A new legal challenge to the ECB’s mandate

Published in Business Spectator (Melbourne), 31 July 2014

Two years ago, three words by the European Central Bank’s President Mario Draghi ended the panic around the euro crisis: “Whatever it takes”. When Draghi said these words at an event in London — meaning that his institution was prepared to use unconventional (and potentially unlimited) ways to stabilise the euro system — it halted the escalating crisis. But it did not solve any of its underlying problems.

There remain, however, severe legal doubts about the lawfulness of Draghi’s intervention. Both the European Court of Justice and the German Constitutional Court still have to decide on this issue (Will the euro die in the courts?, February 13).

“Whatever it takes” also seems to be the motto of Europe’s politicians in dealing with Europe’s ailing banking sector. The problems of European banks are well known. There are too many of them and they are too small; their capital buffers are inadequate; and for those institutes in periphery euro countries, the health of their balance sheets is especially doubtful.

Something needed to be done about this problem. (Just letting the market deal with ailing banks is not considered to be an option.) This is why the European Union agreed to put the ECB in charge of dealing with the continent’s banking mess.

As it now turns out, the solution to Europe’s banking crisis may meet the same fate as the supposed solution to the euro crisis: they are both handled by the ECB. But in both cases the ECB may not have a proper legal mandate, and it will be the courts who will have the final word.

As the German conservative Sunday paper Welt am Sonntag reported last weekend, a group of professors headed by Berlin law and economics professor Markus Kerber have filed a new case with the German Constitutional Court. Their aim is to stop the ECB from becoming Europe’s top banking regulator. Their basic argument is that the ECB’s functions are enumerated by EU Treaty Law, which does not grant the ECB any such power.

The newspaper quoted Kerber as saying that a banking union had no legal foundation in the EU’s treaties and that establishing it paved the way for higher liabilities being shifted onto taxpayers. The idea to move banking supervision to the European level was the “climax of Brussel’s self-empowerment regime”. These are strong words but Kerber and his colleagues may well have a point.

In principle, it is quite reasonable to determine whether European nation states or the European Union and its institutions are in charge of any particular policy area. Unless the member states have empowered the EU by treaty, they remain responsible for any policies. It is the basic principle of sovereignty that is at stake here, and even though the EU has historically grown to be responsible for more and more areas, none of this could have happened without an explicit transfer of power (i.e. a signed and ratified treaty) from member states to Brussels.

Such an explicit transfer of power is missing in the case of European banking supervision. Article 127 (6) of the Lisbon Treaty states that:

“The Council, acting by means of regulations in accordance with a special legislative procedure, may unanimously, and after consulting the European Parliament and the European Central Bank, confer specific tasks upon the European Central Bank concerning policies relating to the prudential supervision of credit institutions and other financial institutions with the exception of insurance undertakings.”

In plain English, this means that EU finance ministers can ask the ECB to assist with banking regulation. However, the EU’s banking union plans go far beyond it. The new Single Supervisory Mechanism would empower the ECB to take control over any bank in the eurozone if it deems such a step necessary.

Quite clearly, Article 127 (6) saw the ECB as an auxiliary in banking supervision, but now this very provision is used to establish the ECB as the ultimate decision-maker. Whether this is desirable or not, it obviously goes beyond what was agreed in the treaty.

Kerber argues that such a profound change in the powers of the ECB cannot be done through the backdoor but needs a proper treaty change. Such changes are notoriously difficult to achieve. They would need to be agreed to by all 28 EU member states, some of which may even be required to subject them to a referendum. No wonder EU leaders did not want to go down that path.

There is also an added complication in the way in which the ECB is supposed to deal with banking supervision. According to treaty law, there is only one decision-making body within the ECB, and that is its Governing Council. When it comes to banking supervision, this council will not make decisions but only have a veto on the decisions of a newly established Supervisory Board. Again, it is at least questionable whether such institutional changes to the ECB can be introduced without any treaty change.

The complaints about the ECB’s new banking supervision role are legalistic in form but political in nature. Of course, the deeper issue in all of this is not whether European treaty law was broken — important as that is in itself. Rather, the question is whether savers and taxpayers in richer eurozone countries can be asked to shoulder some of the burden of bailing out financial institutions in other eurozone countries. This is what Kerber and his colleagues want to prevent.

When it comes to the Constitutional Court, these political matters will be at stake but they will not be decided. The German Constitutional Court will only have to deal with the formal question about the scope of the ECB’s mandate under the Lisbon Treaty.

It will be a very similar question to the previous one the Court had to decide with respect to the ECB’s unorthodox monetary policies. In this ongoing case, the top German judges expressed their severe concerns before tabling the question with their colleagues at the European Court of Justice (while reserving the right to make the final decision). This could well happen in the new case as well.

The two ECB flagship projects of saving the euro and saving Europe’s banks are now both under legal threat. Sometimes “whatever it takes” is not enough if you cannot convince top judges as well.