The economic fallout from Covid-19 requires extraordinary efforts from governments and central banks around the globe. Many of these emergency measures are controversial. Legal pitfalls abound, but this is no time for lawyers. Nor should it be. Consider the market intervention programmes launched by central banks. Both the Federal Reserve and the European Central Bank have initiated unprecedented monetary stimulus to safeguard both the real economy (firms and households) and banks directly. Central to them, on the EU level, was the launch of the Pandemic Emergency Purchase Programme (PEPP), a new bond-buying programme covering private and public sector securities with a total volume of €750 bn. The ECB has also urged banks to keep lending to firms and households, to use their capital and liquidity buffers and to draw down on easily saleable assets such as sovereign bonds. Other initiatives include the controversial plan to create a European 'Bad Bank' to remove non-performing loans from banks’ balance sheets. Further, an unprecedented broadening of credit guarantee instruments has been announced to take some of the increased credit risk off banks’ balance sheets and provide capital relief at the same time. The ECB has further ordered banks to freeze any dividend payments and share buybacks until at least October. The European Commission has also relaxed its state aid framework, which normally restricts subsidies and government payments towards firms.
The flurry of policy measures to fight the economic consequences from the pandemic have been implemented at a remarkable speed, and with unmatched decisiveness both by central banks, legislatures and governments. But there is a pitfall to all of this: the legal framework in which these measures have been taken is challenging. This is particularly true for the European Union, which still lacks strong economic crisis-fighting powers at the central level and is therefore forced to frequently act in legally grey areas. We can therefore expect legal challenges to the emergency measures to shoot up like mushrooms over the next several weeks.
For example, after the recent rebellion by the German Constitutional Court against a previous asset purchasing programme, PEPP is a likely target for fresh legal challenge before the European Court of Justice. PEPP remains controversial. The key question is whether the ECB is acting within its mandate—critics argue that the programme amounts to hidden state financing and is no longer monetary policy. Another question is whether the risks of limitless bond purchases outweigh the potential benefits.
Another controversial area is the revised framework on state aid. The massive scale of current rescue operations that are given green light under the ‘Temporary Framework’ arguably bends the state aid regime to ‘almost no recognition’. This is particularly problematic when it comes to pumping money into the banking sector: The new bank resolution framework, and in particular the BRRD rules on bail-in, seek to prohibit government rescue operations for financial institutions unless private creditors first bear some of the losses. Critics argue that the new bail-in legislation was supposed to address lessons from the global financial crisis and now fails its first serious test. Supporters maintain that the bail-in framework was never written for a non-financial crisis resulting from a pandemic.
Other examples for controversies abound. The plan to erect a European ‘Bad Bank’ may violate both competition law principles as well as the EU bank resolution framework. Issuing common Eurobonds, now termed ‘Corona bonds’, has been an eternal battle and might violate the ‘no bail-out’ clause in the European Treaty. The agreement to activate the European Stability Mechanism to lend to Member States practically without any conditionality might be challenged in court because the ESM Treaty requires strict conditionality. The list can be continued forever.
And yet, the legal system in the EU has been surprisingly flexible in the past, in particular in the eye of a great crisis. This became apparent during the 2008-09 global financial crisis and the ensuing 2010-12 sovereign debt crisis. One of the central tenets of policy-makers, regulators and supervisors has always been to put economic necessities over formal legal problems. As The Economist put it in 2016, ‘Given a choice between financial stability and the rule book, ditch the rule book’.
The genesis of the EU financial market is full of such examples. Amongst them is the attitude towards the famous Euro convergence criteria, which have constantly been violated by several Eurozone Members, famously once including both heavyweights France and Germany. The massive scale of taxpayer-financed rescue operations for domestic banks carried out by many Member States during 2007-08 ran directly contrary to the state aid framework. However, faced with an unprecedented risk of a global meltdown, EU institutions had no other choice than to rubber-stamp all those bail-outs, using the exceptions and loopholes provided by legal framework. Expect a similar development during the present Covid-19 crisis.
Another player frequently in the fire of critique is the ECB. Many initiatives over the past several years have been challenged in court, including Mario Draghi’s notorious OMT programme which he launched with the famous words of ‘whatever it takes’. The courts have always given green light in the end—they have frequently barked, but never bitten. Until the German Constitutional Court gave up any restraint a few days ago.
Given the emergency of the present situation, many interventions are extraordinary and extreme both in their substance and in their time frame. Naturally, this creates a heated legal debate over the configuration of these measures; particularly within the fragile context of EU legislation. In such a situation, insisting on legalistic points and doctrinal arguments is misguided. In an emergency, economic necessities, political decisiveness, and speediness of the decision-making process are paramount and must necessarily take precedent over legal objections.
Wolf-Georg Ringe is Director of the Institute of Law & Economics at the University of Hamburg and Visiting Professor at the University of Oxford.