OMT Forum: Whatever It Takes -- But Not Too Much (Pietro Faraguna, NYU & Trieste)

In this post, new network member Pietro Faraguna (NYU & Trieste) offers a perspective on the interplay between the concepts of limits and limitlessness in the recent OMT decision.

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The Outright Monetary Transactions (OMT) program of the European Central Bank (ECB) is compatible with EU law.  Also sprach the Court of Justice (ECJ).

The outcome of the ECJ decision in the Gauweiler case comes as no surprise. It is probably the most cautious option that the ECJ could have chosen: the ECB’s authority is safe at the European level and at the same time the Federal Constitutional Court of Germany (BVerfG) has been offered many reasons to be able to sell the ECJ’s decision as a half—if not full—German victory. Concisely, the decision is a masterpiece of judicial diplomacy!

But let’s take a step back in the OMT saga. The OMT program had been announced by the Governing Council of the ECB in the framework of the financially hot summer in 2012, when the permanence of the euro had been questioned by the markets. The ECB’s response to that financial turmoil had been its well-known “whatever it takes” doctrine. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough” said the ECB’s President, Mario Draghi, on July 26 2012 (reported here). The announcement of OMT was a piece of this whatever-mosaic. “Whatever it takes,” even though “within our mandate,” plainly signaled a no-limits approach from the ECB. And the limitlessness of the ECB intervention was one of the biggest matters of concern in the “German view”. A no-limits approach raised the prospect of unpredictable losses and unpredictable consequences for the Member States’ budgets.

Now let’s take now one step forward to the decision of the ECJ. What is left of the limitlessness of Draghi’s doctrine? Not so much.

If the ECJ’s reasoning could be visualized in a word-cloud, it would highlight the obsessive attention devoted by the ECJ to the concept of limits. There are valid reasons to think that this obsession with limits was triggered by the BVerfG’s reference (here). Take for example paragraphs 85-88 and paragraphs 112-120: portions of the judgment dominated by the relentless repetition of words expressing the same concept. In just 12 paragraphs it is stated that “the programme is limited in a number of ways”; “may purchase only”; “is concentrated on government bonds with a maturity of up to three years”; “only a limited part”; “circumscribed and limited”; “volume is thus restricted”; “a quantitative limit”; “limit”;  “only in so far”; “limitation”; “limiting”; “restricted the volume”; “has limited the scale”; “is also limited”; “limiting”.  The emphasis is clear.

It is not only a matter of textual obsession. The ECJ’s judgment is conceptually based on arguments that contradict the alleged limitlessness of the whatever-it-takes doctrine. Thus, the European System of Central Banks (ESCB) is entitled to purchase government bonds on secondary markets, but only provided that conditions of purchase would not, in practice, “mean that its action has an effect equivalent to that of a direct purchase of government bonds from the public authorities and bodies of the Member States, thereby undermining the effectiveness of the prohibition in Article 123(1) TFEU” (paragraph 97). This would happen if “the potential purchasers of government bonds on 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” (paragraph 104). This is not the case with the OMT program, as the purchases are materially limited. As a matter of fact, “the programme provides for the purchase of government bonds only in so far as is necessary for safeguarding the monetary policy transmission mechanism and the singleness of monetary policy and that those purchases will cease as soon as those objectives are achieved” (paragraph 112) and is moreover limited “to certain types of bonds issued only by those Member States which are undergoing a structural adjustment programme and which have access to the bond market again” (paragraph 116). These conditions restrict, in practice, the volume of government bonds that may be purchased.

An additional reason that excludes the “effect equivalent” is the fact that “the Governing Council is to be responsible for deciding on the scope, the start, the continuation and the suspension of the intervention on the secondary market envisaged by such a programme” (paragraph 106). The full discretion of the ECB makes it impossible for the potential purchasers of government bonds on the primary market to know if, when, how, and how many bonds the ECB will purchase on the secondary market. Another limitation directly involves the volume of bonds that the ESCB is entitled to buy. So: “whatever it takes?” Not exactly. On the contrary, “the programme is limited in a number of ways” (paragraph 85): the ESCB may purchase only the government bonds of Member States which are undergoing a macroeconomic adjustment programme and which have access to the bond market again” (paragraph 86) and is concentrated only on government bonds with a maturity of up to three years” (paragraph 87).

The ECJ’s effort had been swinging between the intention on the one hand to reassure the BVerfG that everything was under control—and therefore that no unlimited actions were at stake—and on the other hand to guarantee that the authority of the ECB remains intact. Traces of this approach, swinging between limits and limitlessness, were already present in the ECB’s response to the financial turmoil. Indeed, the tension was clear in Draghi’s announcement that the ECB would, on the one hand, do “whatever it takes” to save the Euro, while, on the other, respecting the limits of the Bank’s mandate. This tension between limits and limitlessness finally re-emerges in a syntactically rather acrobatic paragraph of the Gauweiler judgment itself: “In those circumstances, a programme whose volume is thus restricted could legitimately be adopted by the ESCB without a quantitative limit being set prior to its implementation, such a limit being likely, moreover, to reduce the programme’s effectiveness” (paragraph 88).

In short: “Whatever it takes” — but not too much.