. The proposed bond-buying would ensure that credit conditions return to normality, and that the ECB is able to conduct its monetary policy again. Additionally, the ECB argued that the element of conditionality was necessary to ensure that the OMT scheme would not interfere with the programme of macroeconomic reform agreed between the ESM and the Member State in receipt of financial assistance.

As it had done in Pringle, the Court set out to determine whether the measure in question fell within the scope of monetary or economic policy by investigating its objectives and instruments. The Court considered the stated objectives of the OMT programme (to safeguard ‘appropriate monetary policy transmission and the singleness of the monetary policy’) and concluded that they contributed to the ultimate aim of monetary policy, i.e. maintaining price stability. The Court drew an analogy with Pringle at this point to argue that possible indirect effects of the OMT programme in economic policy (the fact that the programme may contribute to safeguarding the stability of the euro area) did not mean the measure should be classified as pertaining to economic policy. The Court came to similar conclusions when examining the instruments to be used in order to achieve the objectives of the programme. In sum, both objectives and instruments of the OMT programme—and thus the programme itself—were taken to fall within the scope of monetary policy.

Interestingly, while Advocate General Cruz Villalón had come to the same overall conclusion regarding the classification of the OMT programme as a measure of monetary policy, he had introduced an important caveat: he saw a problem in the fact that the ECB made bond-buying through the OMT scheme conditional on the Member State’s compliance with a programme of macroeconomic reform adopted within the framework of the ESM or EFSF, and the fact that the ECB plays a very active role in the negotiating and monitoring of this programme with the Member State. This double role of the ECB (first within a framework for financial assistance which constitutes economic policy, according to Pringle, and then in its bond-buying role within the OMT) would tip the OMT scheme beyond the boundaries of the ECB’s powers: monetary policy with, at most, a supporting role in economic policy. The AG thus considered that, if the OMT were to be activated, the ECB would have to distance itself from the Troika and the monitoring of the conditionality for financial assistance immediately.

On the contrary, the Court saw no problem with making bond-buying through the OMT programme conditional upon the Member State’s compliance with ESM or EFSF conditionality; this would lead to the sort of indirect effects in economic policy that the Court had already considered irrelevant to the classification of the measure, and it would ensure that ESM/EFSF conditionality would not be rendered ineffective by the ECB’s actions. This, according to the Court, is in line with the ECB’s obligation to support the general economic policies in the Union. The fact that bond-buying in the secondary markets can be considered a measure of economic policy when the ESM does it (Pringle), and a measure of monetary policy when the ECB does it, is justified, according to the Court, because of the different objectives pursued in each case. Finally, the Court made no reference to the involvement of the ECB within the troika.

Is it proportionate?

The Court concluded that the OMT programme, as first described by the ECB in its announcement, is appropriate for attaining its objectives and does not go beyond what was necessary to achieve them. In conducting its review of proportionality, the Court recognized the ECB’s broad discretion to make complex assessments and technical choices in the area, and it conducted a light-touch review. The Court was satisfied that the ECB had satisfied the duty to give reasons sufficiently, and that it had not made a manifest error of assessment in its analysis of the economic situation and in its view that the OMT programme would be appropriate to achieve the effect sought. Equally, the Court surmised that the measure, as described in the ECB’s press release, would not go beyond what was necessary to achieve its objectives, given the limited nature of the programme and the wording of the press release itself (i.e. that bond-buying would only take place in order to satisfy very specific objectives, and that it would cease as soon as they had been achieved). No prior quantitative limit was considered necessary.

Is it against the prohibition on monetary financing?

The Court then turned to the possible circumvention of the prohibition on monetary financing of Member States. While the Treaty makes it illegal for the ECB to buy government bonds directly from a Member State, the referring court argued that, although OMT bond-buying would take place in the secondary market, this amounted to a circumvention of the same rule. This circumvention would undermine fiscal discipline and would make certain Member States responsible, ultimately, for the debts of others.

The Court of Justice agreed that the ECB should not be able to buy bonds from Member States in the secondary markets under conditions which meant that, in practice, the bond-buying would have the same effect as if it had taken place directly; or, put differently, if indirect bond-buying would defeat the purpose of Art 123(1) TFEU in the same way as buying bonds directly. In order to decide whether the OMT programme could be considered such an illegitimate circumvention of the Treaties, the Court sought to elucidate, first, the aim of Art 123(1) TFEU (the prohibition on monetary financing of Member States); and second, the extent to which indirect bond-buying within the OMT scheme would threaten the achievement of that aim.

According to the Court, the purpose of the prohibition on monetary financing of Member States is to encourage the latter to pursue a sound budgetary policy: if Member States cannot rely on monetary financing, they are subject to market discipline and they need to avoid excessive debt and deficits if they want to be able to sell their bonds, and thus have access to credit in the financial markets, in favourable or sustainable conditions.

The aim of encouraging a prudent budgetary policy could be threatened by indirect bond-buying within the OMT programme to the extent that such actions would improve a Member State’s access to credit, unless certain safeguards were built into the programme. The Court was convinced by the ECB’s assurances that any implementation of the programme would contain such safeguards: distortion to the conditions under which a Member State can sell its bonds in the primary market would be limited (by not announcing in advance the ECB’s intention to buy a Member State’s bonds in the secondary market, and by allowing a reasonable period of time to elapse between the Member State’s sale of its bonds in the primary market and their subsequent acquisition by the ECB). The Court was further satisfied that the uncertain possibility of having the ECB buying a Member State’s bonds in the secondary market would not, by itself, diminish Member States’ incentive to pursue a prudent budgetary policy, given the limited nature of the OMT programme and the limited cases in which it may be used. Finally, making bond-buying within the OMT programme conditional on the Member State’s compliance with ESM/EFSF conditionality would ensure, according to the Court, that Member States in receipt of financial assistance would not see bond-buying through the OMT programme as an alternative to fiscal consolidation.

Overall, then, the Court concluded that the OMT programme—as presented in the press release and subject to the safeguards explained by the ECB before the Court—is compatible with the prohibition on monetary financing: under those conditions, indirect bond-buying through the OMT programme would have an effect on Member States’ access to credit, but that effect would not be equivalent to that of buying bonds directly from Member States (monetary financing) and it would not defeat the purpose of the ban of monetary financing, which is to encourage Member States to pursue a prudent budgetary policy.

Final Remarks

The judgment in Gauweilerbrings no surprises: the ECB’s OMT programme is in accordance with the Treaties, as long as it implemented in the way that the ECB assured the Court it would be. So certain safeguards have to be built into the system, but these safeguards are not new or especially onerous, and they do not go as far as the ones put forward by the German Federal Constitutional Court as conditions of legality. The final result is as expected; the question is whether the safeguards required by the Court of Justice will satisfy the referring court, and what impact this decision will have on the relationship between the two courts.

The Court of Justice has recognized the broad discretion of the ECB to make complex economic assessments and technical choices, while at the same time striving to discharge a meaningful and necessary role: the Court does not want to be seen to be second-guessing the expert body’s policy choices, so it focuses on procedural requirements and applies a light-touch review when it comes to assessing the proportionality of the scheme. It is in the final part of the judgment (when assessing the compatibility of the OMT programme with the ban on monetary financing) that the decision is at its most strict. It is in this section that the Court seeks to apply (and be seen to be applying) a coherent, rigorous-enough-yet-within-judicial-boundaries compatibility test.  Will the Court’s efforts prove convincing enough? It depends on what section of the Court’s audience we consider. The decision can be said to continue in the Pringle vein of ratifying a move away from a rules-based EMU to a policy-based one in the wake of the crisis. Ultimately, disagreement will remain between those that see this evolution as unavoidable and even necessary if EMU is to adapt and survive, and those that, either do not agree with this evolution, or think that it should take place by different means. Finally, the Court’s discussion (like the AG’s Opinion before it) does turn on the specific features of the OMT programme rather than on more abstract questions such as the nature of EMU, its evolution, and the role of solidarity within its constitutional framework. While the decision should unmistakable be read in its more general constitutional context, the most natural forum for this broader discussion may not be a judicial one.

Barnard & Peers: chapter 19

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Catharsis or catastrophe: what next for Greece and the Eurozone?

 

Steve Peers

Yesterday the anti-austerity party Syriza won a large victory in Greek elections and seems certain to become the government, probably in coalition with a smaller party. What is the likely impact upon the EU’s economic and monetary union?

The starting point is Syriza’s election platform. As discussed in more detail in this Open Europe blog post, that party’s aim is not to leave the EU or even the single currency, but rather to renegotiate Greece’s debts and the related austerity obligations. In particular, it wants part of Greece’s debt to be forgiven, and the terms of the remaining debt to be renegotiated, along with an abolition of the austerity demands made upon Greece as condition of previous bail-outs.

But whatever the political and economic arguments for this programme, it potentially faces some legal hurdles. There are limits on forgiving debt or ending austerity, as set out in the EU Treaties and the case law of the CJEU, which I discussed in a previous blog post (which this post updates).

In particular, according to Article 136(3) TFEU, any financial assistance to a eurozone Member State must be subject to ‘strict conditionality’. This is consistent with the CJEU ruling in Pringle, which stated that the ‘no-bailout’ rule in the EU Treaties (Article 125 TFEU) allowed Member States to offer each other financial assistance on the condition that it took the form of loans, rather than a direct assumption of Greek government debt by other Member States. Moreover, the CJEU pointed out, the ESM Treaty (the treaty between eurozone Member States which governs bail-outs) required that in the event of non-payment, the loans would remain payable, and had to be charged an appropriate level of interest.

So it’s not possible for Member States to drop all conditionality as regards loans to Greece, to forgive debt as such or to loan money interest-free. But it is open in principle to reduce the stringency of the conditions somewhat, to reduce the interest rates payable and to lengthen the repayment period – although there is always the risk that some litigant will try to convince a national court or the CJEU that this is going too far. Moreover, the rules in the EU Treaties only bind EU institutions and Member States, not private parties, third States or international organisations (although it might be argued that Member States are constrained as members of the IMF not to violate the no-bailout rule indirectly). So any renegotiation or default as regards such creditors is not subject to EU law rules in principle, although of course other legal rules might be applicable.  And as the Open Europe analysis points out, the bulk of the debt is owed to the Eurozone.

The case law does not rule out a short period of non-repayment of principal or interest, as long as the loans remain payable and subject to interest. Nor does it specifically address the possible conversion of loans into bonds, as some in Syriza have suggested.

Overall, it’s hard to see how the relatively modest renegotiation which EU law would permit would do enough to reduce Greece’s mountain of debt significantly, or to satisfy the voters which supported a Syriza-led government.

The renegotiation of loans might not be the only possibility to help out Greece. For example, arguably the Treaties do not rule out a form of (supplementary) unemployment insurance system as between Eurozone Member States, or support for another Member State’s social spending, as long as it would not take the form of paying off another State’s debts as such.

There is the ultimate possibility of leaving the euro, either at the behest of Greece itself or the other eurozone Member States. As I pointed out in the previous post, it isn’t legal to leave the Eurozone (or to force a Member State out) without that State leaving the EU. On that point, while it’s open to any Member State to leave the EU, it’s not legal to force a Member State out. At the end of the day, though, the European Central Bank holds the trump cards, since it could force a Member State to leave monetary union in practice by stopping the supply of money to that State. The independence of the ECB prevents politicians from ordering the bank to take such a radical step, but it might act on its own initiative.

Quite apart from its very dubious legality and severe economic effects, such a move would be a huge political mistake. The result might not be an increase in support for those moderate parties that reluctantly supported austerity, but rather for the far-right neo-Nazi Golden Dawn party, which came third in the elections.

The better course for the EU is to take this opportunity to re-engage with the millions of EU citizens who are affected or angered by austerity, and re-orient the EU towards ending that austerity, instead of generating more of it. Although this is more easily said than done, it should never be forgotten that the initial rationale for the EU was not austerity, but economic growth which raised living standards for the population as a whole. So in voting for a party which promised the latter, Greeks have reaffirmed, not rejected, the Union’s traditional raison d’etre, reminding it that the Union cannot maintain its social or political legitimacy if it becomes no more than a mechanism for enforcing austerity.

 

Barnard & Peers: chapter 19

Cartoon: Economist.com

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The beginning of the end for the Euro? EU Law constraints on leaving EMU or defaulting on debts

 

Steve Peers

After a couple of years without any (apparent) crisis, the future of Economic and Monetary Union (EMU) is threatened again, following the decision to call snap Greek elections in January. What would be the consequences if the anti-austerity party Syriza becomes the government?

First of all, such an outcome is not yet certain. As Open Europe’s analysis points out, Syriza has only a modest lead in the polls, and even if it becomes the largest party, it may well fall short of having a majority of seats, in which case it would have to form a coalition with another party.

Secondly, it’s necessary to realise that Syriza has, in principle, relatively modest ambitions. Its policy is not to leave the EU or even the single currency, but rather to renegotiate Greece’s debts and the related austerity obligations. Even in previous elections, it sought to default on the debt, rather than leave the EU or EMU.

Having said that, it is possible that Syriza might decide to threaten more decisive action if renegotiation does not go well. Or that party’s more radical elements might take charge.  Or, in the view of some (see this Washington Post commentary), Greece might be forced out of the euro by other Member States, particularly Germany.

While the main issues arising from this situation are political and economic, there are also legal constraints that cannot be overlooked. Some key measures taken to save the euro in recent years were litigated before national courts (particularly in Germany and Ireland), as well as in the CJEU, notably the Pringle case (concerning the treaty establishing the European Stabilisation Mechanism) and the pending Gauweilercase (discussed here), concerning the European Central Bank policy of buying government bonds. The Advocate-General’s opinion in the latter case is due in mid-January – in the midst of the Greek election campaign.

Let’s start with the most radical outcome. Every Member State has an option to leave the EU, set out in Article 50 TEU. It would be unwise to invoke that provision unless a Member State genuinely wants to leave (see my earlier blog post on that provision). Conversely, however, it’s entirely impossible to force a Member State out of the EU against its will. The most that the other Member States can do is to suspend its membership in the event of a ‘serious and persistent breach’ of EU values, in particular human rights and democracy (Article 7 TEU).

What about departure from EMU? The Treaties contain detailed rules on signing up to the euro, which apply to every Member State except Denmark and the UK. Those countries have special protocols giving them an opt-out from the obligation to join EMU that applies to all other Member States. But there are no explicit rules whatsoever on a Member State leaving the euro, either of its own volition or unwillingly, at the behest of other Member States.  There’s an obvious reason for this: the drafters of the Maastricht Treaty wanted to ensure that monetary union went ahead, and express rules on leaving EMU would have destabilised it from the outset. Put simply, legally speaking, Greece can’t jump or be pushed from the single currency.

But other currency unions have fallen apart in history, despite any legal prohibitions that may have existed against it. So it’s important to consider also the practical constraints: it’s not realistic to imagine forcing Greece to leave or to stay in EMU against its will, short of invading and occupying the country. How would Greece be forced out exactly? By printing drachmas in Frankfurt, dropping them from the air over Greece and hoping that Greeks use them?

In the event that Greece did choose to leave EMU in practice, EU law would have to be amended (probably with retroactive effect) to regulate the position. Although there are no express provisions on this issue, arguably Article 352 TFEU (the default power to regulate issues not expressly mentioned in the Treaties) could be used. This would require a unanimous vote of all Member States: it wouldn’t be possible to use the EU’s ‘enhanced cooperation’ rules (allowing a group of Member States to go ahead without the others), since those rules can’t be used where an issue falls within the scope of the EU’s exclusive competence, and the single currency falls within the scope of the exclusive competence over monetary policy. If Article 352 was not legally possible (someone might bring a successful legal challenge if it was used, or one or more Member States might have purely legal objections), it would be necessary to amend the Treaties.

The least radical outcome is that Greece’s debt and austerity obligations are simply renegotiated. But there are legal constraints here too. Most significantly, Article 136(3) TFEU states that any financial assistance must be subject to ‘strict conditionality’, consistent with the CJEU ruling in Pringle. The CJEU also made clear in that judgment that the ‘no-bailout’ rule in the EU Treaties (Article 125 TFEU) allowed Member States to offer each other financial assistance on the condition that it took the form of loans, rather than a direct assumption of Greek government debt by other Member States. Moreover, the CJEU pointed out, the ESM Treaty required that in the event of non-payment, the loans would remain payable, and had to be charged an appropriate level of interest.

So it’s not possible for Member States to drop all conditionality as regards loans to Greece, to forgive debt as such or to loan money interest-free. But it is open in principle to reduce the stringency of the conditions somewhat, to reduce the interest rates payable and to lengthen the repayment period – although there is always the risk that some litigant will try to convince a national court or the CJEU that this is going too far. Moreover, the rules in the EU Treaties only bind EU institutions and Member States, not private parties, third States or international organisations (although it might be argued that Member States are constrained as members of the IMF not to violate the no-bailout rule indirectly). So any renegotiation or default as regards such creditors is not subject to EU law rules in principle, although of course other legal rules might be applicable.  

Whether such fairly modest renegotiation would do enough to reduce Greece’s mountain of debt significantly, or to satisfy the voters which supported a Syriza-led government, remains to be seen. The greater impact may be longer-term, in the event that a Podemos-led government comes to power in Spain, or that new or current governments in other Member States which have been bailed out demand a similar renegotiation.

Finally, it should be recalled that renegotiation of loans might not be the only possibility to help out Greece. For example, arguably the Treaties do not rule out a form of (supplementary) unemployment insurance system as between Eurozone Member States, since it would not take the form of paying off another State’s debts as such. Admittedly, such a system would provide indirect financial support to another State, since it would reduce costs which that Member State might otherwise have. But the same might be said of loaning money to that Member State, at interest rates far lower than it would be offered on the free market, via means of the ESM Treaty – and the CJEU has already found that this didn’t violate the no-bailout rule. Moreover, the previous Commission has already done a lot of preparatory work on this issue (see the fuller discussion here). Such a scheme could probably be launched either inside the EU legal framework, or outside it.  

It’s up to Greek citizens to decide if they want to vote for Syriza or not, and the EU institutions and other Member States should leave them alone to make their choice. But if Greeks do decide to vote for that party, it would be tiresome and counter-productive to react with bluster and threats. Why not take this opportunity to re-engage with the millions of EU citizens who are affected or angered by austerity, and re-orient the EU towards ending that austerity, instead of generating more of it? That’s more easily said than done, of course. But an unemployment insurance system would not only have an economic rationale (as an automatic stabiliser) but also a political one, demonstrating that the EU can assist those who have suffered from the economic downturn directly.

 

Barnard & Peers: chapter 19
Photo credit: Xendpay.com

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Counterfeiting the euro: The EU legislature applies the principle of ineffectiveness

Steve Peers

In some of its key judgments concerning EU criminal law, most notably Pupino and its judgments on the legal base for environmental crime legislation, the Court of Justice of the European Union (CJEU) has attempted to strengthen the principle of effectiveness in this area. However, the EU legislature has recently agreed on a new Directive on counterfeiting the euro, which could only be described as an application of the principle of ineffectiveness.

Background

The issue of counterfeiting the euro is currently addressed by a number of measures, most notably a pre-Lisbon measure, a Framework Decision forming part of the previous 'third pillar', which dates from 2000. This Framework Decision sets out substantive criminal law rules regarding counterfeiting currencies, including the euro. It requires Member States to define as a criminal offence the fraudulent making or altering of currency, as well as a number of similar offences.

The various offences must be 'punishable by effective, proportionate and dissuasive criminal penalties, including penalties involving deprivation of liberty which can give rise to extradition'. More precisely, the offence of fraudulent making or altering of currency must be punishable by a possible maximum penalty of at least eight years. This was the first time the EU had included a rule on sentencing in its substantive criminal law legislation, and most such EU measures adopted since have included further sentencing rules.

The new Directive

In its proposal for a Directive to replace the Framework Decision, the Commission again hoped to break new ground: it suggested that for the first time, EU legislation should establish a minimum sentence for certain crimes. In this case, there would be a minimum penalty of at least six months' imprisonment for certain offences of counterfeiting currency, if at least €10,000 was involved.

The Commission's rationale for this proposal was that many Member States had provided for no minimum sanctions, or only for fines as a penalty as regards counterfeiting currency, therefore increasing the incentive for counterfeiters to 'forum-shop' for a jurisdiction which would treat them quite leniently if they were caught. At p 13 of its impact assessment, the Commission offers convincing evidence that this is taking place. In four Member States with no minimum sanctions, or fines as minimum sanctions, there were 343 cases of illegal printeries dismantled from 2002-2011 (86 cases/Member State). In eleven Member States which provide for at least six months' imprisonment for counterfeiting currency, there were only 179 such cases during the same period (16 cases/Member State). This discrepancy isn't due to the size of Member States, since there was only one large Member State in the first category, and three large Member States in the second. As the Commission suggests, 'these figures seem to suggest that Member States with low levels of sanctions tend to attract counterfeiters'.

However, the European Parliament (EP) and the Council were not willing to accept the Commission's proposal on this point. The final agreed Directive only provides for the current eight year possible maximum sentence for fraudulent making or altering of currency, adding a five year possible maximum sentence for related crimes. But there is no provision on minimum criminal sanctions.

On the other hand, two other innovations proposed by the Commission were accepted. First of all, Member States will have to provide for 'effective investigative tools', such as interception and undercover agents, as regards counterfeiting currency. This will prevent investigations being dropped due to the lack of such techniques being available (for an example of this happening in practice, see p. 16 of the impact assessment). Secondly, Member States will have to allow identification of counterfeits while criminal proceedings are underway. This will speed up the process of ensuring that the bogus currency created from the illegal printing press is rejected (for an example of bogus €500 notes being accepted because there was no early access to the counterfeits, see p. 18 of the impact assessment). The European Parliament also insisted upon a new clause requiring the Commission to collect information on the numbers of prosecutions.

The adoption of the Directive will continue the process of replacing pre-Lisbon third pillar acts with ordinary EU legislation (four other Framework Decisions have been replaced by Directives to date). However, since the end of the transitional period relating to pre-Lisbon third pillar acts is nigh (the usual rules on infringement actions and references from national courts will apply from 1 December 2014), this does not matter very much in practice.

The Directive will not apply to the UK and Denmark, matching precisely the opt-out rules relating to the single currency (all other non-eurozone Member States must adopt the euro in principle).  While the Framework Decision will still apply to those countries for now, the UK has decided to opt out of it (without applying to opt back in) as from 1 December this year. In the hypothetical event that the UK then decriminalises the counterfeiting of the euro on its territory, that would arguably be a breach of the principle of 'sincere cooperation' in EU law.

Comments

One wonders why the EU legislature puts such store by the Commission producing comprehensive impact assessments, and then ignores the evidence set out in them. It is true that a minimum criminal sentence might be at odds with some Member States' criminal law systems, which the Treaty rightly requires the EU to respect. However, the best way to address this legitimate concern is to provide for an exception for those Member States in the relevant legislation .

While there are generally good reasons, on grounds of subsidiarity and such respects for national systems, for the EU not to interfere with the basic principles of national sentencing systems, the case of counterfeiting the euro is special. (So is the issue of protection of the EU's financial interests, where the Commission has proposed to interfere with national rules on prescription for the first time.) Any counterfeiting of the EU's single currency necessarily impacts on all the Member States using it, as well as (less directly) the Member States which are required to use it in future. The EU legislature's choice to apply the principle of ineffectiveness in this new legislation is therefore regrettable.


Barnard & Peers: chapter 25

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Clash of the Judicial Titans: Will the Euro survive?

Steve Peers

The German Federal Constitutional Court (BVerfG) has finally sent a reference to the Court of Justice of the European Union (CJEU). Moreover, it has chosen a crucially important issue to ask questions about. This issue is the validity of the Outright Monetary Transactions (OMT) policy of the European Central Bank (ECB) – the very policy which is credited with keeping the EU’s single currency alive, perhaps single-handedly. If either of these courts rules that this policy is invalid, the very existence of the EU’s single currency could be called into question.

 In a nutshell, the OMT constitutes a promise made by the ECB, back in the summer of 2012, that it would if necessary purchase the government bonds of troubled eurozone Member States on the secondary market (ie, from banks and other financial institutions which own those bonds). The purpose of the policy was to shore up confidence as regards the specific economies in question, and therefore in the single currency in general. In return, among other things, the countries concerned would have to sign up to austerity programmes. While the OMT has never actually been triggered, the mere possibility of its use appears to have calmed financial markets’ doubts about the survival of the single currency (and about the continued use of the euro by all the EU Member States which currently use it) considerably. The BVerfG’s decision to send any question to the CJEU is itself historic. It comes soon after the first references to the Court of Justice from the Spanish Constitutional Court (Melloni) and the French Constitutional Court (Case C-168/13 F, which concerned Jeremy Forrest, the British schoolteacher who ran off with one of his pupils). So all the big beasts among Europe’s constitutional courts have now engaged with the CJEU.

 However, it is clear that the BVerfG at least still does not really regard the CJEU as the king of the jungle. It asserts its intention to find that the OMT programme breaches the German constitution, depending on what the CJEU has to say. On the other hand, the CJEU has always asserted that it is the sole judge of whether an EU act is valid (going back to the judgment in Foto-Frost). Can the single currency survive this conflict between constitutional principles?

The legal issues 

The BVerfG (along with many others, particularly in Germany) doubts that the OMT programme is legal, because it constitutes economic policy (rather than monetary policy) and because it amounts to the ECB buying up eurozone governments’ debt, which is not permitted under the Treaties which the EU is founded up.

Let’s have a closer look at these arguments. First of all, is the OMT programme an economic policy? While the EU has established an economic and monetary union (EMU) among eurozone Member States, and economic and monetary policies are obviously closely related, there is nonetheless a sharp legal difference between the two policies as a matter of EU law. Monetary policy is an exclusive competence of the EU, as far as the eurozone Member States are concerned. Within the EU, the ECB is in charge of that policy.

On the other hand, economic policy is primarily a matter for Member States; the Union (primarily the Council) only coordinates such policies.While this division may not make much economic sense, any significant shift of powers over economic policy to the EU would have been impossible to agree politically, and have raised great(er) doubts about the EU’s legitimacy.

In its Pringle judgment of 2012, the CJEU ruled that the treaty establishing the European Stability Mechanism (ESM), which establishes a system for eurozone Member States to lend financial support to each other, was an act of economic policy, not monetary policy. But the CJEU did not define what ‘monetary policy’ consisted of.

The BVerfG doubts that the OMT programme is valid because it constitutes an independent economic policy of the ECB. But as the BVerfG itself notes, the Treaties provide (in Art. 127(1) TFEU) that the European System of Central Banks (which the ECB forms a key part of) ‘shall support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union’ set out in Art. 3 TEU. Arguably the OMT programme is exactly that: support for the economic policies of Member States (including the ESM) as regards the EU’s objective of establishing and maintaining a single currency. As long as the economic conditionality linked to the OMT programme is no different from, or at least consistent with, the economic conditionality linked to the ESM and the EU rules on economic governance (ie, control of excessive deficits), then the OMT programme cannot be said to constitute a separate economic policy of the ECB.

Secondly, does the OMT programme circumvent the ban on buying government debt? Article 123 TFEU specifies that the ECB and national central banks cannot ‘purchase directly’ the ‘debt instruments’ of eurozone Member States’ governments. Obviously, the word ‘directly’ is significant; if the authors of the Treaties had wanted to ban the ECB from ever owning a government bond issued by a eurozone Member State, they would have left that word out. So it can hardly be doubted that the ECB can purchase such bonds from financial institutions, at least on a modest and non-systematic basis. 

But the BVerfG is concerned about the underlying purpose of the ban on direct purchases of government bonds: to prevent governments from being ‘propped up’ by the central bank. If all government bonds issued by Eurozone Member States were systematically snapped up by the ECB from the financial institutions which had initially bought them, the ECB would arguably be circumventing the ban on direct purchases.

The best approach to this objection is to interpret the ECB’s powers in light of its obligation to contribute to achieving the EU’s objectives, in particular the development of the single currency. In the ordinary course of events, purchasing significant numbers of eurozone government bonds directly on the secondary market might not have a strong link to the existence of the single currency. But in the current circumstances, it does. So this justifies a flexible approach to the limits which might otherwise apply to the ECB’s actions – provided that such purchases are on secondary markets, and are necessary to ensure the single currency’s survival.

The judicial politics 

The BVerfG states clearly what it expects the CJEU to do: to interpret the OMT programme in accordance with its specified constraints, otherwise it will rule that the programme is in breach of the German constitution. But the BVerfG has warned the CJEU before, and then not gone through with its threats. It has come to resemble an angry parent issuing increasingly dire threats to a naughty child – and then not following through on them. The naughty child soon realises that the threats won’t be carried out, and adapts her (mis)behaviour accordingly. 

And there is another factor at play here. When the BVerfG was asked if Germany could ratify (for instance) the Lisbon Treaty, there was a clear route to ensure that its judgment was carried out. Very simply, it could have ordered the German government not to ratify that Treaty. Similarly, in cases concerning the EU’s banana market legislation, or the interpretation of EU age discrimination rules, it could have ordered the German administration and courts not to apply the rules concerned. But it is less clear exactly what it can do to stop the actions of the ECB, which presumably would not consider itself bound by a BVerfG decision. The BVerfG refers to requiring the German government to act (unless there is a retroactive amendment of the German constitution), but exactly how that will stop the application of the OMT programme is unclear. So our naughty child in Luxembourg – and her naughty brother in Frankfurt – must know that their ostensibly strict parent probably can’t carry out this particular threat.

In that case, how will they behave? It might be expected that many of the concerns raised by the BVerfG can be addressed, but not all. In particular, it is hard to see how the OMT programme could achieve its objectives if the ECB does not have the power to buy significant number of government bonds on secondary markets. Possibly the CJEU will allow such purchases to continue, subject to certain conditions – which the BVerfG may decide are strict enough to meet its concerns. Judging from the overall tone of the latter court’s ruling, it is looking to find a way to uphold the validity of the OMT programme despite its fundamental objections.


Barnard & Peers: chapter 19

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