In a recent article in the FT, Mark Mazower argued that Germany’s emergence as the dominant member state has left its imprint on European institutions and that the creation of the Euro has shifted power towards central banks. This comment reflects a widely held belief that the European Central Bank (ECB), in particular, has come to dominate European policy making in the years following the crisis. In the summer of 2012, Mario Draghi, President of the ECB famously promised to do ‘whatever it takes’ to preserve the Euro. These comments became the cornerstone of the ECB’s efforts to rescue the Eurozone and laid the foundation for a series of interventions with long term impacts. My recent paper reflects on the evolution of central bank powers and examines whether the ECB strays from the confines of EU law.
The consequences of operationalising ‘whatever it takes’ have led to Mario Draghi being described both as the saviour of the Euro, and also as a threat to the rule of law in the European Union. At the same time that the ECB was praised for calming markets in Europe, and preventing a second financial crisis, critics were accusing its President of being the facilitator of a coup d’etat in the south of Europe. While most of the angry, nationalist, vitriolic attacks against the ECB aren’t worth the twitter feed they are posted on, the actions of the Eurozone’s Central Bank over the last few years do present a challenge to the legal structure of the Union and could ultimately pose a threat to the rule of law. The reason for this is the uneasy fit of crisis-response measures with the fairly rigid Treaty framework that defines ECB competences. The problem that the Eurozone faces is that a crisis-response requires flexibility in policy making, while respecting the rule of law means devotion to the legal architecture as laid out in the Treaties. Innovative solutions to severe economic problems may require stretching the rules, but does such flexibility mean that we are moving away from a law-bound system of governance? Ultimately, are the courts capable of determining whether doing the right thing is compatible with doing the legal thing?
The ECB has faced its most significant challenges in dealing with the Greek crisis. When things went wrong for the Eurozone, as the financial crisis morphed into a sovereign debt crisis, the ECB took action, but without exposing itself too much for the sake of any particular crisis-afflicted Eurozone member. The ECB pulled away from Greece when the country failed to meet its bailout obligations and then systematically tried to decouple itself from the Greek problem, without doing anything drastic enough to split the Euro. It is perhaps easy with hindsight to point out deficiencies, but it has to be acknowledged that things could have been very different for the ECB. A more severe crisis could have emerged either after a de-facto spit of the Euro, or via a comprehensive banking collapse in one of its member states. Policy decisions are often made with inadequate technical tools within a sometimes uncertain legal framework. Bringing politics, finance and law together in times of crisis is, to say the least, challenging. A careful examination of how the ECB reacted to the Greek crisis reveals that seemingly politically motivated decisions can be in fact the result of a tight squeeze between legal mandates and economic realities. It seems more likely that the ECB did not intend to harm Greece, as is often claimed, or blackmail its politicians. What it did instead was to secure both the integrity of the Euro, and to maintain the stability of the banking system, while making sure that it did not overstep prohibitions on the conduct of economic policy and the financing of member states.
Yet there are problems. Institutional independence is supposed to allow non-political decision making. There is concern however that ‘non-political’ labelling often helps maintain the promotion of economically orthodox solutions. While the ECB has not been receiving instructions from Member States, there have been accusations of German Ordoliberalism being imposed on the rest of the Union via the central bank. Upon reflection however, while ECB decisions may not seem satisfactory to those at the receiving end (the Greeks and Cypriot bank bondholders so far, perhaps Italian bank investors in the future), they have prevented a complete breakdown of intra-institutional relations and have allowed the ECB to survive court challenges. A prominent example is the Outright Monetary Transactions (OMT) Programme judgments of the CJEU and the German Constitutional Court that show how Courts are wading into this boundary dispute between politics and economics. The case tested whether this ECB programme was a (prohibited) economic rather than a monetary measure. It also raised the question whether the programme violated the prohibition of monetary financing of Member States (Art. 123 TFEU). Both the CJEU and the German court found the OMT programme to be legal.
The decision on this challenge to the ECB programme demonstrates, however, that while the appearance of legality is maintained, cracks have begun to appear in the European system of rules-based governance. The cracks are caused by the conflation of economic reasoning (for example the role of programme conditionality) and Treaty interpretation. The point made therefore is that if we base our perceptions of legality on assessments of political and economic criteria (for example a member state’s commitment to ‘reform’ through its participation in a rescue programme), we are getting closer to the point that policy discretion disregards legal boundaries. If the match of ECB decisions with the Treaty Framework is now dependant on economic policy consistency and commitment to conditionality as the OMT judgments suggest, do objective legal boundaries become subjective economic assessments? It could be argued that the compromise reached by the courts so far is not robust enough to guide the ECB through the next phase of Eurozone challenges. Perhaps, instead of trying to bend the rules to accommodate policies, we should start considering amending the rules to safeguard the legal coherence of EU governance. There is a growing sense that this can only be achieved via Treaty amendment.
Ioannis Glinavos is a Senior Lecturer at Westminster Law School, of the University of Westminster.