The European Central Bank (ECB) symbolises the strange mix of politics and technocracy that marks EU governance. The bank was pushed to centre stage by the eurozone debt crisis and the unwillingness or inability of Europe’s national governments to come up with timely solutions. Its rise as a political actor started while it was led by Jean-Claude Trichet, but it has become much clearer under his successor, Mario Draghi.
Indeed, it was Draghi’s promise in July 2012 to do “whatever it takes” to save the euro that prevented a worsening of the crisis that may have led to the currency’s collapse. Thus, the bank now finds itself with a significant amount of power over the eurozone’s fate.
The ECB’s rise is not without controversy. As its legal mandate has not expanded alongside the role it has assumed, the bank operates in a grey zone of semi-legality. This has stoked tensions among different groups in the EU who have different visions of how the common currency should function.
On one side are those who broadly support the “whatever it takes” attitude to crisis response – that is, those who see saving the currency as the number one objective, a goal much more important than worrying about the fine print of EU rules and regulations. On the other are those who are more worried by the idea of EU institutions breaching the organisation’s own treaties in order to fund bailouts and other types of financial assistance.
This second group includes influential individuals, institutions and large segments of public opinion in Northern creditor countries. Their wariness towards the ECB is only likely to increase in light of the recent decision to inject a trillion euros into the eurozone economy through quantitative easing (QE).
Then there’s the bank’s importance when it comes to dealing with the new Greek government. The ECB currently provides essential funding to Greek banks – without access to this money, the country’s entire banking system would collapse. But according to the rules, the ECB can only provide assistance to Greek banks as long as the Greek government complies with the terms of its bailout.
If the Syriza government, which is intent on renegotiating its debt, stops complying with the bailout terms, then the ECB will be forced into the awkward position of having to choose between bending the rules (again) and causing the financial collapse of a eurozone state. Either way, it would be a highly political decision for an institution that was meant to be above politics.
The battle to determine the ECB’s proper role is also being played out over one of its flagship bond-buying programmes, the Outright Monetary Transactions (OMT) programme. Announced in September 2012, this is an initiative to help struggling eurozone economies by buying short-term government bonds on secondary markets. Though it has never been used, it’s seen as an important backup tool to calm markets. Its critics, however, have argued that OMT exceeds the ECB’s mandate and undermines the rules that keep the eurozone from becoming a “transfer union” where stronger members are constantly bailing out weaker ones.
A number of voices within Germany challenged the legality of the OMT programme. In February 2014, the country’s powerful Constitutional Court in Karlsruhe referred the case to the European Court of Justice (ECJ) in Luxembourg.
In making the referral, the court took the opportunity to stress the limits to the European integration project. In fact, though officially it must wait for the ECJ’s ruling, the German Constitutional Court all but rejected OMT as unconstitutional. In very strong wording, the judges argued that OMT breached the ECB’s monetary policy mandate, as well as the prohibition on monetary financing of state debt.
However, the ECJ’s Advocate General, Pedro Cruz Villalon, saw matters differently. Delivering his opinion shortly before the ECB announced its quantitative easing programme, he noted that the bank must be afforded a high degree of discretion in designing and implementing technical policies, particularly in times of crisis. Accordingly, Cruz Villalon concluded that OMT is legally sound – a finding completely at odds with the preliminary conclusions of the German Constitutional Court.
The question is, where to from here? If the European Justices endorse the Advocate General’s opinion, Luxembourg and Karlsruhe will be on a collision course. The case will go back to the German Constitutional Court, which will have to choose between backing down from its strong criticism of OMT and openly breaching EU law.
Either way, the OMT case is likely to worsen divisions within the eurozone. When seen alongside the ECB’s controversial role in Greece, it is clear that the bank’s rise is transforming the EU’s constitutional system.