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Whatever it takes

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The promise to protect the Eurozone from collapse made in July 2012 by the ECB (European Central Bank) President, Mario Draghi, marked a decisive turning point in the EU´s sovereign debt crisis. The latter started with the announcement made in October 2009 by the acting Greek Prime Minister that the public accounts had been manipulated over the years. The European Union (EU) was not prepared for the turmoil that followed when several Member States quickly lost access to international debt markets and faced imminent bankruptcy. “Moral hazard” concerns included in the Maastricht prevented bailouts of Eurozone Member States by the EU and forbade the ECB of acting as a “lender of last resort”.

The first Greek bailout implied punitive bilateral loans granted by the Eurozone Member States and the International Monetary Fund. The Irish and Portuguese bailouts that followed were less improvised but still marked by the urgency of the moment. They were structured through transitional European financial stability mechanisms established by the Eurozone Member States and the European Union. Those mechanisms were replaced in 2012 by a permanent European Stability Mechanism that has the mandate to safeguard financial stability in Europe by providing financial assistance to the Eurozone Member States. All bailouts are subject to strict conditionality, namely to the adoption of structural reforms and austerity measures, imposed and monitored by a Troika composed by the IMF, the European Commission and the ECB.

Unlike other central banks, the ECB has to exercise the Union´s exclusive competence in respect to monetary policy with the restricted mandate of ensuring price stability. This limitation did not clip its wings in becoming a decisive actor in the resolution of the crisis. Faced with the imminent collapse of the Euro the ECB adopted “unconventional” measures that materialize the dramatic pledge made by its President to save the single currency. The latest came in January 22 with the announcement of a massive quantitative easing program.

Some dark clouds still linger in the horizon, coming mostly from Germany. In February 2014, its Federal Constitutional Court sent a preliminary reference concerning the validity of the decision of the ECB to implement the Outright Monetary Transaction (OMT) Program. The latter was publicized in September 2012 and regards another “unconventional measure” that allows the purchase in the secondary markets of government bonds of Member States experiencing financial difficulties. The German court considers the program unlawful both under national constitutional law and EU law and asked the Court of Justice of the European Union to declare it ultra vires and in violation of the Treaty no-bailout provision.

On 14 January 2015, the Spanish Advocate General Cruz Vilallón upheld the general compatibility of the OMT program with the European Treaties. That probably prompted the ECB to announce the quantitative easing program a week later. However, the German Constitutional Court hinted that it would declare the OMT decision to be ultra vires, unless the Court of justice restricts the current scope of the program. Contrary to what happened, for instance, in the “bananas saga” in the mid 90´s, where the German Constitutional Court established an indirect dialogue with the ECJ on the level of protection of fundamental rights through the intermediation of lower courts, in this case the Karlsruhe court assumed the possibility of a direct confrontation with the Luxembourg court using the preliminary reference procedure.

We have then a constitutional crisis in the making that could still be avoided if the Court of Justice follows the legal concerns of the German Constitutional Court about the OMT program. Such a decision would be most to the prejudice of Member States that have benefited greatly from a more un-orthodox approach by the ECB to its monetary competences and will again renew fears of disintegration of the Eurozone.

By Francisco Pereira Coutinho

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