Outright Monetary Transactions Research Articles

The German Constitutional Court and Preliminary References—Still a Match not Made in Heaven?

So far, the German Constitutional Court (Bundesverfassungsgericht, henceforth:BVerfG) has only made a single preliminary reference to the (now) Court of Justice of the European Union (CJEU), despite frequent rulings on matters connected with European Union (EU) Law. Its apparent reluctance seemed odd considering the atmosphere of dialogue and cooperation which prevails between the non-constitutional courts and the EU courts. This situation might, however, have changed with the preliminary reference from January 2014, proving predictions on the perceived “most powerful constitutional court” and its relationship to the EU partly wrong. The legal effects of its preliminary reference on the interpretation of Articles 119, 123, 127 ff. of the Treaty on the Functioning of the European Union (TFEU) and the validity of Outright Monetary Transactions (OMT) by the European Central Bank (ECB) under EU Law are as yet unclear; although the Opinion of the Advocate General Cruz Villalón was delivered in the beginning of 2015, which did not confirm the doubts expressed by theBVerfGabout the conformity of the OMT programme with EU law. Nonetheless, the interpretative scheme and the normative questions as to the reluctance of theBVerfGremain the same after this single referral and offer explanations as to why theBVerfGhad for nearly sixty years not referred a question to the former European Court of Justice (ECJ).

Gauweiler and the Outright Monetary Transactions Programme: The Mandate of the European Central Bank and the Changing Nature of Economic and Monetary Union

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Capital Markets Union: the Key to European Future

Recent data indicate that the European Union (EU) and its common currency area (Eurozone) are entering a cyclical upturn phase. The mixture of recent EU policies, mainly the “fiscal compact” and the outright monetary transactions (OMT) approach by the European Central Bank (ECB), together with a radical depreciation of the Euro, (about 25 %) appear to do the job. However, in the next decade or so, the EU in general and the Eurozone in particular will face a complex set of challenges. Most important of those will be the continuing rise of emerging markets, with its asymmetric impact on Eurozone member economies (Chen, Milesi-Ferretti and Tressel, IMF Working Paper, 12/236, 2012.) This will only exacerbate increasing divergencies between countries on the Mediterranean littoral and countries north of the Alps. Finally, demographic dynamics will exert influence over both productivity and fiscal positions. To confront these challenges successfully, restoration of growth is imperative for the future of the EU and the Eurozone future. Such growth must improve competitiveness and should arrest and hopefully reverse divergence tendencies.Venture capital firms are the key vehicle for the creation and financing of new innovative companies, which in turn are the essence of dynamic, productivity enhancing growth. The actual funds for venture capital come from existing financial establishments, technically termed “limited investors”. (In the US these include pension funds, university endowments, insurance companies, and various investment and hedge funds.) To be able to allocate a relatively small part of their funds to high-risk but high-expected-return venture capital, the “limited investors” need the continuous ability to diversify and hedge the rest of their portfolios (i.e. to optimize the overall portfolio’s risk-return configuration). This in turn requires the financial markets which are broad (in terms of the number of instruments available to trade), deep (in terms of the large number of instruments Atl Econ J (2015) 43:517–518 DOI 10.1007/s11293-015-9478-y

TARGET2 Imbalances and the ECB as Lender of Last Resort

This paper analyses the issue of the dynamics of the TARGET2 system balances during the sovereign debt crisis, when some countries registered a decisive inflow of the central bank liquidity and others showed an outflow. The dynamics in the TARGET2 are here explained as being due to a fall in the level of confidence in the capacity of the Economic and Monetary Union to survive, rather than to disparities in the level of competitiveness among countries of the Eurozone. This crisis of confidence has to be considered as the consequence of the implicit refusal of the European institutions to create a mechanism working as lender of last resort for the euro area member States; indeed, only when the ECB took this responsibility by launching the Outright Monetary Transactions clear signs of improvement were observed in the sovereign debt crisis.

Direct Cooperation Has Begun: Some Remarks on the Judgment of the ECJ on the OMT Decision of the ECB in Response to the German Federal Constitutional Court's First Request for a Preliminary Ruling

By its first request for a preliminary ruling, the German Constitutional Court aired its doubts about the lawfulness of the Outright Monetary Transactions (OMTs) program. In this article it is argued that the ECB's pledge in the summer of 2012 to do “whatever it takes” to safeguard the monetary policy transmission mechanism in all countries of the euro area by buying government bonds was generally compatible with EU law. However, it is argued that there is some potential for the ECB to infringe the Treaty on the Functioning of the European Union (TFEU) while acting according to this announcement. The peculiarity of the situation, the author argues, is that we might be dealing with a “self-fulfilling prophecy” in that the ECB announces a particular policy, which might not be compatible with EU law, but the act announced, will never take place because the political problem would have been resolved by the measure previously announced. The critical question in this scenario refers to how a court should react to such a situation. The author argues that a court in such a situation has to show the legal limits of the particular institution, but neither the ECJ nor the German Constitutional Court may replace the central banks' task to maintain financial stability. Finally, a comment is given on how the German Constitutional Court will react to the ECJ's decision in that case.

After the OMT Case: The Supremacy of EU Law as the Guarantee of the Equality of the Member States

This article analyzes the recent judgment of the European Court of Justice (ECJ) inGauweiler, answering the first preliminary reference ever by the German Constitutional Court (BVerfG), on the legality of the Outright Monetary Transaction (OMT) program of the European Central Bank (ECB). As the article explains, the ECJ rejected any possible claim of illegality of a key program devised by the ECB at the height of the Euro-crisis. However, because the BVerfG had defined the OMT program as ultra vires, and had threatened to strike it down if the ECJ did not reach the same result, the article defends the principle of the supremacy of European Union (EU) law, indicating that a possible nullification of the OMT program by the BVerfG would be clearly unlawful. To re-affirm the supremacy of EU law, the article argues that this principle is functional to ensure the equality of the member states before the law, preventing each country of the EU from cherry-picking which provisions of EU it likes or not. As the article suggests, respect of the principle of the supremacy of EU law – including by the BVerfG – is ultimately in the interest of every EU member state, including of Germany.

Doubtful it Stood…: Competence and Power in European Monetary and Constitutional Law in the Aftermath of the CJEU's OMT Judgment

Quite unsurprisingly, the CJEU has held that the ECB's OMT program does not violate EU law. In accordance with this holding, I argue in the first part of this note that the OMT program does not transgress the ECB's mandate under the Treaty, which is often interpreted too narrowly, in particular by German legal scholars. Furthermore, I argue that a violation of the prohibition of monetary financing of the member States as enshrined in article 123, para 1 TFEU cannot be inferred from the ECB's announcement of a program, which has never been implemented. In any case, there is clearly no manifest and grave transgression of EU competences which, according to the German Federal Constitutional Court's (FCC)Honeywelldoctrine, is required for an ultra vires finding. The second part of this note shows that the FCC's doctrine regarding transgressions of competences by EU organs (ultra vires review) is not only unconvincing as a matter of principle but also and worse (as on premises we can always reasonably disagree) not consistently applied to the OMT program. The note also objects to the Court's somewhat trendy blending of ultra vires and constitutional identity review of EU law through which it increasingly conceals its approach of applying the so-called constitutional constraints of European integration to the EU organs' conduct. The forthcoming FCC judgment is therefore less important as regards the quite foreseeable finding on the lawfulness of the OMT program but – hopefully – of vital importance as it might embody a more coherent relaunch of the FCC's standards of judicial review with regard to EU law.The judgment of the Court of Justice of the European Union (CJEU) on the European Central Bank's (ECB) 2012 announcement of future Outright Monetary Transactions (OMT) comes as no surprise. It had not been expected that the CJEU would interpret the European Economic and Monetary Union's (EMU) Treaty provisions the way the FCC had “suggested.” Neither had it seemed conceivable that the CJEU would reject the FCC's request for a preliminary ruling holding that a legally non-binding assessment of the EU action's lawfulness could not be requested under Article 267 TFEU. The judgment had nevertheless been awaited for with tension for two reasons: First, in the vigorous and in part very critical debate about the ECB's competences under the TFEU and its alleged ultra vires action a judgment by the CJEU was necessary to settle the fundamental European law issues at stake. This is all the more important with regard to the ECB's current Expanded Asset Purchase Program (EAPP) as well as its interconnection with the European Stability Mechanism's (ESM) financial assistance programs. The CJEU's holdings on the ECB's competences within the EMU framework are discussed in the first part of this note regarding the distinction between monetary and economic policy (infra section A.I.) and the interpretation of Article 123, paragraph 1 TFEU which prohibits monetary financing of the member States by the ECB (infra section A.II.). Second, it was clear that the judgment would shape the new stage in the changing and sometimes explosive on-off relationship between the CJEU and the FCC, the stage entered into by Karlsruhe's first ever request for a preliminary ruling. The FCC had fortified its ultra vires doctrine and clearly indicated its readiness not to follow the CJEU but to insist on the notorious “last word” of the German Constitution instead. Thus, the second part of this note discusses the constitutional legal premises of the FCC's approach and the procedural and substantial manner in which the FCC tries to scrutinize the ECB's OMT program (infra sections B.I. and B.II.). In this context, possible scenarios for the upcoming judgment (infra section C.I.) and consequences for European multi-level constitutionalism (infra section C.II.) will be discussed.

A Resource‐based View of the EU's Regional and International Leadership

AbstractHow does one explain the variation in the EU's success in enacting and enforcing policies that lead to the supply of regional or global public goods? We examine how the EU deploys its positional resources to enact laws that compel governments or firms to contribute to the provision of public goods. We suggest that leaders such as the EU are able to compel public goods contributions if they have the legal authority to do so, and are able to deploy their positional resources to build effective coalitions or reduce the leverage of potential veto players. We look at two issue areas empirically: banking and the environment. In the banking cases, the EU sought to provide regional public goods; in the environmental cases, it sought to provide regional and global public goods. We examine instances of leadership success as well as failure. In the banking cases, we examine Outright Monetary Transactions (success) and banking single resolution mechanism (less successful); the environmental cases pertain to chemical regulation (success) and airline emissions (failure). These cases reveal the EU's skill and limitations in deploying its positional authority to induce contributions for public goods provision from EU member governments, EU firms and nonEU firms.

After the OMT Case: The Supremacy of EU Law as the Guarantee of the Equality of the Member States

The article analyzes the recent judgment of the European Court of Justice (ECJ) in the Gauweiler case, answering the first preliminary reference ever by the German Constitutional Court on the legality of the Outright Monetary Transaction (OMT) program of the European Central Bank (ECB). As the article explains, the ECJ rejected any possible claim of illegality of a key program devised by the ECB at the height of the Euro-crisis. However, because the German Constitutional Court had defined the OMT program as ultra vires, and had threatened to strike it down if the ECJ did not follow its advise, the article also reaffirms the principle of the supremacy of EU law, indicating that the German Constitutional Court is compelled to follow the ruling of the ECJ. As the article maintains, the supremacy of EU law is functional to ensure the equality of the member states before the law, preventing each country of the EU from cherrypicking which provisions of EU it likes or not. As the article suggests, respect of the principle of the supremacy of EU law -- including by the German Constitutional Court -- is ultimately in the interest of everyone, including of Germany.

A Theory of Bazookas; or, 'When (and When Not) to Use Large-Scale Official Sector Support'

This paper develops a theoretical model for bazookas, a term coined by US Treasury Secretary Hank Paulson in 2008 and since applied to various large-scale public sector support programs for distressed borrowers. The intention behind such programs is to provide so much available financing (firepower) as to trigger a complementary market reaction, i.e. a sustained reduction in the borrower's credit spreads, in turn reducing the probability that support will actually have to be used. With a four-period partial equilibrium framework, and balance sheet interactions between a public sector creditor and distressed borrower, the model formalizes the conditions under which a bazooka will be effective. Among other things, the effectiveness in reducing spreads will rise with the size of public sector support funds compared to potential borrowing needs; the creditworthiness of the public sector creditor; and the appropriateness of conditionality under which support is available. This framework helps explain the effectiveness of several recent public sector support programs for banks and sovereigns, in particular the relative success of the ECB's Outright Monetary Transactions (OMT).

Gauweiler and OMT: Lessons for EU Public Law and the European Economic and Monetary Union

Many legal disputes have arisen from the post-2008 economic crises before the Court of Justice of the European Union (CJEU). The most prominent to date is Gauweiler, a preliminary reference procedure initiated by the German Constitutional Court, the Bundesverfassungsgericht (BVerfG), concerning the legality of the decision of the Governing Board of the European Central Bank (ECB) of September 2012 on so called ‘Outright Monetary Transactions’ (OMT). The BVerfG questioned the primacy of Union law in a case concerning the hypothetical consequences of a not yet finally developed and not yet implemented future bond purchasing policy of the ECB. This contribution focuses on the general lessons Gauweiler can teach for the development of public law in Europe.

Book Reviews

Assaf Razin of Tel Aviv University reviews “Managing the Euro Area Debt Crisis”, by William R. Cline. The Econlit abstract of this book begins: “Addresses the recent debt crisis in Europe and the European Central Bank's commitment to preserve the euro area with purchases of government bonds, and explores the history of the Euro Area debt crisis and makes projections of future debt sustainability. Discusses policy implications, leading policy issues, and model projections; fiscal adjustment, growth, and default risk; the bank-sovereign debt nexus; external adjustment and breakup costs; eurobonds, firewalls, outright monetary transactions, and debt restructuring; European debt simulation model projections─Ireland, Italy, Portugal, and Spain; and debt restructuring and economic prospects in Greece.” Cline is Senior Fellow with the Peterson Institute for International Economics.

Sustainability vs credibility of fiscal consolidation

Purpose – The purpose of this paper is to explain why some countries in the eurozone between 2010 and 2012 experienced a dramatic vicious circle between hard austerity plans and rising default risk premia. Were such plans too small, and hence non-credible, or too large, and hence non-sustainable? These questions have prompted theoretical and empirical investigations in the line of the so-called “self-fulfilling beliefs”, where beliefs of unsustainability of fiscal adjustments, and hence default on debt, feed higher risk premia which indeed make fiscal adjustments less sustainable. Design/methodology/approach – Detecting the sustainability factor in the evolution of spreads is uneasy because it is largely non-observable and may be proxied by different variables. In this paper, the authors present the results of a dynamic principal components factor analysis (PCFA) applied to a panel data set of the 11 major EZ countries from 2000 to 2013, consisting of each country’s spread of long-term interest rate over Germany as dependent variable, and an array of leading fiscal and macroeconomic indicators of solvency fiscal effort and its sustainability. Findings – The authors have been able to identify the role of these indicators that combine themselves as significant latent variables in boosting spreads. Moreover, the large joint deterioration of these variables is identifiably located between 2009 and 2012 and particularly for the group of countries under most severe default risk (with Italy and France as borderline cases). The authors also find evidence that the announcement of the European Central Bank Outright Monetary Transactions program has improved the sustainability assessment of sovereign debts. Originality/value – Dynamic PCFA is a rather unusual technique with respect to standard econometric tests of models, which is particularly well-suited to reduce the number of variables in a data set by extracting meaningful linear combinations from the observed variables that may concur to explain a given phenomenon (the dependent variable). These combinations, called “common factors”, can be interpreted as latent, non-observable variables.

Euro Area Government Bonds: Integration and Fragmentation During the Sovereign Debt Crisis

The paper analyzes the integration of euro area sovereign bond markets during the European sovereign debt crisis. It tests for contagion (i.e., an intensification in the transmission of shocks across countries), fragmentation (a reduction in spillovers) and flight-to-quality patterns, exploiting the heteroskedasticity of intraday changes in bond yields for identification. The paper finds that euro area government bond markets were well integrated prior to the crisis, but saw a substantial fragmentation from 2010 onward. Flight to quality was present at the height of the crisis, but has largely dissipated after the European Central Bank's (ECB's) announcement of its Outright Monetary Transactions (OMT) program in 2012. At the same time, Italy and Spain became more interdependent after the OMT announcement, providing our only evidence of contagion. While this suggests that countries have been effectively ring-fenced, and Italy and Spain benefited from the joint reduction in yields following the OMT announcement, the high current degree of fragmentation poses difficult challenges for policy-makers, since it leads to an unequal transmission of the ECB's monetary policy to the various countries.

ECB policy and Eurozone fragility: Was De Grauwe right?

Paul De Grauwe's Eurozone fragility hypothesis states that sovereign debt markets in a monetary union without a lender-of-last-resort are vulnerable to self-fulfilling dynamics fuelled by pessimistic investor sentiment that can trigger default. We test this contention by applying an eclectic methodology to a two-year window around Mario Draghi's “whatever-it-takes” pledge that can be understood as the implicit announcement of the Outright Monetary Transactions (OMT) program. A principal components analysis reveals that the perceived commonality in default risk among peripheral and core Eurozone sovereigns increased after the announcement. An event study reveals significant pre-announcement news transmission from Spain to Italy, France, Belgium and Austria that clearly dissipates post-announcement. Country-specific regressions of CDS spreads on systematic risk factors reveal frequent days of large adverse shocks affecting simultaneously those five Eurozone countries, but only during the pre-announcement period. Altogether these findings support the fragility hypothesis and endorse the OMT program.

Whatever It Takes? Regarding the OMT Ruling of the German Federal Constitutional Court

On 14 January 2014, the Bundesverfassungsgericht (German Contitutional Court in Karlsruhe hereafter Karlsruhe) ruled on the European Central Bank’s (ECB) Outright Monetary Transaction (OMT) programme. This ruling has prompted fierce debate among lawyers and economists for a number of reasons. First of all, the OMT programme concerned the very short-term survival of the euro. Secondly, in an unprecedented move, the Court took a position on the current incompleteness and asymmetry of the Economic and Monetary Union as well as on its future course. Indeed, the German Court has made a referral to the Court of Justice of the European Union (CJEU) for a preliminary ruling on two matters: (i) had the ECB exceeded its mandate by infringing upon the competences of Member States in the field of economic policy, and (ii) had it violated the prohibition against sovereign debt monetization stipulated in Article 123 of the Treaty on the Functioning of the European Union? While the content of the referral is critical, the decision to make a referral is in itself significant insofar as the Court has always refused to use this procedure even though such an abstention has been widely seen as a violation of European law. A third reason that the decision came under scrutiny is because the Constitutional Court added an unconventional twist to its preliminary ruling mechanism, ensuring it had the last word and reserving the option of not following the Court of Justice’s ruling. In other words, the German decision implied that although the Bundesverfassungsgericht was extending its hand to the CJEU, it was doing so with a closed fist.

Introduction to Volume 18, 2015

With this issue, the Journal of International Economic Law proudly launches its 18th volume. Our objective continues to aim at providing a diverse selection of international economic law subjects, focusing attention on topics of current discussion and debate. In this first issue of the 18th volume of the Journal, readers will find the now traditional opening essay embodying some personal perspectives of a leading scholar. This year, Professor Thomas Cottier provides a stimulating essay on the common law of international trade and the future of the World Trade Organisation (WTO), discussing new modes of negotiations towards a more sectoral approach and the extension of dispute settlements to include Free Trade Agreements (FTAs). A number of stimulating articles on varied subjects follow the opening essay. These articles include a suggestion to use the creative economy as a new paradigm for the regulation of global trade, discussing large questions linking important changes in trade, technologies, and industries (and the industry convergence that has followed) with cognition and efforts to linguistically grasp these concepts (and the regulatory divergence that has sometimes followed). A more focused look at trade examines international trade in legal services in the context of the Association of Southeast Asian Nations (ASEAN) with particular reference to Singapore. Illustrations of the WTO’s extension to adjacent areas can be seen in an article addressing mechanism available to the WTO to deal with the impact of exchange rates on trade (including a discussion of the prerogatives of the WTO and International Monetary Fund (IMF) in judging such issues) and another comparing adjudication in the WTO to international investment arbitral tribunals in the context of protection of cultural heritage. Investment treaties also provide the basis for another of our articles which presents an index of the most important elements of these now extremely numerous and important agreements. The current interaction between the German Constitutional Court and the Court of Justice of the European Union regarding the European Central Bank’s Outright Monetary Transaction (OMT) policy provides the basis for an article showing a new and still developing context for international economic law.

The AG’s opinion on the Outright Monetary Transactions Case

The AG’s opinion on the Outright Monetary Transactions Case

Announcements of ECB unconventional programs: Implications for the sovereign spreads of stressed euro area countries

This paper studies the effects of ECB communications about unconventional monetary policy operations on the sovereign spreads of Greece, Ireland, Italy, Portugal, and Spain relative to Germany between 2008 and 2012. More than fifty events concerning non-standard operations are identified and classified with respect to the specific ECB program. The empirical results suggest that the ECB announcements about unconventional monetary policies substantially reduced long-term government bond yield spreads relative to German counterparts in all countries, except Greece. Particularly, among the different types of measures, news about the Securities Markets Programme strongly affected the perceived sovereign risk of the five stressed euro area countries, while the announcements of the Outright Monetary Transactions seem to have a significant impact only in Italy and Spain.

Sovereign Stress, Unconventional Monetary Policy, and SME Access to Finance

We investigate the effect of sovereign stress and of unconventional monetary policy on small firms’ financing patterns during the euro area debt crisis. We find that after the crisis started, firms in stressed countries were more likely to be credit rationed, both in the quantity and in the price dimension, and to increase their use of debt securities. We also find evidence that the announcement of the ECB’s Outright Monetary Transactions Program was followed by an immediate decline in the share of credit rationed firms and of firms discouraged from applying. In addition, firms reduced their use of debt securities, trade credit, and government subsidized loans. Firms with improved outlook and credit history were particularly likely to benefit from easier credit access.