THE GAUWEILER JUDGMENT IN VIEW OF THE CASE LAW OF THE EUROPEAN COURT OF JUSTICE ON EUROPEAN CENTRAL BANK INDEPENDENCE Between Substance and Form

THE GAUWEILER JUDGMENT IN VIEW OF THE CASE LAW OF THE EUROPEAN COURT OF JUSTICE ON EUROPEAN CENTRAL BANK INDEPENDENCE Between Substance and Form Stefania Baroncelli* ABSTRACT This article attempts to highlight the difference between the form and the substance of the Gauweiler judgment on the OMT programme undertaken by the European Central Bank. While the case is based upon a formal interpretation, reference to the substantive concept of independence of central banks is analyzed only indirectly by the Court of Justice. The author tries to reconstruct the essence of the Court s reasoning by resorting to the doctrinal concept of central bank independence, the previous case law of the Court of Justice concerning central bank independence, the judgment of the German Constitutional Court, the Opinion of the Advocate General, and the case law of the US Supreme Court, for comparative purposes. Keywords: European Monetary Union; Gauweiler; German Constitutional Court; independence of the European Central Bank; Outright Monetary Transactions 1. INTRODUCTION The European Central Bank (ECB) is the only institution in the EU that can provide unconditional liquidity without setting a specific amount and without notice. 1 This * Professor of Public Law (Italian and European), Free University of Bozen/Bolzano, Faculty of Economics and Management, Italy. 1 T. Buiter and E. Rahbari, The European Central Bank as Lender of Last Resort for Sovereigns in the Eurozone, 50 Journal of Common Market Studies (2012), p. 7. 23 MJ 1 (2016) 79

Stefania Baroncelli is why it took action and adopted various policy instruments, beginning with the Securities Markets Programme (SMP) in May 2010, and continuing with the longerterm refinancing operations (LTROs) of December 2011 and February 2012. 2 The latest and most important tool is, however, the Outright Monetary Transactions (OMT) programme, which was officially announced by the ECB in a press release of 5 and 6 September 2012. On this occasion, the Governing Council gave notice of its intention to purchase selected government bonds issued by Eurozone Member States on secondary markets. 3 The OMT programme is different from the previous instruments because the amount of government bonds bought is not to be announced in advance and is without limit (at least in principle). 4 Given the ambivalence of the OMT programme, the German Federal Constitutional Court (Bundesverfassungsgericht; FCC) raised some doubts about the legality of the ECB s action (based only upon the press release, considering that the OMT programme has not been implemented so far). In the judgment, reference was made to EU law and German constitutional law and in particular to the right to vote enshrined in Article 38 of the German Basic Law (Grundgesetz) read in conjunction with the democratic principle (Article 20 Basic Law). On this basis, the FCC presented a request for a preliminary ruling to the Court of Justice on the legality of the OMT programme, asking if the ECB had exceeded its monetary policy mandate (ultra vires) and if such a programme infringed the prohibition of monetary financing enshrined in Article 123 TFEU. The Court of Justice came to a decision in June 2015, in the so-called Gauweiler case. 5 This decision considers the role of the ECB with reference to its mandate as established by the EU Treaties. As the extension of the powers of the ECB is connected 2 Under the SMP, the Eurosystem could intervene in the Eurozone s public and private debt securities markets. Such interventions were fully sterilized through liquidity-absorbing operations, in order not to affect central bank liquidity conditions, and were strictly limited to secondary markets, so that Treaty provisions were not violated. A second tool was the extension of the maturity of liquidity provisions (LTROs). The maximum maturity had already been extended to 12 months in June 2009. This instrument was relaunched in December 2011 as a response to the sovereign debt crisis, when two three-year LTROs were provided for the same months and for the end of February 2012. P. Cour- Thimann and B. Winkler, The ECB s non-standard monetary policy measures. The role of institutional factors and financial structure, European Central Bank, working paper series No. 1528 (2013), http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2239093, p. 13, 16. 3 The press release on the OMT Programme has been published on the ECB website, www.ecb.europa.eu/ press/pr/date/2012/html/pr120906_1.en.html. The press release reports the decision of the Governing Council of the ECB regarding the Eurosystem s outright transactions in secondary sovereign bond markets. The Governing Council is resolute in establishing that the Programme aims at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. In the same document the Governing Council specifies the framework within which the OMT operations will be conducted, thus creating legal limits upon its future decisions on OMT transactions, such as conditionality coverage, creditor treatment, transparency, and sterilization. 4 C. Gerner-Beuerle, E. Küçük and E. Schuster, Law Meet Economics in the German Federal Constitutional Court: Outright Monetary Transations on Trial, 15 German Law Journal (2014), p. 282. 5 Case C-62/14 Gauweiler, EU:C:2015:400. 80 23 MJ 1 (2016)

The Gauweiler Judgment in View of the Case Law of the CJEU on European Central Bank Independence to the institutional concept of ECB independence, the present article attempts to analyze the judgment from the perspective of central bank independence, especially from a functional point of view. In particular, it will address the following questions: can a central bank that is independent from the political institutions decide upon the scope of its mandate? If so, to what extent? Or, to put it another way, what degree of discretion does it enjoy? What are the boundaries of its discretion? What is the justification behind the acknowledgement of the concept of independence? And are the two courts (the Court of Justice and the FCC) adopting two different concepts of independence? After having considered the content of the EU Treaties and the evolution of the case law at the EU level dealing with ECB independence (Section 2), the article will focus on the Gauweiler case and the Court s analysis of the extent of the ECB mandate on the basis of the concept of ECB independence. After an introductory part (Section 3), it will consider the concept of independence as interpreted by the German FCC (Section 4), the Court of Justice and Advocate General Cruz Villalón (Section 5) and, finally, the threat to ECB independence posed by the intertwining of monetary and economic policy (Section 6). A further section will be dedicated to a similar judgment of the US Supreme Court, for comparative purposes (Section 7). A conclusive section will follow. 2. THE CONCEPT OF INDEPENDENCE PRIOR TO GAUWEILER: COMMISSION v. ECB Both the FCC and the Court of Justice quote the judgment in Commission v. ECB, 6 but for different reasons. This judgment should be considered one of the most important precedents for the Gauweiler case, from which the latter borrows different principles and ideas. It is therefore worth summing up the main legal points decided in the judgment, in order also to clarify its implications for the concept of ECB independence. The discussion was centered upon the exemption of the ECB from a regulation on fraud prevention, which was otherwise applicable to all of the EU institutions, and the objective of which was to prevent financial fraud within the EU framework by way of on-site checks operated by OLAF, an independent body created at EU level. Before the Court of Justice decided the case in 2003, the ECB had been at the centre of a lively doctrinal debate. Some scholars advocated a position of absolute independence of the ECB, which was defined as an institution independent from the European Community, or even a fourth Community in the Community. 7 On the other hand, others have placed the ECB within the wider institutional framework of the EU, limiting the extent of its independence. 8 6 Case C-11/00 Commission v. ECB, EU:C:2003:395. 7 C. Zilioli and M. Selmayer, The Law of the European Central Bank (Hart, 2001), p. 9; M. Selmayer, Die EZB als Neue Gemeinschaft: ein Fall für den EuGH?, Europa-Blätter (1999), p. 170. 8 J.-V. Louis, A Legal and institutional approach for building a monetary union, 35 Common Market Law Review (1998), p. 44; R. Torrent, Whom is the European Central Bank the central bank of?: Reaction to 23 MJ 1 (2016) 81

Stefania Baroncelli The Court of Justice decided in Commission v. ECB to adopt the latter position, accepting in full the principles expressed by Advocate General Jacobs and the European Commission in the challenge. Starting from the assumption that the ECB is part of the wider EU system, the Court of Justice construes the notion of independence as a functionalized concept, which is justified only for the exercise of the specific powers granted to it by the Treaties. According to the Court, the independence of the ECB is not granted in a vacuum of institutional values, but only to the extent that it allows the central bank to pursue its objectives without political interference. More specifically, the guarantee of independence only covers external political influences, which are likely to interfere with the performance of the tasks which the Treaties and the Statute of the ESCB and the ECB 9 assign to the ECB. According to the Court of Justice, this reading is justified by former Article 108 TEC (now Article 130 TFEU) which shields the ECB from all political pressure in order to enable it effectively to pursue the objectives attributed to its tasks, through the independent exercise of the specific powers conferred on it for that purpose by the EC Treaty and the ESCB Statute. 10 The ESCB is thus protected from external pressures in exercising its basic tasks, as listed in Article 127(2) TFEU. Independence then, is not an all-purpose feature of the ESCB, because its justification is strongly anchored to the need to attain the economic objectives described in the Treaty. Such an institutional design finds its theoretical basis in economic doctrine, which is almost unanimous in justifying an independent central bank as a means of achieving the goal of price stability. The link between independence and price stability is thus two-sided: central bank independence is considered as the best tool to achieve price stability. This goal, in turn, can be achieved through monetary policy, as specifically entrusted to the ESCB by Article 127(2) TFEU. The judgment appears to establish some precise legal principles. First, the concept of independence of the ECB is limited to and based upon the need to attain the objectives entrusted to the ECB, in primis the achievement of price stability. The Treaties however fail to clarify the concept of price stability: its definition has been left to the ECB s Governing Council in accordance with Article 12 of the Statute of the ESCB and the ECB and with the principle of independence of the Central Bank. 11 Second, the Court of Justice adopts a systematic interpretation, which emphasizes the context within which the ECB operates. In this regard, it is particularly noteworthy that the Court of Justice acknowledges that the ECB has a special role to play, but that this role still lies within Zilioli and Selmayer, 36 Common Market Law Review (1999), p. 1229; S. Baroncelli, La Banca centrale europea: profili giuridici e istituzionali. Un confronto con il modello americano della Federal Reserve (Firenze, 2000), p. 171. 9 Protocol (No 4) to the Consolidated version of the Treaty on the Functioning of the European Union on the Statute of the European System of Central Banks and of the European Central Bank, [2012] OJ C 326/230. 10 Case C-11/00 Commission v. ECB, para. 134. 11 See Website of the European Central Bank, https://www.ecb.europa.eu/mopo/strategy/pricestab/html/ index.en.html. 82 23 MJ 1 (2016)

The Gauweiler Judgment in View of the Case Law of the CJEU on European Central Bank Independence the Union framework and that the ECB functions according to the common objectives applicable to all EU institutions. This means that in a field which has been entrusted specifically to the ESCB such as that of monetary policy, each time that the ECB retains a margin of discretion in adopting a normative act, once the principle of price stability has been ensured, it remains under the obligation to pursue the general objectives of the EU. 12 This is the essence of the Court of Justice s decision, in which it points out that recognition that the ECB has such independence does not have the consequence of separating it entirely from the European Community and exempting it from every rule of Community law. 13 The Court of Justice very clearly states this principle in affirming that it is evident from Article 105(1) EC [now Article 127 TFEU] that the ECB is to contribute to the achievement of the objectives of the European Community. 14 According to Article 127 TFEU, in fact, [w]ithout prejudice to the objective of price stability, the ESCB shall support the general economic policies in the Community with a view to contributing to the achievement of the objectives of the Community as laid down in article 3 TEU, which includes a high level of employment and social protection, the raising of the standard of living and quality of life, and economic and social cohesion and solidarity among the Member States. 15 In any case, the ECB should remain independent from external pressures, as specifically laid down by the Treaties. 3. THE CONCEPT OF INDEPENDENCE IN GAUWEILER: AN INTRODUCTION If we read the Gauweiler case, we realize that the issue of central bank independence has been taken into account only indirectly. In fact, the decision only refers to independence at three junctures and in each case, only very briefly. A first introductory remark can be found towards the beginning, 16 and consists of a summary of the reasoning of the FCC. The concept of independence is also to be found in the part of the judgment dedicated to the substance of the case 17 where the extent of the powers of the ESCB and ECB are evaluated. Here, the Court of Justice analyses the concept of functional independence to justify the discretion enjoyed by the ECB in deciding upon the extension of its powers. 12 S. Baroncelli, The EMU model and its Aftermath: Back to Maastricht or far from Maastricht?, in S. Baroncelli, C. Spagnolo and L.S. Talani (eds.), Back to Maastricht. Obstacles to Constitutional Reform within the EU Treaty (1991 2007) (Cambridge Scholars Press, 2008), p. 136 137. 13 Case C-11/00 Commission v. ECB, para. 135. 14 Ibid., para. 135. 15 See also Article 119(2) TFEU. 16 Case C-62/14 Gauweiler, para. 8. 17 Ibid., para. 40. 23 MJ 1 (2016) 83

Stefania Baroncelli Finally, the Court of Justice deals with the risk that the independence of the ECB is violated by its exercise of economic policy instruments linked to ESM. 18 The reading of the judgment reveals that the concept of independence is only briefly taken into consideration by the Court of Justice. This omission can be justified by the fact that the FCC analyses the notion of independence only in a negative way, to justify the strict interpretation of the mandate of the ECB, and not to define the role of the ECB in a positive manner. Nonetheless, a closer reading of the case reveals that central bank independence is the hidden concept which underpins the reasoning of the Court of Justice, so much so that it is possible to justify the conclusions reached by the Court of Justice in the case on the basis of the notion of central bank independence. We have identified two main issues around which the discussion on ECB independence revolves: the evaluation of the extent of the powers of the ECB (where the Court of Justice and FCC advance two different views), and the risk that the independence of the ECB could be violated by its exercise of economic policy instruments linked to ESM. We will deal with these topics separately in the next three paragraphs, taking into account both the views of the FCC and the Court of Justice. 4. THE EXTENT OF THE POWERS OF THE ECB: THE VIEW OF THE GERMAN CONSTITUTIONAL COURT The independence guaranteed by Art. 130, Art. 282 sec. 3 sentences 3 and 4 TFEU only refers to the actual powers (and their specific content) that the Treaties confer on the European Central Bank, but do [sic] not refer to the determination of the extent and scope of its mandate. It would be incompatible with the principle of conferral (Art. 5 sec. 2 TEU) if an institution of the European Union could autonomously determine the powers assigned to it. 19 According to the FCC the mandate assigned to the ESCB must be strictly limited in order to meet democratic requirements. 20 Such limits, according to the FCC, should be subject to a comprehensive judicial review on the part of the Court of Justice (or by the FCC itself, in the event that the Court of Justice refuses to do so). 21 The justification for such a full review is to be found in the fact that the ECB cannot by itself define the extent and the scope of its mandate. In fact, the protection stemming from the concept of the independence of the ECB relates only to the powers that the Treaties confer on the ECB and not to their content. 22 The FCC even refers to the case law of the Court of Justice, and specifically to Commission v. ECB, to justify this assumption and it 18 Ibid., para. 60 and 65. 19 OMT Ruling, BVerfGE Case No. 2 BvR2728/13 14.1.2014, para. 60. 20 Case C-62/14 Gauweiler, para. 8, referring to BVerfGE Case No. 2 BvR2728/13 14.1.2014, para. 5. 21 See the contribution of R.D. Kelemen in this Special Issue. 22 Ibid., para. 8. 84 23 MJ 1 (2016)

The Gauweiler Judgment in View of the Case Law of the CJEU on European Central Bank Independence could not do otherwise considering that the interpretation of EU law pertains to the EU judicial system. 23 The fact that ECB acts are subject to the review of the Court of Justice is not in dispute. Firstly, the Treaties give the Court of Justice the power to dismiss a member of the Executive Board if he/she no longer fulfils the conditions required for the performance of his/her duties or if he/she has been guilty of serious misconduct. 24 Such power is at the root of the concept of institutional independence, as was developed in the United States and then in Europe. 25 In addition to that, the Court of Justice in Commission v. ECB has clearly recognized that the operational and institutional autonomy of the ECB does not mean that it is totally separated from the EU and exempt from every EU rule. 26 On the contrary, the Court of Justice has explicitly stated that the ECB is subject to its review according to the rule of law. 27 The issue in Commission v. ECB was, however, internal to the EU institutional framework. The EU regulation had been enacted in a field which was not clearly connected to the exercise of monetary policy (fraud prevention within the EU institutions) and did not encroach upon the objective of price stability, which is the one objective that justifies the position of independence of the ECB. Here, the FCC criticizes the extension of the mandate of the ECB in the field of monetary policy a power that is clearly assigned under the Treaties to the ECB because in its opinion, the OMT programme is not an act of monetary policy. According to the FCC, the ECB cannot determine the extension of monetary policy, and in particular the tools to be used, because its independence is limited to the powers conferred upon it by the Treaties and does not extend to determining the content of such powers. Put differently, the issue is about the extension of discretion to be afforded to the ECB in deciding the content of monetary policy, and in particular its power to decide that OMTs are a tool of monetary policy. In fact, according to the ECB, the OMT programme aims at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. For the ECB, it does not matter whether a measure is conventional or unconventional in nature, what is legally relevant is that it serves the purpose of ensuring a proper transmission of monetary policy to the economic sphere, in particular to restore the link between the key interest rate and the bank interest rates that has been impaired by financial speculation during the crisis. 23 Case C-11/00 Commission v. ECB. 24 Article 11(4) of the Statute of the ESCB. 25 From a strictly legal point of view, the concept of independence for administrative agencies consists of the impossibility for politicians or hierarchical superiors to dismiss the commissioners without a legitimate cause, and not for political reasons. See the Supreme Court case of Humphrey s Executor v. United States, 295 U.S. 602, 295 U.S. 602, 55 S. Ct. 869, 79 L. Ed. 1611, 1935 U.S. LEXIS 1089 (1935). On the notion of independence in American doctrine, see C.R. Sunstein, Paradoxes of the Regulatory State, 57 University of Chicago Law Review (1990), p. 426. 26 Case C-11/00 Commission v. ECB, para. 127. 27 Ibid., para. 135. 23 MJ 1 (2016) 85

Stefania Baroncelli The FCC establishes limits to the range of tools that can be adopted by the ECB. This is a consequence of a restrictive interpretation of the ECB mandate on the basis of the principle of democracy and central bank independence as enshrined in the German Constitution. 28 The former principle (Article 20 of the Basic Law) is defined by the German FCC as the absolute substantial limit to constitutional revision and is deemed to be undermined every time the German parliament suffers a substantial loss of its democratic decision making power. 29 The latter is recognized by Article 88(2) of the Basic Law, according to which the responsibilities and powers of a note-issuing and currency bank may be transferred to the European Central Bank, which is independent and committed to the overriding goal of assuring price stability. 30 This clause was added in order to render the German Constitution compatible with the Treaty of Maastricht. The provision in question is, however, interpreted by the FCC in a restrictive way: only an ECB which respects the strict criteria established in Maastricht (including the Treaties and the Statute of the ESCB and the ECB) and the priority of a stable currency has constitutional validity in the German Federation. According to the FCC, even the autonomous determination of its powers by an EU institution (not only the ECB, but any of the institutions) would be incompatible with the principle of conferral under Article 5(2) TEU. 31 The message of the FCC is so extreme in claiming that the Member States remain the masters of the Treaties 32 and decide step by step upon the evolution of the Union, that the reference to the principle of independence appears to be a mere pretext to curtail the powers of the ECB. We can rebut this argument, however, by stating that if the institutions of the EU were not able to determine the extent of their mandate themselves, and if the principle of conferral was interpreted in a restrictive way and according to the interpretation given at state level, the evolution of the Union would be completely impaired. The EU Treaties should be considered as something more than just legal texts, because they have been agreed on by all 28 Member States of the Union and their modification requires unanimity. This means that the concept of independence should be considered as a European concept and not only as a German one, that is, construed according to German doctrinal and legal ideas. This type of criticism was not, 28 On this remark, see also the dissenting opinion of Justice Lübbe-Wolff, BVerfGE Case No. 2 BvR2728/13 14.1.2014, 28. 29 BVerfGE Case No. 2 BvE 2/08 30.6.2009, 123, 267, 340, DE:BVerfG:2009:es20090630.2bve000208; BVerfGE Case No. 2 BvR 987/10 7.11.2011, 129, 124, 168, DE:BVerfG:2011:rs20110907.2bvr098710. 30 Article 88 of the German Basic Law (Grundgesetz): The Federation shall establish a note-issuing and currency bank as the Federal Bank. Within the framework of the European Union, its responsibilities and powers may be transferred to the European Central Bank, which is independent and committed to the overriding goal of assuring price stability. 31 BVerfGE Case No. 2 BvR2728/13 14.1.2014, 60: It would be incompatible with the principle of conferral (Art. 5 sec. 2 TEU) if an institution of the European Union could autonomously determine the powers assigned to it. 32 See the decision of the FCC on the Treaty of Lisbon, BVerfGE Case No. 2 BvE 2/08 30.6.2009, 150, 213, 235, 271, 298, 334. 86 23 MJ 1 (2016)

The Gauweiler Judgment in View of the Case Law of the CJEU on European Central Bank Independence however, advanced by the Court of Justice, which preferred not to examine the concepts of independence and democracy, as we will see in the next paragraph. It is even paradoxical that the FCC has employed the notion of central bank independence to criticize the ECB s actions, considering that it was specifically at Germany s request that the ECB was made independent under the Treaty of Maastricht. 33 The concept of independence as defined in the EU Treaties is even stronger than the German concept pre-dating Maastricht, whereby the independence of the German Central Bank (Bundesbank) was only recognized under an ordinary statute, and not under the Constitution. Additionally, it is worth recalling that before Maastricht the German Central Bank was not completely independent from the Government and was not entrusted only with the task of maintaining price stability. According to the old text of the Law on the German Central Bank, the Bank had the task of supporting the economic policies of the government in power, to the extent that monetary policy was aimed at ensuring the stability of the German Mark against this policy background. 34 A second paradox in the use of the concept of independence can be found in the FCC basing its criticism on the opinion of the German Central Bank. The German Central Bank is a member of the Governing Council of the ECB, and it is not only independent from the electorate by definition (in particular from the German parliament), but is also an integral part of the ESCB and should act in accordance with the guidelines and instructions of the ECB. 35 It is true that the German Central Bank voted against the adoption of the OMT programme within the Governing Council, but once a measure has been adopted on the basis of a majority, the rule of law should apply. With this judgment, the FCC appears to follow the interpretation of the ECB which it applied in its Maastricht case. 36 In fact, it appears to imply that the European institutions are required to take into account the principle of price stability as expressed by the German Constitution, and interpreted by the German FCC, whenever they are called upon to attach a legal meaning to this concept at EU level. Since it is the ECB which is entitled to pursue the goal of price stability, the statement of the FCC may be read as a rebuke of the ECB, attempting to oblige it to apply the doctrine which had previously been followed by the German Central Bank. It also denies the possibility of accommodating the value of the stability of the currency with other secondary values. 33 See M. van der Sluis, Maastricht Revisited: Economic Constitutionalism, the ECB and the Bundesbank, in M. Adams, F. Fabbrini and P. Larouche (eds.), The Constitutionalization of European Budgetary Constraints (Hart Publishing, 2014), p. 108. 34 According to Article 12 of the old Law on the German Central Bank, which remained in force until 31 December 1998, [w]ithout prejudice to the performance of its duties, the Deutsche Bundesbank is required to support the general economic policy of the Federal Cabinet. In exercising the powers conferred on it by this law, the Bank is independent of instructions from the Federal Cabinet. 35 Article 14(3) of the Statute of the ESCB. 36 BVerfG 89, 155 12.10.1993. English translation in Common Market Law Reports (1994), p. 75. 23 MJ 1 (2016) 87

Stefania Baroncelli Since Maastricht, however, the role of the ECB has grown and the economic and legal context has changed. 37 Firstly, the economic and financial crisis has undermined the very existence of the Euro System, revealing the weakness in the framework of the monetary union in the case of distressed markets and the asymmetric effects of monetary policy. Secondly, under the Treaty of Lisbon, the ECB has become an institution of the EU (Article 13 TEU), bringing with it the duty to cooperate with the other institutions and the obligation to help the EU institutions to achieve the objectives of the Union as a whole as enshrined in Article 3 TEU, once the principle of price stability has been achieved. Thirdly, the mandate of the ECB as described in the Treaties has remained vague, as shown by the fact that it was down to the Governing Council of the ECB to decide upon the content of price stability; this shows that it was endowed with a technical discretion to decide upon the extent of monetary policy. To conclude on this point, it appears clear that the issue of the independence of the central bank has been used by the FCC mainly to justify its restrictive attitude towards the powers of the ECB in deciding its mandate, without taking into account the evolution of the ECB s role since the Maastricht Treaty, at a legal and economic level. This is also shown by the fact that the reference to the case of Commission v. ECB is made only to require a full judicial review of the ECB s activities by the Court of Justice without taking into account the rest of the decision, which requires the ECB to cooperate with the other EU institutions in achieving the overall objectives of the Union. On one issue, however, the FCC is right. This is that the independence of the central bank should be balanced with the principle of democracy. Independence is guaranteed to the ECB, because on the basis of the best German doctrine and experience, an independent central bank is a better tool to safeguard monetary stability, and thus the general economic basis for budgetary policies, than state bodies whose actions depend on money supply and value and which need to rely on short-term approval by political forces. 38 The FCC makes a strong argument here and refers to the substance of independence, and more specifically to the doctrinal justification of independence as a derogation from the principle of democracy. Yet, this does not mean that independence should be interpreted according to the German Constitution. Moreover, independence does not mean that the ECB operates without any political oversight, as it should be accountable at EU level vis-à-vis the European Parliament through reports, press releases, and periodical meetings with the competent parliamentary commission, and not necessarily to the German Parliament. 37 See the contribution of J.-V. Louis in this Special issue. 38 BVerfGE Case No. 2 BvR2728/13 14.1.2014, 59. 88 23 MJ 1 (2016)

The Gauweiler Judgment in View of the Case Law of the CJEU on European Central Bank Independence 5. THE MANDATE OF THE ECB AS JUSTIFIED BY THE PRINCIPLE OF INDEPENDENCE ACCORDING TO THE COURT OF JUSTICE AND THE ADVOCATE GENERAL Article 130 TFEU is, in essence, intended to shield the ESCB from all political pressure in order to enable it effectively to pursue the objectives attributed to its tasks, through the independent exercise of the specific powers conferred on it for that purpose by primary law. 39 The concept of independence is to be found in the part of the Gauweiler judgment dedicated to the substance of the case, 40 where an analysis of the powers of the ESCB and ECB is carried forward. In that part, the Court of Justice acknowledges the exclusive competence of the Union in respect of monetary policy for the Member States whose currency is the Euro on the basis of Article 3(1)(c) TFEU and the ESCB s power to define and implement that policy. 41 Such principles are detailed as specified by the Court of Justice in Article 12(1) of the Statute of the ESCB and ECB read in conjunction with Article 129(1) TFEU, which entrusts the Governing Council with the power to formulate the monetary policy of the EU. The guidelines and decisions laid down by the Governing Council acting under its powers have to be implemented by the Executive Board of the ECB, while the national central banks including the German Central Bank are obliged to act in accordance. 42 The Court of Justice does not make any reference to the issue of democracy expressed upon by the FCC, and limits itself to a literal interpretation of the EU Treaties. As an additional and more substantial justification, the Court of Justice makes reference to its own case of Commission v. ECB the same judgment cited by the FCC, but viewed in a different light to defend the adoption of the OMT programme. It is in that case that the Court of Justice specifically acknowledges the independence of the ECB and bases upon this concept the justification for it to freely exercise the powers conferred on it by the EU Treaties. The Court of Justice reads Article 130 TFEU as the legal basis for recognizing the full independence of the ECB when carrying out its task of formulating and implementing the Union s monetary policy. 43 After having assumed that the function of central bank independence enshrined in Article 130 TFEU is to shield the ECB from all political pressure in order to enable it effectively to pursue the objectives attributed to its tasks, the Court specifies that such objectives can be pursued through the independent exercise of the specific powers conferred on it for that purpose by primary law. 44 Unfortunately, this is the only passage 39 Case C-62/14 Gauweiler, para. 40. 40 Ibid., para. 40. 41 Article 127(2) TFEU. 42 Article 14(3) of the Statute of the ESCB and the ECB. 43 Case C-11/00 Commission v. ECB, para. 134, referred to in Case C-62/14 Gauweiler, para. 40. 44 Ibid. 23 MJ 1 (2016) 89

Stefania Baroncelli where the Court of Justice deals with the concept of independence, and it is only a quote taken from a previous judgment. It seems to be more of an obiter dictum than a true legal basis for justifying the powers of the ECB. No mention is made of the technical nature of the central bank, which is normally considered as a justification for its independence from a constitutional point of view. The implications of the vagueness of the definition become apparent when the Court of Justice decides to define the limits of monetary policy. 45 It identifies in the objectives (that is, price stability) pursued by the measure, the means to evaluate if the act falls within the area of monetary policy. 46 In addition to that, the instruments used to achieve such objectives are also considered relevant. The Court of Justice s definition is, however, based more on the Pringle case than on a theoretical basis. 47 This is probably the reason why the explanation as to the delimitation of monetary policy is barely understandable and comes across as tautological. As the Court of Justice states: the objective of safeguarding the singleness of monetary policy contributes to achieving the objectives of that policy inasmuch as, under Article 119(2) TFEU, monetary policy must be single. 48 This is also the case when the Court of Justice defines the need to guarantee an appropriate transmission of monetary policy as an objective that is likely to preserve the singleness of monetary policy and to contribute to maintaining price stability. This is also tautological, as a good functioning monetary policy (and the transmission mechanism which is a part of it) is a necessary precondition for achieving the aims that it was created to pursue. In sum, the reason put forward by the Court of Justice to justify the mandate for the ECB and its OMT programme, in order to maintain a good functioning monetary policy, seems to be based more on formal and tautological explanations than on substantive ones. In order to obtain a more detailed perspective on the issue, we should turn to the Opinion of Advocate General Cruz Villalón. The Advocate General mentions the concepts of ECB functional and organic independence, and links these institutional features to the principal goal of the ECB ensuring price stability and to the almost constitutional character of the Statute of the ESCB and the ECB, which is very difficult to amend, something which differentiates the ECB from most central banks. 49 The Advocate General is right in explicating the concept of independence, and citing its double meanings. Although scholars normally identify four categories of central bank independence functional, institutional, personal and financial it is the functional one that is relevant here. 50 Such a feature is identified by the Advocate General in 45 Case C-62/14 Gauweiler, para. 46 50. 46 Ibid., para. 46. 47 Case C-370/12 Pringle, EU:C:2012:756, para. 53 and 55. 48 Case C-62/14 Gauweiler, para. 48. 49 Opinion of Advocate General Cruz Villalón in Case C-62/14 Gauweiler, EU:C:2015:7, para. 108. 50 Institutional independence refers to the external dimension of autonomy, which is the relationship between the central bank and other institutions (e.g. the possibility to annul the acts of the central 90 23 MJ 1 (2016)

The Gauweiler Judgment in View of the Case Law of the CJEU on European Central Bank Independence the independent nature of all the actions undertaken by the ECB linked to the hard character of the Treaties. A second point stressed by the Advocate General is the technical nature and high level of specialization of the ECB. Its remit involves the management of important data and information, which are often difficult to gather and interpret. 51 On this basis, the Advocate General supports the acknowledgment of a broad discretion to the ECB for the purpose of framing and implementing the Union s monetary policy. A full judicial review, as required by the referring court, would not take into account the necessary experience and expertise that the EU Treaties require from the ECB, which is also a justification for its independence. 52 The issue of the expertise needed by central banks to carry out their activities has been brought up by the judges of the Court of Justice who on this basis have justified the technical discretion of the ECB, in the part of the case dedicated to the proportionality test. When evaluating the appropriateness of the OMT programme, the Court considers that the technical analysis conducted by the ECB on the Member States of the Eurozone is not undermined by a manifest error of assessment. 53 At the same time, as the Court acknowledges, the economic context within which OMT was adopted was one of emergency: the interest rates on the government bonds of several Eurozone Member States were highly volatile and the spreads of government bonds were characterized by bank). Personal independence concerns the internal organization of the central bank and its governing council as recognized in its statute, and specifically: the guarantees for the nomination and dismissal of the Governor and members of the Governing Council, professional and technical prerequisites and the length of the mandate. Financial independence means that the central bank should avail itself of the financial resources that are necessary to achieve its objectives and decide upon their allocation on the basis of priorities, without being subject to the approval of the government or the parliament. Finally, functional independence relates to the function performed by the central bank, and has an external dimension based upon the institutional position of the central bank within the framework of the objectives and powers distributed among the various institutions, the objective (or objectives) which it is required to pursue under its statute, and also upon its capacity to reach such objective in an independent way. See S. Baroncelli, La banca centrale europea: profili giuridici e istituzionali, p. 263; and J.-V. Louis, Vers un Système européen de banques centrales, Collection Etudes Européennes (Institut d Etudes européennes, 1989). For an approach more oriented towards practice, see L. Bini Smaghi, Central bank independence: from theory to practice, European central bank (2007), https://www.ecb.europa.eu/press/key/date/2007/html/sp070419.en.html#ftn.fnid1. 51 Opinion of Advocate General Cruz Villalón in Case C-62/14 Gauweiler, para. 110: the ECB also has access to knowledge and particularly valuable information, which permits it to perform its tasks more effectively whilst also, over time, bolstering its technical expertise and reputation. Those features are essential for ensuring that monetary policy signals actually reach the economy since, as has previously been stated, one of the functions of central banks today is the management of expectations, and technical expertise, reputation and public communication are basic tools for carrying out that function. 52 Ibid., para. 111. 53 Ibid., Gauweiler, para. 74. 23 MJ 1 (2016) 91

Stefania Baroncelli extreme spreads that were unjustifiable according to the economic data. 54 The judges of the Court of Justice are therefore positive that questions of monetary policy are usually of a controversial nature and in view of the ESCB s broad discretion, nothing more can be required of the ESCB apart from that it use [sic] its economic expertise and the necessary technical means at its disposal to carry out that analysis with all care and accuracy. 55 The Court of Justice does not justify the recognition of technical discretion and the limited ground of judicial review on principles of the independence of the ECB, but on more general case law. 56 It is possible, however, to identify a reference to the theory of central bank independence when the Court of Justice makes reference to the need for the ECB to perform its functions more effectively and acknowledges its technical expertise and reputation, on the basis of the Opinion of Advocate General Cruz Villalón and the previous judgment in Commission v. ECB. 57 This acknowledgment clearly underpins the Court of Justice s reasoning when defining the aim of Article 130 TFEU. This provision, in fact, appears to be aimed at shielding the ESCB from all political pressure in order to enable it effectively to pursue the objectives attributed to its functions. Such reference to the effectiveness of monetary policy hints at a more substantive concept of independence on the part of the Court of Justice. In fact, if monetary policy should effectively achieve the aims entrusted by the Treaties, a more powerful instrument is required, which can be identified only by the central bank, on the basis of its technical expertise. 6. THE INDEPENDENCE OF THE ECB THREATENED BY THE INTERTWINING OF MONETARY AND ECONOMIC POLICY The second occasion where the concept of independence comes to the fore in the Gauweiler judgment is related to the issue of differentiation between economic and monetary policy. According to economic doctrine, the most common standard of evaluating the functional independence of central banks is that they stick to one principal objective, that is, price stability. 58 It was upon this presupposition that the concept of the independence 54 Ibid., para. 72. 55 Case C-62/14 Gauweiler, para. 75. 56 Ibid., para. 68. 57 Ibid., para. 40: Article 130 TFEU is, in essence, intended to shield the ESCB from all political pressure in order to enable it effectively to pursue the objectives attributed to its tasks. 58 V. Grilli et al., Political and Monetary Institutions and Public Financial Policies in the Industrial Countries, 13 Economic Policy (1991), p. 341 392; A. Cukierman, S.B. Webb and B. Neyapti, Measuring the Independence of Central Banks and its Effect on Policy Outcomes, 6 World Bank Economic Review 92 23 MJ 1 (2016)

The Gauweiler Judgment in View of the Case Law of the CJEU on European Central Bank Independence of the ECB had been built, and which distinguished the ECB from other central banks entrusted with multiple tasks, where monetary policy objectives are given the same weight as economic and fiscal objectives, such as in the case of the US Federal Reserve. Of course, the intermingling of monetary tools with others which have an economic and fiscal content may not only put in danger the ECB s reputation as a fighter of inflation, but can also remove it from the safe institutional harbour of independence. In fact, institutional independence that is, lack of political control is conceived as a justifiable derogation from the normal circuit of legitimation on the basis that it is considered to be the most appropriate tool to achieve the objective of price stability. Such a guarantee does not apply, however, once the ECB leaves the field of monetary policy and ventures into economic policies, where decisions are left to the traditional democratic process. This division of responsibilities is all the more acute in the EU, where economic responsibilities lie with the Member States, with only some coordination tools agreed at the European level. The enactment of economic policy instruments by the ECB would mean putting it in the difficult situation of making political choices with possible redistributive impacts upon EU citizens, businesses, and upon the Member States, but without taking any responsibility for such choices. The members of the Governing Council can, in fact, only be dismissed in extreme cases by the Court of Justice, where it is proved that they are not up to their job or for serious misconduct. 59 This issue is analyzed in some depth by the FCC. According to the FCC, the modification to the principle of democracy that ensues from providing an independent EU agency with an important economic policy tool such as that of monetary policy, should be interpreted as being limited only to the field of monetary policy. Such a derogation is in fact justifiable because it takes account of the special feature of monetary policy tried and tested in the German legal order, and also by the scientific community that an independent central bank is more likely to safeguard the monetary value, and thus the general economic basis for governmental budgetary policies as well as for private plans and transactions in exercise of the economic freedoms. 60 In the FCC s view, this option would be preferable to a democratic circuit, because state bodies whose options and means for action depend on money supply and monetary value need to rely on short-term approval by political forces. 61 To that extent, placing monetary policy on an autonomous basis under the sovereign jurisdiction of an independent ECB satisfies the constitutional requirements according to which the principle of democracy (1992), p. 358 398. For a review of the doctrine on the concept of independence, see S. Lombardo, The independence of the European Central Bank between monetary union and fiscal union: the OMT case as a conflict among non-majoritarian institutions, 4 Law and Economics Yearly Review (2015), p. 195. 59 Article 11(4) of the Statute of the ESCB. 60 BVerfGE Case No. 2 BvR2728/13 14.1.2014, 32. 61 Ibid. 23 MJ 1 (2016) 93

Stefania Baroncelli may be modified. The ECB jurisdiction cannot, however, be transferred to other political areas, such as economic or fiscal policy, as this would contradict the premises upon which the whole construct of ECB independence is built. 62 The Court of Justice analyses only implicitly the issue of independence as a derogation from the principle of democracy in connection with the possible infringement of Article 123 TFEU (no monetization of debt). According to the Court of Justice, it is apparent that the OMT programme falls within the area of monetary policy and does not impinge upon the domain of economic policy. This is shown, first of all, by the objectives pursued, that is to ensure the proper transmission and singleness of monetary policy which are within the jurisdiction of the ECB. 63 The legality of the OMT programme also emerges from the tools used by the ECB, that is, intervention on the secondary market. Such purchases of selected government bonds issued by Eurozone Member States, are allowed under Article 18 of the Statute of the ESCB and the ECB and are not forbidden by Article 123 TFEU, the ambit of which is limited to purchases on the primary market. 64 This conclusion for the Court of Justice is not changed by the fact that the implementation of OMT decisions are made conditional upon full compliance with EFSF or ESM macroeconomic adjustment programmes. 65 The Court of Justice considers that the ESCB has linked decisions taken within the OMT programme to the existence of an EFSF or ESM macroeconomic adjustment programme. Such a link does not, however, bring the ECB into the domain of economic policy. On the contrary, according to the Court, it has the advantage of ensuring that monetary policy will not provide the Member States whose sovereign bonds it purchases with financing opportunities which would enable them to depart from the adjustment programmes to which they have subscribed. 66 The issue of functional central bank independence is briefly taken into consideration when the Court of Justice observes that the ECB has made the OMT programme conditional upon full compliance with EFSF or ESM macroeconomic adjustment programmes in a wholly independent manner. 67 This implies that other members of the troika (IMF and the European Commission), who are extraneous to the circuit of monetary policy, did not participate in this decision. Since it is the ECB which is entitled to pursue the goal of price stability, the statement of the Court of Justice can be interpreted as a reprimand to the ECB, attempting to oblige it to pursue only monetary policy objectives and not to enter the economic policy domain, which pertains to the Member States and to the coordinating powers of other EU institutions. 62 Ibid. 63 Case C-62/14 Gauweiler, para. 56. 64 Ibid., para. 100 and 101. 65 Ibid., para. 57. 66 Ibid., para. 60. 67 Ibid., para. 60. 94 23 MJ 1 (2016)