Part III - Legal Accountability

9 Constructive Constitutional Conflict as an Accountability Device in Monetary Policy

Ana Bobić

9.1 Introduction

The year is 1974. In Karlsruhe, the Second Senate of the Bundesverfassungsgericht just informed the Court of Justice that the way in which the latter is safeguarding fundamental rights is subpar to the standard of protection provided in the Grundgesetz.¹ Solange, the Court of Justice, does not step up its fundamental rights protection game; the Bundesverfassungsgericht will continue to do so despite the possibility of EU law requiring otherwise.² Theories and commentaries abounded, so much so that this instance of constitutional conflict is still used as the ideal type guiding our academic thought in the area of judicial interactions in the EU. For example, the doctrines of ‘Reverse Solange’³ and ‘Horizontal Solange’⁴ are an unavoidable reading for anyone attempting to make sense of judicial interactions in the EU.⁵ Substantively, an important consequence of Solange is an increase in the level of fundamental rights protection in the EU, incrementally and dynamically developing through contestation between the EU and the national level.⁶

Fast forward to 2020, and the Court of Justice is being reprimanded by the Bundesverfassungsgericht yet again, this time for not properly controlling the European Central Bank (ECB) in respecting the limits of the law of the Economic and Monetary Union (EMU).⁷ The ECB acting in excess of what the Treaties allow for is, according to the Bundesverfassungsgericht, not permitted by the Basic Law. This time around, the reaction to the German decision appears to me to suffer from a certain conflict fatigue: the attacks on the rule of law coming from Poland and Hungary are causing a strain in the ability of EU institutions⁸ to ensure the respect of the values contained in Article 2 TEU, and the ultra vires finding of the Bundesverfassungsgericht is seen as unnecessarily adding fuel to the flames. This would explain the conceptually flawed, yet overwhelmingly present, conflation of the German and the Polish/Hungarian situations as both representing a rule of law issue that is an existential threat to the EU.⁹ Constitutional conflict is thus considered a disruptive factor in the scholarship that regards the EU as a federal or quasi-federal system.¹⁰

Conversely, the EU’s constitutional sphere is comprised of multiple constitutional sites of discourse and authority,¹¹ where the mutual recognition and respect between these sites is ‘the only acceptable ethic of political responsibility for the new Europe’.¹² In consequence, constitutional conflict is not a bug but an important feature contributing to the system’s functioning and incremental development.¹³ So long as the conflict remains within the possible interpretation of values contained in Article 2 TEU, the conflict is contained within the ‘constitutional’ but remains ‘pluralist’.¹⁴ Ultimately, a heterarchical setup is achieved through the system’s in-built auto-correct function, which serves to incrementally accommodate points of conflict through mutual respect and sincere cooperation of all courts involved.¹⁵

Taking this context as the starting point, my aim is to answer what role does constitutional conflict, as a feature of the EU’s constitutional framework, play when it comes to achieving accountability goods presented in the theoretical framework of this book? And in unpacking the goods further, are (and should) they better achieved through procedural or substantive means? I will more specifically refer to three accountability goods. First, the analysis of the jurisprudence of constitutional conflict in the monetary field will show the way in which courts can contribute to non-arbitrariness, by imposing on the decision-makers more stringent standards for justifying their policies. There is of course a procedural as well as a substantive dimension to such judicial demands. As I will show below, a common critique of the Court of Justice is that it remains on the procedural side of ensuring the non-arbitrariness in ECB decision-making. On the other hand, the Bundesverfassungsgericht is also criticised for holding too firm a grasp on the ECB in terms of its substantive demands to demonstrate the ways in which its action is constrained. There is thus a need to take a closer look at the potential of constitutional conflict to act as a discursive mechanism between the EU and national courts in devising a standard of judicial review that ensures the good of non-arbitrariness that goes beyond its procedural facet.

The second accountability good that can be achieved through judicial review characterised by constitutional conflict is effectiveness. How can courts ensure that the decisions of the ECB are in fact correct? Another common critique of judicial review in monetary policy is that the courts necessarily lack the expertise required to in fact substantively ensure that the ECB’s decisions are sound. The analysis below will thus aim to show the ways in which effectiveness has featured in judicial review in the monetary field.

Finally, I will also show the ways in which judicial review and the resulting constitutional conflicts flesh out how the ECB can be accountable by delivering the good of publicness. What is particularly interesting in this regard is that publicness might mean different things to different courts, and the role of constitutional conflict is particularly important here to ensure that for areas where the EU has competence, the good of publicness contributes to the common interest of the entire Union.

In answering these questions, I will focus on the judgment of the Bundesverfassungsgericht in Weiss II through an incremental lens, forming part of a broader conversation on accountability in the EMU between the two courts that began with the earlier Gauweiler litigation. After a brief presentation of the broader ECB-related jurisprudence of the two courts in Section 9.2, I will address, first, the question of the role of the principle of proportionality in assessing the legality of ECB action (Section 9.3); and, second, the competition between the Court of Justice and national constitutional courts in competence control (Section 9.4). The final Section (9.5) will offer some conclusions on how these judicial interactions fared in achieving the procedural and/or substantive facets of the three accountability goods, as well as the remaining dangers of the Weiss II decision for the European judicial space.

9.2 The Monetary Policy Litigation

From the perspective of constitutional conflict, the two courts have been discussing the appropriate level of control of the ECB as an idiosyncratically independent institution for some time now,¹⁶ beginning with the Outright Monetary Transactions (OMT) mechanism that was at the centre of the Gauweiler litigation. The decision of the German court in Weiss II is at present the last instance of this back and forth. Three main threads run through and shape these interactions: the legality of ECB action, ultra vires review, and the role of constitutional identity, culminating in the German rejection of the interpretation provided by the Court of Justice.

In Gauweiler, the Bundesverfassungsgericht raised doubts concerning the compatibility of the OMT mechanism with primary EU law. More specifically, for the OMT to be ultra vires, it needed to exceed the monetary policy mandate of the ECB and the prohibition of monetary financing, resulting in an encroachment of Member States’ economic policy.¹⁷ The Court of Justice’s response confirmed the legality of the OMT programme: it first analysed the powers of the ECB and concluded that indirect effects of monetary policy on economic policy do not make them equivalent, leading to the conclusion that the ECB was acting within the boundaries of its mandate.¹⁸ The Court of Justice further provided an interpretation setting out some of the conditions necessary for compliance with the Treaties,¹⁹ albeit differently than what the Bundesverfassungsgericht stated in its order for reference.²⁰ In relation to the judicial relationship between the two courts, the Court of Justice omitted any analysis of the claims to constitutional identity and ultra vires review of the Bundesverfassungsgericht, stating only that the decisions provided by way of the preliminary reference procedure concerning the interpretation and validity of Union acts are binding on the national court.²¹ The Bundesverfassungsgericht accepted the findings of the Court of Justice, by setting out the relationship between the principle of primacy and the Basic Law, addressing also the identity and ultra vires review it carries out in relation to EU acts. It concluded that any such review must be done cautiously, with restraint, and in a way that is open to European integration.²²

It is against this background that the Bundesverfassungsgericht submitted its second preliminary reference concerning the scope of ECB’s mandate. This reference revolved around three issues: whether the ECB had complied with its obligation to state reasons in devising the Public Sector Purchase Programme (PSPP), whether said programme falls within the monetary policy mandate of the ECB, and whether it is contrary to the Treaty prohibition of monetary financing. The principle of proportionality was mentioned by the Bundesverfassungsgericht only in relation to the first two issues. After receiving the response from the Court of Justice, the Bundesverfassungsgericht found that the proportionality test as applied by the Court of Justice deprives the said principle of its ability to protect Member State competence.²³ It declared the judgment of the Court of Justice²⁴ and the PSPP²⁵ of the ECB ultra vires.

Having rejected the findings of the Court of Justice, the Bundesverfassungsgericht then took it upon itself to interpret the scope of the monetary policy mandate of the ECB. The ECB failed to take into account the economic policy effects of the PSPP and, importantly, balance a number of competing interests against each other.²⁶ In defining the relevant steps of the proportionality test, the Bundesverfassungsgericht stated that the fourth stricto sensu step has been omitted by the Court of Justice,²⁷ and there was no review of the sufficiency of information provided by the ECB in balancing the relevant interests.²⁸ The ECB thus failed in its duty to state reasons concerning the proportionality of the PSPP.²⁹ In relation to the prohibition of monetary financing, the Bundesverfassungsgericht raised some doubts as to the scrutiny applied by the Court of Justice, again related to the duty to state reasons,³⁰ but ultimately decided that the programme is in line with the Treaty prohibition of monetary financing and does not breach the constitutional identity of Germany.³¹

In consequence, the Bundesverfassungsgericht provided the Bundesbank with a three-month deadline during which it is obliged to work together with the ECB in ensuring the programme meets the principle of proportionality as interpreted by the German court. Otherwise, the Bundesbank will no longer be allowed to participate in the PSPP.³² Since then, the ECB has decided to comply with the request of the Bundesverfassungsgericht,³³ which the President of the Bundesbank deemed to be in compliance with the demands on the proportionality analysis to be carried out and published by the ECB.³⁴

9.3 Proportionality and ECB Accountability

One of the central criticisms directed to the decision in Weiss II revolves around whether proportionality is the correct answer when the question is how competences are divided between the EU and the national levels.³⁵ It refers to Bundesverfassungsgericht’s use of the principle of proportionality in delineating competences between the EU and the national levels, rather than applying it to the way in which these competences are exercised. This criticism is grounded in the wording of the Treaty, where Article 5(1) TEU clearly separates existence of competence to be guided by the principle of conferral and its exercise by the principle of proportionality. However, as I hope to show by analysing the interpretation of the two courts across Gauweiler and Weiss, this separation is not as straightforward when it comes to the mandate of the ECB, and the nature of separation between monetary and economic policy. In turn, this has important consequences for the accountability of the ECB as it allows the courts to better limit the arbitrariness of the ECB by connecting more closely the existence and exercise of competence in combination.³⁶ The conflict concerning the role of the principle of proportionality in holding the ECB to account thus seems to me to lose its pertinence. As I hope to show, it is less important to which stage, formally, it is being applied. What is relevant from the perspective of the good of non-arbitrariness in a substantive sense is that it places demands of justification on the ECB.

It is easy to say that the principle of conferral can be straightforwardly applied to whether something is, for example, an action in the area of competition law under Article 3(1)(b) TFEU, further specified in its content in Articles 101 and 102 TFEU. The European Commission, tasked with implementing competition law, does not have the mandate to define that it is agreements between undertakings that are prohibited by competition law, nor can it include or exclude the abuse of a dominant position from the scope of competition law. How it applies these concepts in the exercise of its competence is then subject to the principle of proportionality. However, when it comes to the ECB, Article 119(2) TFEU states that the competence itself includes ‘the definition and conduct of a single monetary policy’ (emphasis added).³⁷ In other words, the very existence of monetary policy is almost impossible to separate from and already forms part of its exercise: in order to find out whether the ECB acted within its mandate, we need to find out how it defined its mandate.³⁸ That this self-imposed and specific mandate has important consequences for the accountability of the ECB has been highlighted by the Court of Justice,³⁹ the Bundesverfassungsgericht,⁴⁰ as well as in the literature.⁴¹ In the specific context of the ECB, then, both should in my view be subject to the principle of proportionality as reviewed by courts.

Let us then take a closer look at how the Court of Justice separates the analysis of existence and exercise of monetary policy competence for the ECB. In both Gauweiler and Weiss, ‘delimitation of monetary policy’ and ‘proportionality’ are separate headings, keeping in line with the division of Article 5(1) TEU.⁴² However, in substance, a proportionality analysis can be discerned under both headings. In the proportionality section in Gauweiler, the Court of Justice defines it as requiring that acts of EU institutions be appropriate for attaining the objectives pursued and not go beyond what is necessary in achieving those objectives.⁴³ Back to the section on delimiting the monetary policy, the Court of Justice analysed whether the OMT mechanism contributes to achieving the objective of singleness of monetary policy and maintaining price stability.⁴⁴ Furthermore, the Court went on to assess whether the means to achieve the objectives of the OMT are in line with the objectives of monetary policy⁴⁵ – finding itself on the thin line separating existence from exercise of monetary policy. Precisely because a measure may have both monetary policy and economic policy effects,⁴⁶ and these are difficult to separate,⁴⁷ the Court is inevitably engaging in an assessment of whether the decision-maker (the ECB) by enacting its measures (the OMT, the PSPP) exceeded the scope of their mandate (monetary policy).⁴⁸ The inability of separating the question of existence versus exercise is more explicitly apparent in Weiss, when the Court of Justice analysed the delimitation of monetary policy:

It does not appear that the specification of the objective of maintaining price stability as the maintenance of inflation rates at levels below, but close to, 2% over the medium term, which the ESCB chose to adopt in 2003, is vitiated by a manifest error of assessment and goes beyond the framework established by the FEU Treaty.⁴⁹

(emphasis added)

A manifest error of assessment is a well-established standard for assessing the proportionality of exercise of competence of EU institutions in EU law.⁵⁰ Going beyond what is necessary is the explicitly stated third step of the proportionality test.⁵¹ This approach is in fact not different from the way in which the Bundesverfassungsgericht phrased its standard in its Order for reference: ‘a manifest and structurally significant exceeding of competences’.⁵² The argument here is not that the two tests correspond to each other in their precise content but that both carry a logic of proportionality in assessing the ECB’s compliance with its monetary policy mandate. From the perspective of ensuring the accountability of the ECB in a setup where it is empowered to define its own mandate, it thus seems inherently impossible to separate the existence and the exercise stage of competence control. The European System of Central Banks (ESCB), when determining the inflation target – which arguably should act as the outer limit of the monetary policy competence – is in fact already also exercising it. Otherwise, would it at all be possible that the Court of Justice says such a determination is in compliance with the TFEU unless a manifest error of assessment is made?⁵³

A somewhat positive consequence of applying the principle of proportionality to the existence of competence in monetary policy is an increased standard in competence monitoring that has arguably been at the source of the preliminary references in both Gauweiler and Weiss. Once applied to the PSPP, proportionality does have the potential of increasing the accountability of the ECB through a more stringent obligation of giving account, even in the stage of defining the inflation target. This arguably has direct influence on the ability of courts to ensure the accountability good of non-arbitrariness. In the area of self-defined mandates, then, a conflation of existence and exercise of competence seems useful in delivering the non-arbitrariness good of accountability. The very existence of the need for the ECB to take action will thus be subject to scrutiny. By extension, the effectiveness and publicness of such decisions will also be controlled at an earlier stage and on a more in-depth level.

The Court of Justice has been subject to ample critique concerning its light touch proportionality review in both Gauweiler⁵⁴ and Weiss,⁵⁵ reducing its review to the duty to state reasons, and accepting any and all reasons provided by the ESCB as sufficient. The proportionality analysis in Gauweiler did not properly engage in the assessment of less burdensome alternatives, and was reduced to the Court of Justice analysing and ultimately accepting solely the information provided by the ESCB, thus concluding:

the ESCB weighed up the various interests in play so as to actually prevent disadvantages from arising, when the programme in question is implemented, which are manifestly disproportionate to the programme’s objectives.⁵⁶

In Weiss, the Court of Justice was equally one-sided in the choice of information that it found relevant for assessing the proportionality of the PSPP, again accepting the information provided by the ESCB as the only relevant one.⁵⁷ In essence, the Court of Justice does not allow for a pluralist peer review of the duty to state reasons on the part of the ESCB.⁵⁸ This criticism has been picked up directly by the Bundesverfassungsgericht,⁵⁹ demanding that less burdensome alternatives be considered, and a wide array of interests included in such considerations. But who is in the best position to make such an assessment? Surely the ECB, both due to its Treaty role and the necessary expertise. Still, in order to ensure the effectiveness good of accountability, the ECB is not unique in being an institution that operates with a high level of expertise – so is the European Commission in many of the fields in which it operates. The same is the case for many EU’s agencies. Yet, as regards the Commission, the Court of Justice developed standards of review to ensure that it effectively performs its Treaty-appointed functions.⁶⁰ The Court of Justice is also able to order expert reports as well as question them in the hearings before it.⁶¹ This is also a standard practice before German courts.⁶²

The courts therefore do not need to become experts in the field in order to ensure that a proper peer review of decisions such as the ECB’s is subject to a more detailed obligation of justification resulting in a substantive good of effectiveness.

In addition, which court, then, is in the best position to review such an assessment being made? Certainly, the Court of Justice is an institution presumed to safeguard EU-wide considerations, as opposed to a single national court.⁶³ Here the accountability good of publicness plays an important role. Importantly from the perspective of constitutional conflict, depending on which court we turn to, publicness might be understood as ensuring that decision-making is made in the EU or in the national interest. Indeed, the Bundesverfassungsgericht has been criticised for focusing on German fiscal and economic interests when it listed what information the ECB could have listed in its assessment in preparation for the PSPP. Yet, for matters of monetary policy, where the EU has exclusive competence, it is the common interest of the EU that should be ensured. This is another reason why the question of competences remains so prominent in this constitutional conflict.

Judicial review of monetary policy decisions is inherently not ideal: judges cannot be the ones to make complex economic assessments, as explicitly acknowledged by the Bundesverfassungsgericht.⁶⁴ Thus, another possible consequence of this litigation is that other national courts follow the German example and begin imposing their own standards and demands for justification on part of the ECB, leading to a proliferation of diverging national standards and resulting in the creation of an unrealistic burden for the ECB. This is in addition to a danger of demanding the publicness good to be delivered by the ECB in the national, rather than EU, common interest.

To remedy both these possibilities, a more substantial improvement in the accountability of the ECB may ultimately necessitate a treaty change that would either redefine its mandate or devise novel accountability arrangements.⁶⁵ However, as long as this does not take place, courts demanding more of the ECB in terms of assessing the redistributive effects of large-scale purchase programmes such as the PSPP does not appear to me controversial. In fact, the ECB, despite Article 130 TFEU explicitly prohibiting it from taking instructions from Member States, complied with the request of the Bundesverfassungsgericht⁶⁶ to better explain the proportionality of the PSPP. The ECB has, ‘in line with the principle of sincere cooperation … decided to accommodate this request’.⁶⁷

The lesson learned from Gauwiler and Weiss may well be that the structure of Article 5 TEU does not operate as well in the context of self-imposed mandates, where judicial review would need to be confined to accepting any and all reasons provided by the institution in question.⁶⁸ However, looking at how the Bundesverfassungsgericht introduced this change, can we really speak of a genuine pursuit of an increased level of accountability of the ECB by applying mutual respect and sincere cooperation? The next section aims to answer this question by looking at jurisdictional competition between the two courts.

9.4 Sincere Cooperation and Actual Accountability Outcomes

If any Member State could readily invoke the authority to decide, through its own courts, on the validity of EU acts, this could undermine the precedence of application accorded to EU law and jeopardise its uniform application. Yet if the Member States were to completely refrain from conducting any kind of ultra vires review, they would grant EU organs exclusive authority over the Treaties even in cases where the EU adopts a legal interpretation that would essentially amount to a treaty amendment or an expansion of its competences.⁶⁹

Thus, we have before us the well-known conundrum of the European Union’s constitutional setup digested in one paragraph: who has the final say on the limits of EU competence? This central and most likely eternal question of the EU’s constitutional framework has important consequences for accountability goods. Namely, both non-arbitrariness and publicness as accountability goods depend on the manner in which competence control is exercised. This constitutional conflict thus firstly tells us that meaningful limits must exist to EU competence, and its institutions can use it only in a non-arbitrary manner. Secondly, the competence control conflict also has important repercussions as to what is the common interest to be ensured through the accountability good of publicness. Translated to the context of the ECB, then, the competence conflict can ensure that when it defines its activities, it indeed stays within its Treaty-accorded role in the monetary field. In this way, the manner of exercise of its mandate will already be subject to (at least a procedural) demand of non-arbitrariness. Constitutional conflict has even more striking consequences for the purposes of the publicness good. Once a competence of conferred upon the EU, the institution exercising it must do so in the common interest of the EU. In that sense, once the judicial review takes place before a national court, it cannot restrict itself to reviewing this accountability good solely from the perspective of the national common interest.

Ultra vires review was first introduced in the Maastricht judgment of the German court, widely considered the foremother of constitutional pluralism.⁷⁰ The Bundesverfassungsgericht maintained the thesis that Member States are the ‘Masters of the Treaties’,⁷¹ which are ‘continuously breathing life into the Treaty’.⁷² This meant that primacy of EU law only extends to acts within vires,⁷³ and it was the Bundesverfassungsgericht who has retained the right to control the division between intra and ultra vires. Because the principle of conferral is a shared concept of EU and national constitutional law,⁷⁴ its application is likewise shared between EU and national courts, inevitably creating conditions for a possibility of constitutional conflict.

To place an EU measure outside the borders of EU competence, one must step through a significant number of hurdles set out in the Honeywell decision of the Bundesverfassungsgericht.⁷⁵ The logic of these numerous steps is to maintain competence control as a task shared and coordinated with the Court of Justice. In so doing, no other court in Germany but the Bundesverfassungsgericht can conduct ultra vires review; a preliminary reference must be submitted to the Court of Justice prior to making any conclusions; and the Court of Justice has a tolerance of error in its judgment. Only after these conditions are met is the test of a ‘manifest transgression’ in the area ‘highly significant’ in the division of competences between the EU and its Member States applied.⁷⁶

The way that these steps were applied in Weiss II leaves space for doubt. When is a competence highly significant in the structure of the division of competences? We know that this does not cover the substance of constitutional identity from Article 79(3) of the Basic Law, which is automatically excluded from European integration.⁷⁷ But that leaves us with little knowledge as to what highly significant is, leaving the Bundesverfassungsgericht in danger of a laesio enormis fallacy⁷⁸ concerning the boundaries of the German constitutional obligation to participate in the integration programme. To demand of the Bundesverfassungsgericht to more clearly define this boundary would be a welcome development.

It must also be acknowledged that the conceptual conundrum in competence control by the Court of Justice and its relationship to proportionality, as explained in the previous section, was neither explicitly raised nor contemplated by the Bundesverfassungsgericht.⁷⁹ Rather, the Bundesverfassungsgericht failed to emphasise the centrality of proportionality, and in particular its stricto sensu step, in its preliminary reference, therefore not engaging in a genuinely open dialogue with the Court of Justice.⁸⁰ This runs counter to its statement in Gauweiler that there is an obligation to ‘respect judicial development of the law by the Court of Justice even when the Court of Justice adopts a view against which weighty arguments could be made’.⁸¹ The Bundesverfassungsgericht placed great emphasis on the Court of Justice maintaining consistency with the standards concerning the ECB’s mandate in Gauweiler⁸² as well as in the Order for reference in Weiss.⁸³ And yet, the German court itself behaved entirely inconsistently: the stricto sensu step of the proportionality test touted as central to the review of the PSPP was only introduced in the response to the decision of the Court of Justice, whereas no such expectation was hinted at in the order for preliminary reference itself, and even less so in the Gauweiler litigation.

Furthermore, the Bundesverfassungsgericht argued that the stricto sensu stage of balancing was not present in the analysis of the Court of Justice, thus warranting the application of its own proportionality test. Yet, it had not applied the stricto sensu stage itself either – and while it appears counter-intuitive that the ECB should do so,⁸⁴ in particular given the emphasis of the German court on the ECB’s limited mandate and insufficient democratic legitimation⁸⁵ – it stated that ‘it would have been incumbent for the ECB’ to do so.⁸⁶ The Bundesverfassungsgericht devoted considerable attention to analysing the difference in the proportionality test developed by the Court of Justice and itself, respectively, opting unsurprisingly to apply its own standard. The German Court has in consequence been accused of parochialism,⁸⁷ and ‘framing a European legal question largely in terms of German constitutional law’.⁸⁸ The Second Senate engaged in an analysis of how the test is applied in other Member States,⁸⁹ then explained to the Court of Justice its own (the latter’s) proportionality test,⁹⁰ concluded it is deficient for the delimitation of competences between the EU and the national level,⁹¹ and thence applied its own (presumably superior) proportionality test. A similar approach was subject to critique on the occasion of the Bundesverfassungsgericht’s order in Mr R⁹² when deciding to disapply the European Arrest Warrant, without submitting a preliminary reference to the Court of Justice.⁹³

In the structure of constitutional pluralism, mutual respect and sincere cooperation play a central role in incrementally managing interpretative differences and ensuring the constructive nature of a possible constitutional conflict ensuing.⁹⁴ The way in which proportionality was introduced in Weiss II can hardly be referred to as a role model for this approach. Language and expressions used by constitutional courts and the Court of Justice are of importance in the way constitutional conflict and its resolution is managed, and there is a coherence in this sense among different constitutional courts in the EU.⁹⁵ The allegation of the Bundesverfassungsgericht that the judgment of the Court of Justice is ‘simply not comprehensible’⁹⁶ is in that sense not the sort of language that should be employed between courts that have for so long interacted in a constructive manner, enhancing the EU’s constitutional sphere. It departs from the need for mutual respect and sincere cooperation, and unnecessarily distracts from the issues that can constructively be addressed through constitutional conflict.

The advantage of constitutional pluralism has in large part been precisely addressing issues such as the competence control carried out by the Court of Justice, dynamically and incrementally developing EU’s constitutional sphere and preventing outright domination of one constitutional order over the other. This has direct benefits for the goods of non-arbitrariness as well as publicness. As regards the former, constitutional conflict has the advantage of courts questioning and incrementally raising the intensity of review, and by extension, ensuring that the institution in question acts within the limits of its competence. As regards the latter, constitutional conflict has the advantage of resolving, for individual cases, the question of competence division and therefore creating precise demands as regards the common interest of the EU or the Member State in question. In that sense, declaring an action of the ECB ultra vires is an outcome for the Court of Justice as well as EU institutions to reckon with. There are constructive elements in this finding that can incrementally be resolved through the auto-correct function of constitutional pluralism.

9.5 Conclusion

When can national courts contest the findings of the Court of Justice? In other words, is it possible for the Court of Justice to make a mistake? Justice Landau, in his dissent to the Honeywell decision, underlined the necessity of the Court of Justice being kept in check, be it by other EU institutions or Member States.⁹⁷ In the aftermath of the Weiss II decision, Justice Huber stated that there is space for improvement of the judicial review standards of the Court of Justice.⁹⁸ Legal scholarship has equally taken note of the light standard of review that the Court of Justice applies in relation to the ECB in specific.⁹⁹ Constitutional conflict in this area, it seems to me, performs an important function in delivering the accountability goods of non-arbitrariness (by specifying the limits and necessary justification for acting and the manner of such decision-making), effectiveness (by expanding the possible review of expertise decisions, expanding the pool of peer review through the use of experts in showing the correctness of decision-making), and publicness (by demanding the ECB to show how its measures are addressing an EU-wide common interest).

So while the German decision does not put into question the rule of law or basic values set out in Article 2 TEU, there are some, more permanent dangers lurking from the decision beyond its most immediate impact on the PSPP. One such danger that merits addressing is the interpretation put forward by the Bundesverfassungsgericht concerning Germany’s constitutional identity in the context of risk-sharing. The Bundesverfassungsgericht’s initial worry in Gauwiler concerned the possibility that quantitative easing may involve unforeseeable risks for national budgets beyond those directly approved by the Bundestag. It took into account the assurances of the Court of Justice that the OMT programme entails safeguards preventing such an outcome.¹⁰⁰ The same concern was raised in Weiss, where the Court of Justice dismissed the question about risk-sharing as hypothetical.¹⁰¹ The Bundesverfassungsgericht took this to mean that the Treaties prohibit risk-sharing as such and added that this would also be contrary to Germany’s constitutional identity protected by Articles 23(1) and 79(3) of the Basic Law.¹⁰²

In that sense, identity review is a weapon of a strength incomparable to that of ultra vires review: while the latter allows for the situation to be remedied by an action of the Bundestag, the former is embedded in an unamendable characteristic of the Basic Law and without allowing any departures.¹⁰³ Translated to the language of the accountability good of publicness, a finding that an ECB measure goes against constitutional identity determines the scope of the common interest and by extension to the possible focus of any similar measure in the future. It may well be that constitutional identity (even if at the moment offering a constructive check to the principle of conferral) as performed by courts might act as a break in the political process that might legitimately aim, at a certain point, at a reform of the existing division of competences.

The PSPP was nevertheless found to be within what the constitutional identity allows for, but the findings concerning constitutional identity have landed on fertile ground. At present, the EU’s ‘Next Generation EU’ pandemic programme that forms part of the EU’s Own Resources Decision¹⁰⁴ is being challenged before the Bundesverfassungsgericht by the founder of the Alternative für Deutschland (AfD) precisely on the basis of constitutional identity.¹⁰⁵ On 26 March 2021, the Bundesverfassungsgericht issued an unreasoned decision¹⁰⁶ to the Federal President to hold off signing the bill until it decides whether to grant the applicants interim relief.¹⁰⁷ The interim relief was not grounded, but the decision is currently pending on the merits. The central argument of the applicant revolves around the possibility that Germany becomes liable for the entire amount of the pandemic fund, effectively introducing risk-sharing into EU law. Sincere cooperation, mutual respect, as well as consistency would demand a preliminary reference to be submitted to the Court of Justice. Here, the Court of Justice would also be put in a position to abide by its own standards concerning risk-sharing, or provide new insights that were possibly beyond the interpretations provided for the OMT and PSPP. However, in the midst of these uncertainties, it may transpire that the delicate balance between the two courts is already significantly upset by the above-analysed interpretations of proportionality and jurisdiction. In such a scenario, it is possible that the constitutional conflict reaches a destructive stage that cannot be remedied by a reasonable disagreement concerning the interpretation of EMU law. This might result in a need for a more general political reckoning of the German participation in the EMU and its future development, and the Covid-19 crisis seems to have provided a direct impetus for this to take place.

10 Adjudicating Transnational Solidarity Conflicts Can Courts Ban the Destructive Potential?

Anuscheh Farahat ^*

10.1 Introduction

This chapter focuses on transnational solidarity conflicts as a specific type of conflict in the EMU that has been aggravated by the Eurozone crisis but persists also in current debates about how to share the economic costs of both the COVID-19-pandemic and climate change. This new type of distributional conflict encompasses both quarrels about the adaptation of domestic welfare systems to EMU requirements and the distribution of costs and benefits between Member States. As EMU governance is largely executive driven and as distributive decisions in one Member State also affect other Member States, accountability for distributive decisions in the EMU gains new salience. The goal of this chapter is to understand how legal accountability and, more specifically, constitutional accountability may contribute to a constructive management of transnational solidarity conflicts. In addressing this question, the chapter will focus specifically on the accountability goods of openness and publicness, as developed in the introductory chapter.

10.2 Transnational Solidarity Conflicts as a Core Feature and Peril of the EMU

The transformation of the EMU during and after the Eurozone crisis not only resulted in an aggravated deficit of accountability and legitimacy (1), but also provoked new types of conflicts within and between the Member States, which shall be described in this chapter as transnational solidarity conflicts (2). Transnational solidarity conflicts yield a potential for destabilising the EMU. The core question to be addressed in this chapter, therefore, is how legal, and more specifically constitutional accountability mechanisms, may contribute to mitigate the disintegrative potential of transnational solidarity conflicts in the EU (3).¹

10.2.1 Responsible Instead of Responsive Government: The Increasing Lack of Accountability and Legitimacy in the EMU

Progressive economic integration in the EU has reinforced the legitimacy issues of European governance. Decisions taken at the supranational level increasingly affect the design of national distribution regimes or have otherwise far-reaching distributional effects for the Member States. Moreover, the EMU increases political and economic interdependencies among Euro Member States. The measures taken to rescue the common currency and counter the financial crisis have further restricted national scope for distributional policy as the political and economic costs of comprehensive welfare state regulation have become ever higher. This led to a deep legitimacy and accountability crisis: The Eurozone Member States lose the capacity and political space for implementing distributive policies, but at the same time often have to bear the consequences of decisions made by other national legislators.² This problematique is exacerbated by the fact that fiscal and economic policy recommendations on the European level can now also be enacted in the absence of majority decisions. Together these developments contribute to further political imbalance among the Member States.³ In addition, decisions with far-reaching distributional effects within the EMU are today mostly dominated by executive bodies and thus undermine the idea of democratic-parliamentary self-legislation.⁴ Even if one accepts an increasing need to allow for competing expressions of the public will,⁵ parliamentary legislation by democratically elected representatives is still an irreplaceable mechanism of responsiveness in a democratic polity.⁶

In the context of the Eurozone crisis, this post-democratic problematique becomes even more salient, since political decision-makers have long proven to be largely ignorant to alternative ways of dealing with conflicts and negative social impacts of the measures taken.⁷ This reflects a general shift from responsiveness to responsibility in democratic governance.⁸ Governments and their supporting parties are increasingly compelled to act responsibly towards markets in terms of risk minimisation.⁹ The yardstick for such responsibility is formed by international and supranational guidelines or standards, which have become more detailed and comprehensive, especially during the Euro crisis. The dominance of responsibility is also expressed in the rhetoric of ‘no alternative’, which tends to discredit any discussion of alternative response options as inadequate, inefficient, or even counterproductive.¹⁰ In this context, responsiveness to citizens’ political preferences is increasingly difficult to realise for political parties. There is a risk that open debate about alternative visions of the common good, and the appropriate measures to achieve it, is replaced by a managerial mindset of optimising governance goals through technocratic administration. Citizens in the EU Member States are thus exposed to political and economic decisions that are neither legitimised through parliamentary-democratic decision-making at the European level nor through responsive democratic procedures at the Member State level.¹¹ This constellation results in a new quality of conflicts about EMU governance, about the consequences of the European monetary policy for the distributive regimes of the Member States and about the democratic accountability of EMU institutions. The question therefore arises to what extent accountability mechanisms beyond parliamentary-democratic decision-making may compensate for the lack of responsiveness by enhancing openness and publicness of executive decision-making.

10.2.2 Transnational Solidarity Conflicts: A New Type of Conflicts and Their Potential for Destabilising the EMU

The Eurozone crisis has created a new dynamic of conflict that can be described as transnational solidarity conflicts. Conflicts arise not only over the extent to which the adjustment burdens caused by the common currency should be borne jointly by the members of the Eurozone but also over how social security can be secured for those population groups that do not directly benefit from freedom of movement within the EU. Today, solidarity between and within the Member States can no longer be shaped and developed independently, thereby increasingly producing conflicts between societal groups that cut across the boundaries of the national welfare state.

Transnational solidarity conflicts illustrate the unprecedented politicisation that European economic governance witnessed during the Eurozone crisis.¹² Politicisation can be understood as comprising three interrelated elements: raising awareness for a specific issue, mobilising around this specific issue, and polarising the debate about this issue.¹³ The Eurozone crisis has raised public awareness of the fact that European governance has significant distributional effects between Member States and within national distributional regimes.¹⁴ The handling of the crises has laid bare the distributional effects of monetary policy and highlighted the inextricable link between economic policy choices and monetary policy. It revealed a multiplicity of political conflicts in terms of the distribution of costs and benefits built into a highly interdependent transnational polity. With transnational solidarity conflicts flaring up, different policy preferences regarding the appropriate answer to major economic shocks have once more shown their divisive potential by splitting the European Union, yet again, into ‘southern’ and ‘northern’ blocks. The result was increasingly polarised political spaces, with new salience for and mobilisation around European issues at both the national and the supranational levels.¹⁵

In the context of intensifying transnational solidarity conflicts, European issues became a pivotal point of reference and mobilisation in the construction of political identities. The consensual nature and relative sobriety of European integration were suddenly permeated by the political logic of antagonism. Measures of crisis reaction and the future of the single currency have become a central issue in national election campaigns and in the political positioning of individual parties.¹⁶ There is a serious risk, however, that the destructive dynamic of such polarised conflicts may not stop at the level of disagreement about specific policies. Rather, when institutions face serious critique because of their decision-making, politicisation may spill over from the conflictual issue itself into the ‘conflict frame’,¹⁷ that is from the policy level to the polity level. Once the political and legal infrastructure (i.e. the ‘conflict frame’) of a political order is perceived by a significant part of the citizenry as allowing for no alternatives to currently dominant political projects, institutions themselves might come under attack. Polarisation therefore carries a destructive threat for the political structure of the EMU and the EU as a whole.

10.2.3 Constitutional Accountability as a Tool to Mitigate Adverse Effects of Transnational Solidarity Conflicts?

In the light of intensified and potentially divisive transnational solidarity conflicts, the role of accountability of EMU institutions gains new salience. If effective accountability mechanisms are in place, it may be possible to channel the destructive potential of transnational solidarity conflicts in a way that allows not only to enhance responsiveness of EMU institutions towards the citizenry but also to prevent a spill-over of policy conflicts to the level of the polity. Against this backdrop, I will focus in this chapter on how legal accountability can contribute and in fact has contributed to mitigate the divisive potential of transnational solidarity conflicts in the EMU. The idea is that constitutional review may provide a suitable tool to articulate alternative visions of the common good that have not been taken into account in previous, crisis-driven decision-making. It may thereby contribute to enhancing publicness of an executive decision, as it allows clarifying in the first place which common goods are legitimate or ought to be considered according to the normative (constitutional) framework. Moreover, by forcing decision-makers to justify their decisions and to reveal the considerations behind a given decision, legal accountability may also enhance the openness of decisions. In the following, I will concentrate on the specific role constitutional law has played for the accountability of the EMU during and in the aftermath of the eurozone crisis considering both domestic and EU constitutional law.

Constitutional accountability merits closer inspection for at least two reasons: First, in many polities in the EMU, constitutional law serves as a major benchmark for legal accountability of political institutions and decision-makers. Second, while theoretical approaches to conflict teach us that social conflicts have the potential for destructive and disintegrative effects, they have also highlighted the potentially integrative effect of conflicts for political communities. Such integrative effects, however, presuppose mechanisms of conflict resolution that allow for the (re)articulation of a normative framework.¹⁸ Constitutional law, as a core infrastructure for the resolution of political conflict and normative orientation in modern societies, lends itself as a natural candidate to channel social conflicts in a way that reduces their destructive tendencies to a minimum. Constitutions aim to serve as ‘normative scripts’¹⁹ for political actors, guiding and limiting political action not only in times of seeming consensus but also in times of crisis and open conflict. The core challenge for constitutionalism in times of fundamental crises is to ensure both reliable normative continuity and sufficient flexibility to adapt normative concepts to new crisis-driven societal demands.²⁰ It is precisely through these interpretative processes in which limits and adaptations are negotiated that constitutions may serve to productively channel social conflicts. They thereby provide a space to negotiate and ultimately determine the common goods which can legitimately or sometimes even ought to be taken into account in a political order.

By the same token, individuals and social groups may integrate into a political community through discursive practices in which they – at least in their majority – accept and refer to the constitution as the relevant normative framework. Although they may interpret concrete constitutional norms in different or even divergent ways, they nonetheless refer to the same document and thereby implicitly or explicitly accept it as the dominant normative symbol of the political community.²¹ In this sense, the constitution becomes indiscriminate towards the various visions of the collective self-perception. Such an understanding fits well with Claude Lefort’s idea of the empty place of power in modern democracies.²² The constitution itself symbolises this empty place if its concrete meaning remains open to reinterpretation and to differing, even diverging, meanings that are given to its provisions. ‘Emptiness’ in this sense does not equal arbitrariness but rather results from reiterative discursive processes in which the respective provisions are identified with different meanings by different actors.²³ It is precisely this form of emptiness through discursive and reiterated re-interpretation that allows a constitution to both channel the destructive potential of major social conflicts and provide a meaningful normative benchmark for accountability.

In light of these theoretical considerations, constitutional accountability mechanisms need to fulfil two conditions in order to allow for a productive conflict management: On a procedural level, they need to be inclusive in order to allow a variety of actors to bring their case to court and thus to construct the societal conflict as a constitutional conflict. On a substantive level, constitutional provisions need to preserve a certain emptiness in their interpretation to allow different political actors to continuously identify with constitutional provisions and make the constitution the core normative point of reference. For constitutional courts as the most authoritative interpreters of constitutional norms, this means that they should refrain from an overly saturated interpretation that injects specific economic concepts or policy choices into constitutional norms. Likewise, to guarantee that a broad variety of constitutional actors can indeed participate in the discursive and iterative process of opening and emptying the meaning of constitutional norms, constitutional courts need to make sure that the process of political will-formation and decision-making remains open. More specifically, this requires power asymmetries not to become too much entrenched and political decision-making not to be permanently captured and constrained by arguments of necessity or market responsibility.

If constitutional norms on EU level become a shared reference point for negotiating and managing transnational solidarity conflicts, they may contribute to enabling polity building also on EU level. At the same time, this would also enhance the conditions for improving the accountability infrastructure on the supranational level as regards to the ‘publicness’ dimension developed in the introductory chapter of this volume. According to this dimension, accountability serves to ensure that official action is oriented towards the common good. While the common good might be defined differently by different actors in a polity, a collectively acceptable definition of a common good may be facilitated if it echoes principles enshrined in a shared constitutional framework. Moreover, constitutional law serves as an institutionalised framework to ensure the responsiveness of political actors towards the citizenry as opposed to responsibility towards markets or private interest. Transnational solidarity conflicts, however, are governed not only by EU constitutional law but also by domestic constitutions. The following two sections of this chapter will therefore assess the role of constitutional accountability for the management of transnational solidarity conflicts in the EMU on the domestic level and on the EU level in turn.

10.3 Legal Accountability before Domestic Courts

This section will analyse in how far constitutional accountability of EMU decision-makers before domestic courts during and after the eurozone crisis contributed to minimising the destructive threats of transnational solidarity conflicts in the EMU. It asks in how far domestic constitutional courts have delivered the goods identified with accountability in the introductory chapter. A specific focus will be on ‘publicness’ as the good seeking to ensure that political action is geared towards common, in this case constitutional goods. The core interest therefore is in how far domestic and European constitutional principles have been taken into account and in how far the requirements of procedural inclusiveness and substantive emptiness developed in the previous section of this chapter have been fulfilled. The analysis will focus on two prominent examples of domestic constitutional accountability, namely cases before the Portuguese Tribunal Constitucional (PTC) and the German Federal Constitutional Court (GFCC) representing one side of transnational solidarity conflicts, respectively.

10.3.1 From Restrained to Resistive Constitutionalism: The Austerity Case Law of the Portuguese Tribunal Constitucional

During the economic and financial crisis, the PTC emerged as a ‘lone hero against austerity’.²⁴ In its early judgements of 2010 and 2011, however, the court adopted a restrained position towards the austerity plans of the liberal-conservative government. In its first decision on crisis measures (acórdão 399/2010), the PTC had to decide whether a tax increase in the current year and for the entire income of that year was compatible with the principle of the protection of legitimate expectations as an expression of the principle of the rule of law (Article 2 PC). The court denied a violation of the principle of the protection of legitimate expectations. It basically argued that taxpayers could not have expected that taxes would remain unchanged in the current year, given the tight budget situation resulting from the current economic and financial crisis.²⁵ In light of the specific weight of these budgetary constraints,²⁶ the court granted legislative bodies particularly large discretion.

The PTC maintained this general line in Acórdão 396/2011 declaring cuts in public service allowances and salaries at issue to be constitutional. Once again, the court resorted to the logic of the economic state of emergency and the resulting need for quick reactions and far-reaching decisions.²⁷ The court argued that even if the principle of equality in general requires that all citizens had to contribute equally to the public finances, this does not imply a priority of budget consolidation through tax increases over public salary cuts but leaves the choice of measures to the legislative bodies.²⁸ According to the court, the principle of equality only precludes arbitrary unequal treatment which imposes an unjustified and disproportionate burden on a particular societal group. On the one hand, this line of jurisprudence left the political-parliamentary process as open as possible by granting the legislator wide discretion. On the other hand, it led to the constitution almost completely taking a back seat to economic rationality and crisis exceptionalism. Rather than defining effective criteria of constitutional accountability, the court emphasised that, considering the ‘absolutely exceptional economic development’,²⁹ the overriding public interest pursued with the cuts was paramount. It was ‘a situation of emergency’ in which the measures taken were ‘absolutely necessary’.³⁰ Both decisions illustrate that the court did not develop any substantial standard of constitutional accountability but was rather satisfied with a procedural safeguard, namely that the legislator demonstrated that it had indeed considered alternative options before taking the respective measures.

This restrained position of the PTC changed in the second phase of its Euro-crisis jurisprudence. As of 2012, the court no longer accepted the reference to the economic crisis as a free ticket for permanently broad legislative discretion. Instead, it started interpreting the principles of equality and proportionality in a way that set a limit for long-term and structural shifts in economic burden sharing. The core instrument for this shift was the ‘invention’ of the principle of proportional equality in acórdão 353/2012. The question at issue was whether cancelling the 13th- and 14th-month salaries for public sector employees as foreseen under the Budget Law of 2012 was in breach of the principle of equality by placing the burden exclusively on public employees. In stark contrast to the broad discretion granted to the legislator in earlier decisions, the PTC now declared the cuts unconstitutional for violating the principle of equality in conjunction with the principle of proportionality.³¹ While the court still held that a different treatment of public and private sector employees in terms of their respective burdens is permissible in times of crisis, it clarified that the extent of the unequal treatment must itself be proportionate to remain within ‘limites do sacrifício’.³² In the eyes of the court, this was no longer the case. The new cuts hit public sector workers unilaterally so that the unequal burden sharing of the exceptional fiscal situation reached a point, where it was disproportionate regarding the constitutional principle of equality.

The principle of proportional equality structured the austerity case law of the PTC from thereon leading to a number of public pay cuts considered to be one-sided and unconstitutional.³³ Despite some harsh political and doctrinal criticism,³⁴ the concept of proportional equality strengthened the benchmark for constitutional accountability. Moreover, the PTC combined this benchmark with a duty on part of the legislature to properly justify austerity measures in the light of the rights and principles enshrined in the Portuguese Constitution. Hence, domestic constitutional rights need to be ‘properly’ taken into account by the government and the legislature when implementing measures of crisis reaction in the EMU context.³⁵ It thereby combined a procedural understanding of accountability with a more ‘substantiated’ version of constitutional accountability. By requiring ‘proportional equality’, the court developed a benchmark that not only enabled a ‘resilient constitutionalism’³⁶ by setting perceptible limits to political crisis management but also reactivated the socially progressive aspiration of the constituent moment in Portuguese constitutional law with its strong emphasis on social rights.³⁷ In a political constellation characterised by a strong power asymmetry between creditor and debtor countries and a dominant rhetoric of emergency and no alternatives, the adjudication of the PTC thereby allowed to effectively articulate alternative policy options in the language of constitutional law. Consequently, the political debate started to centre on the Constitution and its ‘adequate’ interpretation against the backdrop of a profound crisis.³⁸ In this sense, the accountability standard applied by the court is focused on binding political action to the common constitutional good (publicness) while at the same time leaving room to negotiate politically how this common good ought to be interpreted and realised.

At the same time, however, this line of constitutional interpretation effectively made the transnational dimension of the underlying conflicts invisible. The crucial parameters of accountability, deduced from constitutional principles of proportionality, equality, and protection of trust, framed the crisis-induced conflicts as an ideological issue between liberal, market-oriented and progressive, welfare state-oriented ideas of order and as a national redistributive conflict between public servants and private sector employees. Despite strong arguments in favour of submitting the question of the compatibility of the conditionalities with the fundamental rights of the Union to the ECJ,³⁹ the PTC has not yet submitted any question from the crisis case law to the ECJ for a preliminary ruling. While the court thereby may have prevented an open conflict between national constitutional principles and European constitutional law, it missed the opportunity to renegotiate the social content and the social formative power of the Union’s constitutional law and to concretise it in the context of the crisis.⁴⁰ Instead, the question of the mode and measure of solidarity and the distribution of any adjustment costs was nationalised and the mode of accountability remained largely deductive.

10.3.2 ‘Lost in National Democracy?’: The Aporias of the Eurozone Crisis Case Law of the German Federal Constitutional Court

At first glance, similar considerations apply to the German Federal Constitutional Court. Like the PTC, the Bundesverfassungsgericht has set important limits to crisis management, and like the PTC, it has nationalised the crisis-induced conflict by emphasising the constitutional necessity of an autonomous choice of means at the national level. However, this type of ‘nationalisation’ turns out to be even more ambivalent as it harbours a strong disintegrative potential as the court largely ignores the transnational horizontal effects of its own decisions.

Already in its early decisions on the eurozone crisis measure, the GFCC insisted on the requirement of parliamentary participation in all measures with budgetary impact.⁴¹ Building on its earlier jurisprudence in Maastricht⁴² and Lisbon,⁴³ the court ruled that the Bundestag must always hold plenary sessions when ‘essential decisions which affect the overall budgetary responsibility of the German Bundestag’ are involved.⁴⁴ The court thereby blocked a delegation of decisions on crisis management to a smaller committee and insisted that the Bundestag must retain a ‘continuing influence’⁴⁵ and must not be relegated to merely nodding through executive measure of crisis management.⁴⁶ In addition, the court also held that the federal government had violated its constitutional duty to provide information to the parliament⁴⁷ and stressed the need to ensure that the information forwarded to the parliament was used by the latter to allow for an open and democratic will-formation.⁴⁸ This line of reasoning reflects a mostly deductive and procedural approach to constitutional accountability. It concretises the constitutional requirements by highlighting the necessity of procedural safeguards for open parliamentary debate and will formation.

However, other parts of the court’s crisis jurisprudence rather led to narrowing the space for constitutionally legitimate definitions of the common good and the measures to its realisation. In the ESM-ruling⁴⁹ the court build on its earlier case law in Maastricht, where it made Germany’s participation in the monetary integration conditional to ‘German conditions’⁵⁰ by linking price stability and budgetary discipline as the supreme objective of the future currency area to the principle of national democratic self-determination.⁵¹ In the ESM-ruling the GFCC tightened this standard further and considered the design of the monetary union as a stability community as the ‘essential basis’ for Germany’s participation in the EMU.⁵² While the court held the concrete mechanism in this case to be constitutional, it effectively made any solidarity-based aid measures dependent not only on the approval by the Bundestag but also on the parliamentary prerogative to determine conditionalities ensuring that the overriding goal of price stability and balanced budgets is not jeopardised.⁵³

Given the dominant executive mode of technocratic ‘risk management’⁵⁴ during the eurozone crisis, the court can certainly be praised for protecting parliamentary budgetary rights, defending the openness and revocability of democratic legislation against supposed crisis imperatives.⁵⁵ While this again strengthened procedural accountability under German constitutional law, the decision also contains a substantial element. The court closed the potential meanings of democracy under the Basic Law by linking it to price stability and frames possible alternatives for shaping transnational solidarity in the Eurozone (e.g. Eurobonds or a transfer union) as breaches of German constitutional law. It thereby significantly narrows the political space for negotiating a European common good. Furthermore, by linking the national principle of democracy to supranational conditionality, the court de facto contributes to depriving the legislatures in the debtor countries of precisely those political options that the court insists on securing on the national level. From a transnational perspective, it thus becomes apparent that given the power asymmetries of the consolidation regime ‘more democracy’ in Germany is synonymous with ‘less democracy’ in Greece or Portugal.⁵⁶ Rather than critically reflecting transnational power asymmetries enshrined in the crisis-ridden EMU, the court found itself entangled in an aporia of a national state-based understanding of democracy.

Unlike the PTC, however, the GFCC did not ignore the transnational dimension of the underlying conflicts entirely. In its Outright Monetary Transactions (OMT) and Public Sector Purchase Programme (PSPP) rulings,⁵⁷ it referred for the first time to the ECJ and framed the conflicts about crisis management basically as vertical conflicts about competences. The core complaint underlying both the OMT and the PSPP decision was that by buying government bonds of overly indebted eurozone Member States, the European Central Bank (ECB) is de facto violating Article 123 TFEU and thus acting ultra vires. These measures were said to imply potentially unlimited liability on the part of Germany, preventing the Bundestag from exercising its overall budgetary responsibility and thus, violating constitutional identity. In contrast to its Maastricht ruling the GFCC now emphasised the constitutional necessity of strengthening the democratic accountability of the ECB and limiting its independence. By referring these two cases to the ECJ, the court created an important opportunity for the transnational dimension of the conflict to be articulated in the language of European constitutional law. The GFCC’s referral in OMT was celebrated by some as a ‘good day for democracy in Europe’ because it revealed the legitimacy problems of the ECB’s relevant decisions⁵⁸ and was said to provide an effective red line limiting technocratic crisis management.⁵⁹

While the court in the end accepted the ECJ’s assessment in OMT that the ECB has not exceeded its competences as the programme had primarily monetary policy character,⁶⁰ the controversy about how to hold the ECB accountable also for the transnational economic impact of its decisions continued in the PSPP case. Upon referral, the ECJ again argued that indirect economic policy effects do not call into question the monetary policy character of a measure and emphasised that independence of the ECB precluded a stricter proportionality review. The GFCC insisted on strictly reviewing whether the ECB had proportionally fulfilled its functions or exceeded its competences by acting disproportionately. The GFCC eventually found that the ECB had acted ultra vires.⁶¹ It held that the ‘right to democracy’ under German constitutional law was violated since the ECB had neither examined nor proven that the measures foreseen in the PSPP were proportionate despite their effects on economic policy.⁶² The measures taken by the ECB therefore resulted in a ‘structurally significant shift of competences’⁶³ to the detriment of the Member States. The court also found the ECJ’s decisions to ‘obviously’ transgress its competences as its reasoning was, in view of the GFCC, methodologically ‘incomprehensible’ and thus ‘objectively arbitrary’.⁶⁴ On one hand, the decision by the GFCC deserves credit for laying bare the accountability problems of the executive-driven EMU governance and insisting on the centrality of parliamentary will-formation.⁶⁵ On the other hand, it also bears the risk of constitutional closure and power shift to courts rather than to the legislator. A strict proportionality review as required by the GFCC would ultimately empower constitutional courts to take a decision on conflicting monetary and economic policy objectives.⁶⁶ This would not only undermine the ECB’s independence but also increase the risk that particular economic and monetary policy understandings are again constitutionalised. Substantial accountability could eventually be traded for closing the democratic space for constantly (re-)negotiating the common goods in the European constitutional order.

10.3.3 In Search of a European Common Good: Deductive and National Accountability in a Transnational Context

The two constitutional courts reviewed in the previous sections largely applied a deductive approach to accountability in the EMU by applying exclusively domestic constitutional standards to transnational solidarity conflicts. In the case of the GFCC, the primary benchmark was national parliamentary sovereignty as well as fiscal stability as enshrined in the German Basic Law. In the case of the PTC, the primary benchmark were the principles of proportionality, equality and equal burden sharing as enshrined in the Portuguese Constitution. Likewise, both courts tended to ‘nationalise’ transnational solidarity conflicts rather than taking into account horizontal effects (in the case of Germany)⁶⁷ or supranational constitutional law (in the case of Portugal). By ignoring the European dimension of decision-making in the EMU, this line of jurisprudence decreased publicness rather than increasing it. It basically reduced the conflict to matters of domestic common goods and excluded the possibility of thinking about transnational, European common goods. To the extent that domestic constitutional courts refer to EU constitutional law, the relationship between domestic and EU constitutional law is characterised by conflict, denial of relevance or a rhetoric of deficit. What is profoundly absent is any vision of a European common good based on EU constitutional values (such as solidarity) that could inform the management of transnational solidarity conflicts and lead to EU constitutional law as a benchmark for ‘publicness’. Therefore, domestic case law on transnational solidarity conflicts has at best produced integrative effects for domestic constitutional orders (inwards) but did not contribute to a further development and deepening of a European constitutional order. This is particularly remarkable, given that on a more technical regulatory level the eurozone crisis boosted further integration in the EMU.

The two domestic constitutional courts under review addressed transnational solidarity conflicts largely through procedural forms of accountability insisting on the need of an informed parliamentary decision and requiring the legislator to properly justify austerity measures. However, both constitutional courts have also applied some substantive aspects of accountability. The GFCC has stressed the relevance of a ‘proportionality review’ in the context of ECB decisions and has tried to push the ECJ to apply stricter scrutiny in this respect. However, it applied this standard only to the exercise of competences by the ECB and thereby deprived the principle out of its usual function of providing a yardstick for evaluating interferences with fundamental rights. The PTC has also applied substantive elements of accountability by developing and applying a standard of ‘proportional equality’ to measures of crisis reaction.

The advantage of domestic constitutional accountability regarding the achievement of integrative conflict management lies in the broad accessibility and procedural inclusiveness of accountability mechanisms. A diverse spectrum of political actors and/or individuals can challenge EMU-related decisions before domestic constitutional court. The procedural requirements are particularly low in the case of the German individual complaint (Verfassungsbeschwerde), but also the Portuguese system allows for a broad range of actors to challenge such decisions. Domestic constitutional accountability therefore allows to make transnational solidarity conflicts visible in the first places and channels as well as transforms them into constitutional conflicts. However, substantive emptiness of domestic constitutions remains limited during the management of transnational solidarity conflicts. While at least the GFCC kept an eye on trying to ensure openness of political will-formation in the German Bundestag, it otherwise ‘closed’ the meaning of several constitutional norms by upgrading economic concepts such as conditionality to constitutional principles. It thereby even enforced the ‘no alternative’ discourse by giving economic and political preferences the credit of constitutional value. The PTC on the other hand tried to ensure some substantial emptiness by ‘opening up’ the principle of equality to adapt it to new challenges and to use it as a tool to contest the EMU logic of market responsibility. At the same time, it ‘closed’ the Portuguese constitutions in the respective cases for interpretations that would require further austerity measures. At the very least, constitutional accountability before domestic courts has made transnational solidarity conflicts and accountability gaps more visible. It may also have partly contributed to enhancing the transparency of decision-making and increased publicness on the domestic level by positioning domestic constitutional principles as a benchmark for ensuring common goods.

10.4 The Unprepared Court: Limitations of Legal Accountability before the ECJ

In view of the transnational conflict structure and the lack of domestic courts to take it into account, legal accountability at the supranational level seems to be a promising way to close accountability gaps in the EMU. A closer look, however, reveals that the ECJ was rather unprepared to fulfil this function and to contribute to an integrative role of European constitutional law.

The court’s decisions in Pringle, Gauweiler and Weiss were paradigmatic of its familiar role in arbitrating vertical conflicts between the EU and its Member States. In Pringle the ECJ was asked to rule on the compatibility of the ESM Treaty with the no-bailout clause in Article 125 TFEU and the prohibition of the purchase of bonds under Article 123(1) TFEU. As such, the case concerned a fundamental premise of the EMU, namely that monetary policy (exclusive Union competence) and economic policy (primary competence of the Member States) can be clearly separated. At the core of the case were therefore substantial questions about fundamental constitutional principles governing the Economic and Monetary Union (EMU). In Pringle, the ECJ waved through the rescue mechanism so urgently needed to save the euro. It held that the ESM was an instrument that cannot be assigned to monetary but belonged to economic policy, so that the Member States did not violate the EU’s order of competences when introducing the ESM on the basis of an international treaty.⁶⁸ Thus, the ECJ affirms the so-called separation thesis⁶⁹ (Trennungsthese), according to which economic policy and monetary policy can be accurately separated even under a common currency. The court thereby deproblematised the constitutional dimension of the ESM rather than engaging in the development of meaningful constitutional benchmarks for crisis reaction. Regarding the no-bailout clause, the court argued that the provision was intended to ensure that the state budgets ‘remain subject to the logic of the market’.⁷⁰ Mutual financial assistance was therefore permissible as long as it did not threaten the overriding goal of ‘maintaining the financial stability of the monetary union’.⁷¹ In the view of the ECJ, this is ensured where the ‘granting of financial assistance is tied to conditionalities that should ensure that the recipient states continue to pursue sound budgetary policies’.⁷² Thereby the ECJ – just like the GFCC – upgrades conditionality as a specific regulatory means to a constitutional requirement. By substantiating constitutional accountability with a particular regulatory idea, the ECJ itself contributes to the long-term closure of the political and constitutional discourse. Rather than reducing political discretion and potential interpretations of the common good in such a way, the court could have emphasised the constitutional need for political deliberation and parliamentary decision-making even in times of a financial crisis and could also have considered applying the EU Charter of Fundamental Rights whenever the act in the context of rescuing the common currency. Instead, the ECJ missed an opportunity to update a symbolic constitutional topos for a European constitution in times of crisis.

Compared to Pringle, the evaluation of the ECJ’s Case Law in Gauweiler is more ambivalent in terms of accountability. On one hand, the court again confirmed the idea of strict separation between monetary and economic policy,⁷³ which allowed the court to rule the OMT program to remain within the mandate of the ECB as a purely monetary measure. On the other hand, ECJ now tried to develop more substantial benchmarks for the actions of the ECB by requiring that crisis measures are temporary limited⁷⁴ and introducing a proportionality test as a yardstick for assessing the ECB’s action.⁷⁵ The concrete evaluation by the ECJ boiled essentially down to a mere rationality control and still granted the ECB broad discretion as ‘monetary policy issues are usually controversial’.⁷⁶ Nevertheless, the introduction of a proportionality test in Gauweiler and maintained later on in Weiss can be understood as a cautious attempt to tie the ECB’s crisis response to general constitutional topoi and to update the concrete meaning in central bank’s competences in light of the recent changes in the Eurozone. It thereby introduces a light procedural standard of accountability rather than a substantial requirement. While this prevents the court from narrowing constitutional meaning to economic considerations, it also fails to grasp and address the full dimension of the accountability and legitimation problems that arise from the increasing involvement of the ECB in the political processes of macroeconomic adjustment through conditionality.

In contrast to the classic conflicts of competence, the ECJ proved much more hesitant to accept jurisprudence in conflicts over the legality of Union-induced crisis measures resulting from conditionalities, such as wage and pension cuts.⁷⁷ From the very beginning of the crisis, visibility of conflicts over conditionalities before the ECJ was limited for three structural reasons. First, major crisis instruments, such as the ESM, partly took place outside the European Treaties, so that it was difficult to identify contestable acts of the Union institutions. In Mallis and Malli, for instance, the General Court of the EU denied attribution of negotiations under the ESM to the European Commission.⁷⁸ Second, since the national authorities were left with room for manoeuvre in the implementation, even if the crisis measures were clearly traceable to the action of an EU institution, it was difficult to prove that individuals were directly affected by EU measures in the sense of Article 263(4) TFEU. In ADEDY the court held that the applicants were not directly affected because the contested decision of the Council of the EU left Greece with considerable room for manoeuvre in implementing the requirements.⁷⁹ Finally, national crisis response measures were only rarely implemented in the form of binding Union legal acts but were often based on Memoranda of Understanding whose legal nature and binding effect were disputed.

This latter problem also affected cases brought to the court under the preliminary reference procedure. In the first phase of the eurozone crisis, the General Court rejected a total of seven references from Portuguese and Romanian courts concerning the compatibility of conditionality-induced wage cuts in the public service with fundamental rights under the EU Fundamental Rights Charter. In all seven cases, the court argued that the referring courts had not sufficiently demonstrated the link between the wage reductions imposed by national laws and Union law.⁸⁰ Unlike in other cases, the court refrained from re-interpreting the referrals so as to establish its jurisdiction and did not ask the domestic courts for clarification either. The court thereby failed to provide a meaningful standard of European constitutional accountability and severely restricted access to accountability.

However, in the course of the crisis, the ECJ cautiously adapted to the new type of conflict. In Florescu,⁸¹ the ECJ willingly reformulated the referred questions and held that the measures taken by the Romanian government were in fact implementing the MoU, and thus fell within the scope of application of the EU Charter of Fundamental Rights pursuant to Article 51. In Ledra Advertising, the Court activated the rules on the non-contractual liability of the Union. The court clarified that EU institutions were obliged to sign memoranda for the ESM only if they are compatible with Union law, including the EU Charter of Fundamental Rights and that they could otherwise be held liable under Article 268 in conjunction with Article 340 TFEU.⁸² The outcome in terms of substantive accountability, however, remained rather meagre also in the case law following Ledra Advertising. The court readily accepted that interferences with fundamental rights were justified in the light of the imminent economic risks and raised a high bar for actually activating liability of EU institutions in this respect.⁸³ By resorting to the rhetoric of the economic state of emergency, the court ultimately refused to concretise a substantive fundamental rights standard. Neither did it specify what the standard would be to return to after the acute crisis phase nor did it introduce a temporal limitation of the crisis-induced interferences.

To sum up, the EU courts allowed only for limited access to constitutional accountability. In terms of accountability goods, the ECJ focused primarily on economic constitutional values but only hesitantly applied other constitutional values such as social rights and solidarity as a benchmark for substantive accountability. It thereby only rarely allowed for contestation of dominant narratives of the understanding of constitutional norms but rather joined domestic courts in upgrading specific economic concepts and political preferences (e.g. conditionality) to constitutional values. Rather European courts primarily engaged in procedural accountability by introducing requirements for justification, thus serving to ensure the effectiveness and transparency of EMU decision-making, but often also to merely rubber-stamping crisis measures. Only to a very limited extent did the ECJ ensure substantive accountability and contribute to the publicness of EMU decisions. In light of this analysis, it seems obvious that European constitutional accountability mechanisms did not yield substantial integrative effects and did not ensure meaningful accountability in the sense of concretising and re-negotiating constitutional common goods.

10.5 Limits and Perspectives of Legal Accountability

Instead of a conclusion, the final section of this chapter seeks to address the limits of constitutional accountability of the EMU and to sketch out some perspectives for its future development. We have already seen that the capturing of constitutional accountability by economic policies and limited access to supranational accountability mechanisms pose significant obstacles to develop European constitutional law as a meaningful benchmark for providing publicness. However, the call for courts to play a more active and meaningful role in providing publicness as an accountability good also raises issues. As courts are typically not legitimised to take distributive decisions and likewise often not qualified to substantially review technocratic institutions, a more substantial role of courts in the EMU accountability architecture raises concerns as to the separation of powers.

As a preliminary matter, judicial review in modern societies can be seen as not only ensuring the rule of law but also contributing to democratic will-formation. The historian Pierre Rosanvallon has shown from a conflict-theoretical perspective that every majority decision excludes a part of the democratic people, while normatively the decision of the majority is supposed to represent the general will of the people and thus implicitly carries the ideal of unanimity.⁸⁴ The more pluralistic societies become, the less this implicit ideal, according to which the democratic majority also represents society as a whole, is true. It can no longer be claimed that future political decisions are already implied in the electoral decision.⁸⁵ The members of a pluralistic demos feel they belong to different social groups simultaneously so that ‘the people’ sort of becomes a plural of minority.⁸⁶ Consequently, parliamentary majorities do not represent the people as a whole.⁸⁷

There is, therefore, an increasing need to allow for competing expressions of the public will.⁸⁸ Separation of powers could thus be best understood as an arrangement that gives institutional expression to the plurality of society and represents it in different forms. Constitutional courts lend themselves as a forum where such competing visions of the public will can not only be expressed but need to be taken into account. Using the constitution as a yardstick for accountability, constitutional courts can ensure that a currently dominant vision of the common good always needs to justify itself in the light of all other potential versions of the common good that are embodied in the constitution. In this sense, the accountability good of publicness should not be misunderstood as requiring compliance with a specific common good but rather as ensuring that the open-ended search for a common good remains the reference point of policy choices.

However, parliamentary legislation by democratically elected representatives is still an irreplaceable mechanism of responsiveness in a democratic polity. After all, the open-ended debate about and re-negotiation of the common good cannot take place before courts alone. Not only would this overburden the courts, but it would also ignore that democratic will-formation is not only an individualistic endeavour but rather requires collective processes. In light of these considerations, the primary function of future constitutional accountability mechanisms should be to foster adequate decision-making procedures and ensure sufficient space for open political will-formation and decision-making. It should help make political preferences that are often hidden behind a rhetoric of necessity visible again and challenge not only their necessity but also their compatibility with the normative script embodied in the constitution.⁸⁹ Importantly, this also implies making sure that constitutional provisions are not hijacked by political preferences or by economic concepts. In the context of the EMU in particular and the EU more generally, a core function of constitutional accountability should also be to allow for identifying and openly addressing transnational solidarity conflicts. To properly address the transnational dimension of solidarity conflicts and EMU action, both domestic and EU courts need to better reflect the impact of their decisions on other legal orders within the EMU. Only then can they together contribute to rendering European constitutional law into a meaningful normative framework for accountability.

11 Judicial Accountability of Financial Assistance in the Case of Eurozone Debtor Countries

Teresa Violante ^*

11.1 Introduction

This chapter investigates legal accountability of financial assistance from the perspective of borrower countries. It adopts an empirical approach taking the Portuguese case to test how accountability of the financial assistance programme, on the one hand, and of the national measures implementing conditionality, on the other, was exercised. The investigation focuses on the judicial review of austerity measures in different institutional contexts comprising the domestic constitutional court, the Court of Justice of the European Union (CJEU), and the European Court of Human Rights. It aims at assessing how far these judicial fora have delivered the accountability goods identified in the introductory chapter, particularly publicness, as the good oriented towards ensuring that public action is guided by common goods, namely that it respects the constitutional principles of equality and proportionality. These yardsticks have been specifically contemplated by the case law of the Portuguese Constitutional Court and the European Court of Human Rights.

It focuses specifically on the role of the CJEU as an accountability-rendering forum for the financial assistance programmes developed in the framework of the Eurozone crisis. On the other hand, it focuses on how far domestic constitutional adjudication can be an effective accountability tool as it was enforced to control the compatibility of economic conditionality with constitutional yardsticks, particularly the protection of salaries and pensions, as well as general principles, such as equality in the allocation of the adjustment costs and the protection of legitimate expectations. The role of the Portuguese Tribunal Constitucional (PCC) as a forum for the legal accountability of austerity measures is explored in detail. The limited role of the European Court of Human Rights (ECtHR) is also addressed.

The chapter is organized into four sections, following this introduction (Section 11.1). Section 11.2 briefly outlines the normative developments of financial assistance mechanisms in the Eurozone following the Treaty of Lisbon, and the architecture of the financial assistance programme to Portugal, as well as its complex and disputed legal nature. Section 11.3 deals with the absence of judicial review of the Portuguese MoU, at both the EU and the domestic levels, and the factors that explain why such an important European Monetary Union (EMU) governance mechanism escaped judicial scrutiny. This section also identifies a prominent gap in EU case law which has only been partly addressed as late as of May 2022: the topic of knowing whether financial assistance to euro area members comes under the purview of EU law. The factors contributing to the immunization of the MoU from domestic judicial review are also explored, particularly the ‘nationalization of the crisis’ by the case law of the Constitutional Court. Section 11.4 deals with judicial review of national measures implementing MoU conditionality. It provides an in-depth analysis of Associação Sindical dos Juízes and its problematic consequences for the furtherance of inequalities between immobile public workers and the displacement of social rights and solidarity conflicts from the Luxembourg stage. At the level of domestic constitutional law, it portrays the PCC as the only judicial stage available for the accountability of financial assistance conditionality. Section 11.5 concludes and hypothesizes that more lines of tension between domestic and EU constitutionalism may emerge in the constellations related to solidarity and welfare rights.

11.2 The Architecture of the Portuguese Financial Assistance Programme of 2011

11.2.1 Financial Assistance in the Eurozone

The first signs of the euro area sovereign debt crisis surfaced just a few weeks after the Treaty of Lisbon entered into force. The revised EU legal framework left almost untouched the EMU, with the exception of the new Article 136 TFEU. The urgent need to equip the EU and particularly the EMU with tools to deal with a major financial crisis was overlooked.¹ There was no instrument to regulate emergency assistance to Eurozone Member States facing financial distress as the predominant paradigm affirmed that each country was fully responsible for its financial (mis)fortunes.²

In 2010, the first emergency mechanisms were created: the European Financial Stabilisation Mechanism (EFSM) and the European Financial Stability Facility (EFSF), the former being a ‘creature of EU law’,³ established under Article 122(2) TFEU.⁴ Portugal received a total of €24.3 billion from the EFSM.

Besides establishing a financial assistance mechanism applicable to all Member States; a Special Purpose Vehicle was also adopted. The European Financial Stability Facility was incorporated in Luxembourg on 7 June 2010 as a société anonyme, and its shareholders are the euro area Member States.⁵ The EFSF has provided financial assistance to Ireland, Portugal, and Greece. It was set up as a temporary mechanism, and it does not provide further financial assistance as this task is now assigned to the European Stability Mechanism.⁶

Financial assistance under any of the mechanisms would be subject to strict conditionality: ‘financial support should be contingent upon the recipient Member State fulfilling certain budgetary, financial sector, and macroeconomic conditions’.⁷ This new mode of economic governance has been qualified as ‘authoritarian liberalism’ for its resonance with the German experience of the late 1920s and early 1930s.⁸

11.2.2 The Financial Assistance Programme to Portugal

In April 2011, Portugal became the third Eurozone country to request financial assistance, following Greece and Ireland. The Portuguese Financial and Economic Assistance Programme (FEAP) comprised a €78 billion loan to be delivered between 2011 and 2014 provided by the International Monetary Fund (IMF), the EU, within the framework of the EFSM, and the Eurozone countries, under the EFSF. The programme incorporated three documents: the Memorandum of Economic and Financial Policies, the Technical Memorandum of Understanding, and the Memorandum on Specific Policy Conditionality (hereinafter, the MoU). The first two documents were sent as attachments to a letter of intent addressed to the IMF’s executive Commission, and the third document was signed between the Portuguese Republic and the European Commission. The MoU detailed the general economic policy conditions embedded in Council Implementing Decision 2011/344/EU, of 30 May 2011, on granting EU financial assistance to Portugal.

The FEAP covered three broad lines of action to reach the 3 per cent deficit ceiling in 2013. It provided for the adoption of profound ‘structural reforms’ and a credible ‘fiscal consolidation’ strategy. As the government’s report on the Adjustment Programme’s execution claimed, ‘these were the years of the deepest and most wide-reaching reforms in the history of [Portuguese] democracy’.⁹

The language of ‘structural reforms’ and ‘fiscal consolidation’ translates strict conditionality as a vital component of the bailout agreement. As Ioannidis notes, ‘[c]onditionality is the new topos of EU economic governance’.¹⁰ To eliminate the danger of moral hazard, it ‘became the basic disciplining instrument’.¹¹

The bailout was negotiated between April and May 2011 by the Portuguese State with a Troika composed of the IMF, the European Central Bank, and the European Commission. The negotiations were held by a resigning government, and the EU and Eurogroup required the commitment of the main opposition parties to the MoU to ensure political consensus.¹²

11.2.3 The Legal Nature of the FEAP

The legal character of the memoranda and their conditionality has been a disputed topic. Some scholars claim that the programme had a pure proclamatory nature at the domestic level, while others argue that they are international treaties.¹³ Others still recognize the hybrid nature of the programme, which combined a unilateral act (the IMF’s declaration), a bilateral agreement (the framework agreement and the loan contract with the EFSF), and EU acts (on the EFSM).¹⁴ Another strand of scholarly literature claims that, despite the mixed legal parentage of the programme, and the links with the EU legal order, the predominant pedigree relates to instruments which must be qualified as international agreements.¹⁵

That is not the opinion shared by Claire Kilpatrick who noted that, in the Portuguese and Irish bailouts, the ‘European leg’ of the memoranda prevailed as the ‘pole normative position’ was assigned to the ‘EU sources containing the loan conditionality…, not the international sources’.¹⁶

Similarly, the PCC affirmed, in the first opportunity in which it was confronted with austerity policies implementing MoU conditionality, that the memoranda were legally binding. Whereas the Greek Council of State ruled out the legal value of the Greek MoU and sought to recognize its role as a political and economic plan whose implementation claimed the adoption of primary or secondary legal instruments,¹⁷ the PCC recognized the ‘binding force for the Portuguese State’ of the FEAP, since it combined instruments based on both international law and EU law according to Article 8(2) of the Constitution. The international law leg was based on Article V, Section 11.3 of the IMF Agreement, whereas the EU leg was located on Article 122(2) TFEU and Council Regulation (EU) No 407/2010 of 11 May establishing the EFSM. In the words of the Court, ‘These documents impose the adoption by the Portuguese State of the measures contained therein as a condition for the phased compliance with the financing contracts signed between the same entities.’¹⁸

11.3 Judicial Review of the MoU

According to Fabbrini, the intergovernmental method of governance that dominated the EMU during the Eurozone crisis led to high degree of judicial intervention by both domestic and EU courts.¹⁹ This phenomenon can be framed as the paradox of judicialization in contrast to the deferential posture adopted by the US courts in economic issues. In relation to the Portuguese financial assistance programme, domestic courts were very active in the adjudication of EMU affairs. However, that does not hold true for the CJEU, which refrained from intervening in the disputes that emerged in the context of the financial assistance to Portugal.

The Portuguese MoU has never been tested in court due to what has been called a ‘systemic failure in the jurisdictional system of the EU’.²⁰ For different reasons, the MoU escaped review by both the CJEU (1) and the PCC (2). This section reviews the circumstances underlying the immunization from judicial accountability of this important instrument of Eurocrisis governance.

11.3.1 EU Case Law

Two preliminary references by Portuguese courts indirectly challenged the validity of the MoU before the CJEU but in both cases the Court held that it clearly had no jurisdiction to hear them. Previously, another preliminary reference had challenged budgetary provisions implementing austerity measures adopted in the context of an excessive deficit procedure initiated by Council Decision No 2010/288/EU of 19 January 2010.²¹ The wording of the three references challenged only national law implementing pay cuts on public-sector companies and failed to establish that the impugned domestic budgetary provisions implemented EU law.²² Significantly, the CJEU treated all three cases as analogous in spite of the different legal frameworks underlying the concerned austerity measures. Furthermore, both the Fidelidade Mundial and Via Direta cases concern Article 21(1) of the Budget Law for 2012 on the suspension of payment of holiday and Christmas bonuses or similar benefits, whose wording expressly referred to the financial assistance programme:

For the duration of the Economic and Financial Assistance Programme (PAEF), as an exceptional measure of budgetary stability, the payment of holiday and Christmas bonuses … or any benefits relating to the 13th and/or 14th month pay to those persons referred to in Article 19(9) of [the 2011 Budget Law], as amended by Law No 48/2011 of 26 August 2011 and Law No 60-A/2011 of 30 November 2011, whose monthly remuneration is greater than EUR 1.100, shall be suspended.

The CJEU was outwardly dismissive of its jurisdiction to hear the cases alluding to the referring courts’ failure to establish the link with the EU bailout terms with sufficient clarity. The poor drafting of the references can be attributed to the complexity underlying the foundational bailout and its subsequent updates.²³ However, that should have not prevented the CJEU from redrafting the questions submitted by the Portuguese courts.²⁴ In cases of issues of admissibility, the CJEU has developed a generous understanding according to which questions submitted by national courts enjoy a ‘presumption of relevance’. Questions on the interpretation of EU law referred by a national court in the factual and legislative context which that court is responsible for defining, and the accuracy of which is not a matter for the Court to determine, enjoy a presumption of relevance.²⁵ Only in exceptional circumstances will the Court refrain from giving a preliminary ruling providing that there is a rebuttal to the presumption.²⁶

In Escribano Vindel,²⁷ a case concerning reduction in salary of a Catalonian judge, in the context of general pay cuts linked to the requirements of eliminating an excessive budget deficit, the presumption of relevance was crucial for the Court to accept jurisdiction. In this case, the only link to EU law consisted of the reiterated reference to the ‘requirements of eliminating an excessive budget deficit’, without any specification being put forward of the normative framework detailing the EU sources potentially involved. The contrast in the attitude of the Court of Justice between the references from the Portuguese courts and Escribano Vindel is startling.

The fact that the Court failed to apply the presumption of relevance might imply, as Markakis hypothesizes, that it did not regard the contested bailout measures as resulting from an EU law obligation.²⁸ According to this line of reasoning, the bailout terms embodied conditionality the national authorities would have to implement to access the disbursement of funds but were not legally binding. Insofar as said conditions concern areas of national competence, they would be mere recommendations. Accordingly, the EU has secondary competence to set the terms on which the financial assistance can be provided,²⁹ but the relevant Council decisions would not give rise to EU law obligations to transpose and implement the bailout conditions into domestic law. However, the CJEU did not come clean on this and was limited to stating that the decisions for reference did not contain any specific material showing that the national measures were intended to implement EU law.³⁰ Moreover, in later case law, as we will see below, the CJEU would eventually acknowledge that the bailout conditions form part of EU law and the Member State concerned is ‘implementing Union law’ within the meaning of Article 51(1) of the CFEU, at least when financial assistance is granted by the EFSM.³¹

11.3.2 Ledra and Florescu

In the following years, the Court delivered other important judgements in different settings of financial assistance that would retrospectively point to the flaws in its initial case law to decline jurisdiction in the framework of the Portuguese financial assistance programme. A first moment came when, in Ledra, relating to the Cyprus bailout,³² despite rejecting the qualification of the bailout as an act of EU law act, the Court nevertheless added that EU institutions remain fully bound by EU law and the Charter when they act as agents of a distinct international organization such as the ESM.

Afterwards, in Florescu,³³ the Court acknowledged that a Memorandum of Understanding for Balance of payments is an act of an EU institution and could thus be referred under Article 267 TFEU for interpretation. The Court also specified that the national measure implementing MoU and a Council decision conditionality constituted an implementation of EU law and thus triggered the application of the Charter of Fundamental Rights. It has been argued that the ‘Florescu ruling serves to enhance the legal accountability of the EU institutions for their actions with respect to bailouts’.³⁴ However, Florescu related to a bailout adopted in the framework of Article 143 TFEU concerning assistance to non-euro area Member States experiencing difficulties with respect to their balance of payments. For accountability purposes, the field of financial assistance to euro area members still posed as a gap in the case law of the Court of Justice.

This gap has only partly been addressed in more recent case law of the CJEU, and in terms which raise problematic issues. This will be further addressed below.

11.3.3 Constitutional Court Case Law

As explained above, the PTC qualified the documents that integrated the financial assistance programme as legally binding and found that the MoU was ‘ultimately based on Article 122(2)’ TFEU, and qualified, therefore as EU law. As such, insofar as the founding documents imposed the adoption, by the Portuguese State, of conditionality, there was no discretion as to whether the domestic authorities were in fact obliged to implement the said conditions. However, the Court found that those measures afforded discretion to the State to decide on the means best able to ensure compliance with those commitments.

In Decision 353/2012, however, the judges failed to realize that the impugned measures – the total and partial suspension of the 13th and 14th monthly salary payments of public workers and pensioners – albeit absent from the initial version of the MoU, had been included in its second update. In fact, whereas the first disbursement of financial assistance is released after the signature of the MoU, further instalments are conditional on the fulfilment of the bailout conditions included in the MoU (Article 4 of Regulation (EU) 407/2010). Changes in the general economic policy conditionality are negotiated between the Commission and the beneficiary Member State. Afterwards, the Council, acting by a qualified majority on a proposal from the Commission, approves the revised adjustment programme prepared by the Member State. The disbursement of the next instalment of the loan follows the signature by the Commission and the Member State of an updated version of the MoU revised in accordance with the Council’s decision (Article 3(6) and (7) of Regulation 407/2010).

The complex framework underlying the financial assistance programme added to the difficulty of the Court in handling claims involving the adjudication of complex economic issues in times of economic crisis.³⁵ Importantly, by failing to trace the link between the domestic impugned measures and the MoU, a document which had been qualified by the PCC as EU law, the stage was set for what would become a dominant trend of the extensive bulk of austerity case law: the ‘nationalization of the crisis’³⁶ whereby the PTC depicted domestic measures implementing the bailout conditionality as purely domestic affairs.

The challenged austerity measures were always framed as the result of autonomous political choices between competing viable alternatives, which allowed the Court to circumvent the difficult questions concerning the relationship between EU law and the national constitution and the validity of the MoU. This nationalization strategy of the crisis immunized the austerity litigation from the reach of EU law. Had the Court acknowledged that at least some of the challenged measures were – textually – determined by the MoU, then it should have drafted a preliminary reference questioning its compatibility with EU law, namely the Charter. Such a reference³⁷ would be harder to dismiss by the CJEU and would have brought the challenged measures to ‘their natural stage’ in accordance with the transnational dimension of austerity conflicts.³⁸ Furthermore, it could have pushed the CJEU to face the solidarity conflicts undergirding the bailout austerity and measure the austerity against the social provisions of the CFEU. This leg of substantive accountability in relation to the public goods of social provisions of the Charter is missing not only in relation to the Portuguese financial assistance programme but generally in relation to the tension underlying social and liberal Europe.

It should be noted, however, that the nationalization of the austerity conflicts on the part of the PCC is in line with its traditional case law that had a reluctance to engage with EU law. Like other Kelsenian constitutional courts, the PCC followed the ‘doctrine of isolationism’³⁹ for a long time, separating EU law issues from the stage of constitutional adjudication.⁴⁰ Only recently has the PCC meaningfully engaged with EU law in its decisions.⁴¹

11.4 Judicial Review of National Measures Implementing MoU Conditionality

Conditionality agreed at the level of financial assistance programmes needs to be implemented at the national level. In the sense that it is entrenched in legislation enacted in the scope of EU law, it can be challenged at the EU level, and measured against EU law standards, including the CFREU (11.4.1). However, national measures implementing conditionality can also be subject to national accountability instruments, namely review by domestic courts. In the case of the Portuguese financial assistance programme, the PCC played a pivotal role in reviewing the compatibility of several austerity measures implementing bailout conditionality (11.4.2). When domestic courts failed to provide adequate relief, litigants also turned to international courts (11.4.3).

11.4.1 EU Case Law

11.4.1.1 Associação Sindical dos Juízes Portugueses⁴²

As mentioned earlier, after the initial CJEU case law in relation to the Portuguese bailout, declining jurisdiction to review national measures implementing the EU bailout, and the doctrine established in Ledra and Florescu, there was a gap in the jurisprudence of the Court, concerning the field of financial assistance to euro area Member States. In Associação Sindical dos Juízes, the Court of Justice was finally faced with the opportunity to address this gap and confirm or reject the thesis that there was a link between domestic conditionality measures also in the context of the Eurozone and EU law.

In this case, the CJEU dealt with a reference from a Portuguese court on pay cuts that also affected judges and were adopted in the context of the excessive deficit procedure and the financial assistance programme to Portugal. Both the referring court and Advocate General H. Saugmandsgaard Øe qualified the national measure at stake as implementing EU law in the sense of Article 51 of the Charter.⁴³

The case was raised in the framework of a strategic litigation plan developed by the Association of Portuguese Judges, as the complainant, in representation of judges from the Court of Auditors.⁴⁴ The Association of Portuguese Judges had argued that the reductions in salaries breached the principle of judicial independence, in its double dimension of a constitutional and EU law yardstick. The judicial independence claim was raised following the Constitutional Court’s assessment of the reductions in salaries that will be analysed in more detail below. The Constitutional Court’s review had considered the principles of legitimate expectations and equality but not the principle of judicial independence, which justified a new wave of litigation prompted by the Association of Judges.

On a first case,⁴⁵ the Supreme Administrative Court refused to refer the dispute to the CJEU, on the basis that it did not involve EU law. To substantiate its reasoning, the Supreme Administrative Court referred to the Court of Justice’s earlier case law that had declined jurisdiction to rule on preliminary references from Portuguese courts on cases concerning pay cuts adopted in the context of the assistance programme.⁴⁶ This judgment was adopted in full chambers. Three judges, however, dissented in the issue concerning the preliminary reference, in a vote drafted by Judge Medeiros de Carvalho.⁴⁷ The dissent reasoning noted, on the one hand, that the financial adjustment measures could also be construed as EU law, and, on the other, that a problem of judicial independence might also be framed under Articles 19(1) TEU and 47 of the CFEU.

The Association of Portuguese Judges was encouraged by these three dissenting votes – restricted to the issue of the preliminary reference to the Court of Justice – to pursue its litigation strategy. As it raised further challenges to the pay cuts, one of them was eventually allocated to one of the judges that had expressed his dissent on the preliminary reference issue, Judge Araújo Veloso.⁴⁸ The Association of Judges joined a legal opinion⁴⁹ authored by two EU law professors to substantiate the claim that a preliminary reference should be drafted, and the case taken to Luxembourg. This legal opinion analysed the relevance of a reference and the terms in which a question should be addressed to the Court of Justice. The wording of the question was provided and later adopted by the Supreme Administrative Court in the reference.⁵⁰ It also addressed the substance of the dispute to conclude that the pay cuts breached the principle of judicial independence enshrined in Articles 19(1), TEU, second subparagraph, and 47 CFREU.

In his opinion, Advocate General H. Saugmandsgaard Øe concluded that the principle of judicial independence, as enshrined on Article 47 CFREU, did not preclude the general salary-reduction measures adopted by Portuguese authorities to eliminate an excessive budget deficit from being applied to the members of the Portuguese Court of Auditors. He also argued that the dispute before the referring court did not involve judicial independence as such.⁵¹

The CJEU did not address the compatibility of judicial pay cuts with the Charter, following the case law established in Ledra that financial assistance MoUs entered into by EU institutions triggered the application of the Charter. Instead, in a ruling that has been qualified as ‘groundbreaking’, ‘surprising’,⁵² and ‘the most important judgment since Les Verts as regards the meaning and scope of the principle of the rule of law in the EU legal system’,⁵³ the CJEU claimed jurisdiction on the basis of Article 19(1), TEU, second subparagraph, focusing on the role of national courts within the European judiciary and thus triggering the threshold of the requirements essential to effective judicial protection. Following a very creative line reasoning, the CJEU ‘shifted the focus from the economic crisis (or Eurocrisis) to the “rule of law crisis”’.⁵⁴

Regarding the pay cuts, the Court concluded that since the impugned measures applied to several groups of civil servants, were temporary, and aimed at the reduction of the country’s excessive budget deficit, they did not impair judicial independence.

From the Eurocrisis perspective, particularly in the framework of the Portuguese financial assistance programme, Associação Sindical dos Juízes Portugueses was a disappointing ruling.⁵⁵ After having kept its doors shut to previous references concerning austerity measures adopted in the framework of the financial assistance programme, the CJEU had finally agreed to take jurisdiction on this case. Still, it maintained absolute silence as to the relationship between austerity measures and EU law and transformed an economic crisis dispute into a rule of law case. By doing so, it confirmed that the only judicial accountability forum fully available to contest financial assistance conditionality was found at the domestic level.

In fact, although the Court accepted to review the validity of the pay cuts in Associação Sindical dos Juízes Portugueses, its jurisdiction was determined by the universe of the workers affected by the cuts – judges from the Court of Auditors. The Court of Auditors holds jurisdiction for cases concerning EU own resources and the use of financial resources. Therefore, in the Court’s view, its judges must enjoy a sufficient level of independence required under Article 19(1) TEU. The applicability of Article 47 CFEU was excluded.

The jurisdiction of the Court of Justice to review pay cuts in the context of Eurozone austerity was limited to pay cuts applicable to judges,⁵⁶ which excluded all the slashes to wages and income endured by the remaining public workers. On a first moment, the distinction could seem irrelevant since magistrates in general were subject to the same pay cuts applicable to public workers in general. However, the scrutiny of the CJEU was narrowed by the professional quality of these workers: the reductions in wages were measured solely against the principle of judicial independence as this was the single yardstick mobilized by the Court and that, indeed, triggered its jurisdiction.

The considerable distributive impact of the financial assistance programme at the national level, as well as its encroachment on core human rights provisions of the EU, were therefore overlooked. In fact, contrary to what the CJEU had stated in Ledra, where it affirmed the duty of EU institutions to respect the CFREU when formulating financial assistance conditionality, in Associação Sindical dos Juízes the Portuguese financial assistance programme does not come under the purview of the Charter and EU human rights. In fact, by adjudicating this case solely on the basis of Article 19(1) TEU, the Court inaugurated a new line of case law as this parameter had ‘never served as an autonomous standard for the review of national laws’.⁵⁷ The Court distanced itself from the doctrine established in Florescu (which, incidentally, also concerned judges’ remunerations, in the form of pensioners’ rights), where it assumed jurisdiction by considering that MoU qualified as acts of EU institutions and that national implementing measures fell within the scope of Union law. That made the Charter applicable. In Associação Sindical dos Juízes, the CJEU dispensed the qualification of the MoU as an act of EU institution and circumvented the Charter’s application. The case turned into a system scrutiny of the country’s judicial structures and not, as Krajewski argues, a fundamental rights’ case.⁵⁸

As the Court partly accepted the structure designed by the Association of Portuguese Judges in its strategy to defend their salaries from austerity measures, and embraced the framing provided by the principle of judicial independence, it inescapably confirmed that its judicial forum is not fit for social conflicts.

11.4.1.2 A New Distinction between Winners and Losers of European Integration

Moreover, Associação Sindical dos Juízes created a differentiation between immobile public workers in Portugal: on the one hand, those who come under Strasbourg’s umbrella of protection (national judges); on the other hand, all the other public workers, who do not enjoy the extra accountability forum rendered by the principle of judicial independence as a trigger for the CJEU’s jurisdiction to review pay cuts implemented in the framework of a financial assistance programme (which the Court had, until very recently, systematically denied the quality of Union law). Such differentiation brings to the fore a new cleavage in European and national citizenship: whereas the fault line between mobile and immobile Europeans, or between the movers (the ‘Eurostars’⁵⁹) and the stayers, had already been pinpointed in the literature,⁶⁰ a new divide emerges between national immobile citizens. On the one hand, those that cannot resort to the protection afforded by EU law, that is, the communities that are treated as ‘deserts’ of EU law.⁶¹ On the other, domestic judges, who enjoy not only the national level of protection but also the supranational guarantees, including the EU institutional machinery.

11.4.1.3 A Case of Eurocrisis Strategic Litigation Turns into the Rule of Law Crisis Landmark Case

Considering Associação Sindical dos Juízes Portugueses under this lens, it also becomes clear that this ruling – the seminal case that inaugurated the rule of law case bulk of the Court of Justice – did not primarily concern the judicial independence of domestic legal structures. Rather, the issue frame presented by the judges’ association emerged in a larger context of a litigation strategy against pay cuts in a context of financial retrenchment, where the entire public sector was affected by slashes in wages. The challenge on judicial independence is explained because the National Association of Judges was forced to raise new legal questions that had not been exhausted under previous case law to avoid preliminary dismissal of the merit of its claims near the Supreme Administrative Court. The issue frame – do pay cuts adopted in a context of financial retrenchment breach the principle of judicial independence? – was thereby determined by the previous constitutional case law that had accepted temporary cuts as valid under the principles of proportionality and equality. It is a case where the litigant selects an alternative frame over the prevailing one – according to which cuts would be illegal for breach of universal principles – because the latter has already been dismissed in the lower court, or, in this case, by the case law.⁶² In fact, as we will see below, the Portuguese Constitutional Court had assessed said measures against the principles of proportionality and equality but not against the principle of judicial independence. There was a ‘strong incentive to reframe the issue by offering an alternative dimension, or frame, on which to base the decision’,⁶³ to maximize the chances of reaching a different decisional outcome.

Moreover, the Court of Justice’s initial case law had declined jurisdiction to rule on salary-reduction measures adopted in the framework of the bailout. The reluctance of the ECJ in taking jurisdiction in austerity-related cases was salient in light of its previous case law. That is why the litigant Association of Judges, and later the referring Supreme Administrative Court, emphasized the link with EU law of the measures enforcing the salary reductions, stressing that the proceedings came within the scope of Article 47 of the Charter since the mandatory requirements for reducing the State’s excessive budget deficit were imposed on the Portuguese Government by EU decisions granting, in particular, financial assistance to that Member State. The decisional outcome to base the jurisdiction of the Court solely in Article 19(1) TEU was fully unexpected. As Pech and Kochenov cogently argue,

[T]he practical, if not far-reaching, consequence of the Court’s interpretation in Portuguese Judges is that private parties, in particular judges when acting as plaintiffs, have been empowered to rely upon the second subparagraph of Article 19(1) TEU directly to challenge, in the context of domestic proceedings, national measures which can be considered to undermine the independence of any national court or tribunal which may apply or interpret EU law’.⁶⁴

11.4.1.4 An ‘Unforgivable Late Admission’: BPC Lux 2⁶⁵

Only in May 2022 has the CJEU come to acknowledge that the financial assistance programme to Portugal entails a link with EU law and finally addressed the mentioned accountability gap in its case law. On its ruling delivered on 5 May 2022, the court found that the Portuguese legal framework for banking resolution that came into force in 2012 was a national measure applying EU law since it represented an implementation of a MoU signed within the framework of Regulation 407/2010 establishing the EFSM. As Martinho Lucas Pires accused, this is an ‘unforgivable late admission’⁶⁶ from the CJEU.

This conflict concerned the validity of a resolution measure applied by the national authority to a private bank considering the protection of the right to property afforded by Article 17 of the CFEU. To put it bluntly, petitioners claiming breach of their right to property, specifically investment funds, did not face an insurmountable barrier to take their case to Luxembourg. On the other hand, workers and pensioners who had seen their wages and pensions subject to cuts and freezes did not enjoy the same opportunity. This is another sign of the inequality between rights-holders enhanced by the case law of the CJEU that I mentioned previously and that points to the accountability gaps at the level of the European judicial stage with regard to financial assistance programmes.

What reasons can account for this ‘late admission’ of the CJEU? On the surface, one could simply think that the court was coming to terms with its jurisprudential troubled past and making amends with it. After having rejected jurisdiction in the early cases and taking the strategic shift in Associação Sindical dos Juízes, BPC Lux 2 might just represent the closure of a troubled process, and be the appropriate case to build coherence with Florescu in which the court had already accepted that bailouts are acts of EU law. There may be something else to the story, however: the problem at stake was too important to be missed by the CJEU. In fact, the main issue of the referred questions concerned the problem of knowing whether the fact that the Portuguese applicable regime at the time of the resolution did not expressly entail the principle of ‘no creditor worse off’, enshrined in the Bank Recovery and Resolution Directive (BRRD),⁶⁷ entailed any violation of said directive or of the right to property enshrined in the Charter.

Bail-in powers have given rise to constitutional litigation in domestic courts and the European Court of Human Rights.⁶⁸ In Pintar and Others v Slovenia, the Strasbourg Court was confronted with Slovenian legislation implemented in the context of the Eurozone crisis that resulted in the bailing-in of shareholders and bondholders of banks. In the proceedings, the Slovenian Constitutional Court had already found unconstitutional breaches in the legislation, following the CJEU ruling in Kotnik and others.⁶⁹ The Court found that the domestic legislation governing how shareholders and bondholders bring claims for unlawful takings of property failed to provide a legal avenue to effectively challenge the lawfulness of the alleged breach of the right to property.

Moreover, there are scholarly works emerging that accuse the BRRD and the bail-in provisions of breaching the right to property of bank creditors and, therefore, presenting a legal risk to resolution authorities in Member States. Therefore, in BPC Lux 2, the CJEU had every interest in taking jurisdiction and having its say on the questions referred, especially considering the possibility that the conflict may end up being adjudicated by the Portuguese Constitutional Court, in concrete review proceedings. Taking jurisdiction in this case allowed the CJEU the possibility to have the first word on the interpretation of the fundamental rights’ constellation at stake, particularly from the perspective of the compatibility of the legal regime at stake and, ultimately, of the ‘no creditor worse off’ principle with the constitutional protection of the right to property. In fact, in the analysis of the domestic legislation, the Court was able to frame as materially providing for a solution which is substantially equivalent to the mentioned principle even though that yardstick was not expressly foreseen in the statute at the time of the bank resolution. However, to claim jurisdiction, the CJEU could not simply rely on the fact that the domestic legislation aimed at transposing the BRRD. This is where the MoU comes to the fore as the jurisdictional trigger for the CJEU.

The Portuguese legal framework on recovery and resolution of credit institutions has a mixed pedigree. It was first introduced in 2012⁷⁰ and subsequently amended, for the first time, in 2014.⁷¹ This first amendment aimed at partially transposing BRRD. The 2012 piece of legislation was adopted before the Commission presented the proposal for the directive which led to the BRRD, as the Advocate General highlighted in his opinion.⁷² Moreover, the 2014 act transposed part, but not all, of the BRRD. So, there was the theoretical possibility that this case could fall out of the jurisdiction of the CJEU.

The safest avenue to claim jurisdiction, however, was to lean on the fact that the original regime, dating from 2012, had been approved to implement MoU conditionality, as the Portuguese Government clarified in the proceedings. According to the MoU, since its original version, the Portuguese authorities ‘amend legislation concerning credit institutions’ [to] ‘introduce a regime for the resolution of distressed credit institutions as a going concern under official control to promote financial stability and protect depositors’.⁷³

After accepting jurisdiction in this, it was not difficult for the Court to resolve and discard the alleged breach of the right to property. In the few cases where the Court accepted jurisdiction to review austerity measures, the tension between financial stability and fundamental rights has always been resolved in favour of the former.⁷⁴ This creates a stronger incentive for domestic institutions to stand up as gatekeepers of ‘the rights of those who do not benefit from integration and whose voice can be structurally undermined by it’.⁷⁵

11.4.2 Constitutional Adjudication⁷⁶

The PCC became a prominent forum for litigation concerning austerity measures at the height of the Eurozone crisis. Between 2012 and 2014, several restrictive measures, directly requested by the MoU and the bailout conditionality, were checked for their compatibility with the domestic constitutional standards. On some occasions, the PCC delivered significant blows to the Government’s strategy by invalidating measures based on the principle of equality, particularly in the dimension of equality of burdens concerning the financial adjustment costs, the principle of legitimate expectations, and the principle of proportionality.⁷⁷

It struck down further pay cuts on public workers and pensioners,⁷⁸ a new framework broadening the legal basis for firing civil servants,⁷⁹ some of the amendments to the Labor Code aimed at slashing labour costs and reducing the employees’ protection against unfair dismissals,⁸⁰ and permanent cuts to pensions.⁸¹

Whereas in the first challenges concerning pre-bailout austerity the PCC scrutiny was self-restrained and deferential,⁸² when called upon to review domestic measures implementing MoU conditionality the Court moved from a light level of scrutiny to a less deferential approach. On the one hand, this greater unwillingness to defer to the political branches is in line with the tendency observed in the general judicial reaction towards the Eurocrisis.⁸³ On the other hand, the Court justified the strengthened scrutiny with the cumulative effect of the restrictive measures, and the passage of time that created additional burdens on the domestic authorities to devise alternatives to reach fiscal stability without jeopardizing fundamental rights and the welfare system.

The primary benchmarks enforced by the PCC were the principle of ‘proportional equality’, in the sense that there should be an ‘equal distribution of the economic burden created by austerity’,⁸⁴ and the principle of legitimate expectations. Despite the detailed catalogue of welfare rights, often qualified as the longest bill of social and economic rights in a national constitution,⁸⁵ the austerity case law primarily relied on general and abstract provisions following the Court’s traditional ‘self-restrained’, ‘minimalist’ and ‘shy’⁸⁶ socioeconomic rights jurisprudence.

The PCC addressed austerity conflicts concerning domestic measures implementing financial assistance conditionality primarily through substantive accountability means. As the Court highlighted,⁸⁷

The Constitution certainly cannot remain unaware of the economic and financial reality, and in particular of a situation that can be considered to be of serious difficulty. But it has a specific normative autonomy that prevents economic or financial objectives from prevailing, without any limits, over parameters such as equality, which the Constitution defends and must enforce.

The financial impact of the decisions led to several renegotiations of the bailout programme of the MoU conditionality. The parties to the bailout agreement recognized the existence of a ‘constitutional risk’ to the implementation of the programme and introduced ‘legal safeguards’ in the MoU to mitigate ‘legal risks from future potential Constitutional Court rulings’.⁸⁸

The introduction of the legal safeguards did not lead to a substantial change in the Court’s review. On the one hand, the level of scrutiny remained intense, and the Court later struck down some of the replacement measures. On the other, the appeal to the transnational dimension of the austerity conflicts did not induce the Court to substantially engage with EU law yardsticks. If, on the surface, the judges regularly cited EU law and international law to frame the rescue package for Portugal, such references had no substantial value, and the cases were always solved against national constitutional yardsticks.

11.4.3 Pensions’ Cuts Case Law by the ECtHR

Some austerity cases concerning reductions in pensions found their way to the Strasbourg court, but they failed at the admissibility stage. In Da Conceição Mateus and Santos Januário v Portugal⁸⁹ the Court found that the cuts in the applicants’ pensions were ‘clearly in the public interest within the meaning’⁹⁰ of Article 1 of Protocol 1 of the European Convention on Human Rights (ECHR) (protection of property). The Court also added that ‘a wide margin of appreciation is usually allowed to the State under the Convention when it comes to general measures of economic or social policy’.⁹¹ At a later moment, in Silva Carvalho Rico v Portugal,⁹² the ECtHR referred to the PCC decisions of 2013 and 2014 that found the pensioners’ contribution to be a proportional measure given its extraordinary and temporary nature. The Court also added that ‘budgetary constraints on the implementation of social rights can be accepted as long as they are proportionate (…) and do not reduce social rights’ claims to purely symbolic sums’, and that the ‘international recognition of the country’s economic situation indicates that the present budgetary constraints constitute an imperative, which however did not reduce possessions originating in a statutory social right’s claims to a level that deprives the right of its substance’.⁹³

Moreover, the Court found itself incompetent to decide whether alternative measures were available, given the State’s wide margin of appreciation to decide on general measures of economic and social policy.

11.5 Conclusions

The CJEU has provided a very limited forum for review of austerity measures adopted in a context of financial assistance to a euro area Member State. First, the CJEU only delivered substantial review of conditionality measures at the end of the crisis, when Portugal had already exited the bailout programme and the political pressure exerted upon the national political institutions had eased.⁹⁴ Second, the initial scope of review was limited by the type of workers affected by the specific cuts reviewed in Associação Sindicial dos Juízes Portugueses, where the protection offered by the CJEU was narrowed to judges. By framing the case as a rule of law crisis review – and not a Eurocrisis review – the Court narrowed its accountability-rendering stage to national judges, as special public workers, subject to a certain employment relationship which renders them a specific role in the adjudication of EU law conflicts. Third, the Court was also limited in its parameter of control. The cuts were measured against Article 19(1), subparagraph two TEU to determine if the salary-reduction measures affected the principle of judicial independence. No other constitutional goods, namely the proportionality of the reductions, social rights, or solidarity,⁹⁵ were taken into account by the Court. Fourth, in BPC Lux 2, a case concerning the protection of rights and interests of investors and creditors of resolved institutions, and the stability of the financial system, there was no hesitancy from the Court to accept jurisdiction, which confirms the Court’s more favourable orientation towards liberal rights to the detriment of social rights.

The Court thus failed to ensure full judicial protection to austerity measures concerning salary-reductions adopted in the context of a financial assistance programme to a euro area Member State as well as in the more general framework of an excessive deficit procedure. The Portuguese bailout is exemplary of the protection offered by European law against austerity measures. Individuals and companies can be sheltered in their role as investors and judges but not as workers and pensioners.

Domestic constitutional adjudication provided the only effective avenue for full substantive accountability of MoU options: national judicial fora can provide a supplement to the missing but needed accountability in substance of the EMU institutional structure.⁹⁶ Domestic constitutional courts provided adequate fora to challenge national measures implementing the MoU in what has been called the paradox of judicialization, in contrast to the deferential posture adopted by the US courts in economic issues.⁹⁷

However, since the PCC failed to scrutinize the MoU, several hurdles related to the process were not reviewed, namely aspects related to the procedure leading to the approval of the bailout – which was conducted outside the parliament and by a resigning government, the fact that it was not officially translated into Portuguese and the difficulties in accessing the updated version following each revision. These aspects, which raise serious rule of law concerns, were not reviewed and there is a full absence of procedural accountability with regard to the Portuguese programme.

Furthermore, EU institutions were not held accountable by the constitutional case law: as the conflicts were fully nationalized, the ‘account-giver’ was limited to the domestic institutions who were reduced to a role with limited negotiating power with the creditors which raises doubts as to the likelihood of the accountability provided through domestic judicial review in the case of borrower countries. That was not the case of the Bundesverfassungsgericht which, in its PSPP⁹⁸ ruling, was able to hold accountable not only the domestic institutions (the Bundestag and the Federal Government) but also the CJEU and the European Central Bank (ECB). The German Court, however, in its Eurocrisis case law, has always assumed the transnational dimension of the conflicts under adjudication. That fact enabled it to resort to the preliminary review mechanism when it deemed appropriate – in fact, for the first time⁹⁹ after a long history of indirect judicial dialogue between the two jurisdictions. Later, when the CJEU failed to properly hold the ECB accountable for its quantitative easing policy,¹⁰⁰ the German Federal Constitutional Court was able to scrutinize both institutions. To do so, it activated the ultra vires review, a tool that the court had been developing since its seminal Maastricht decision.¹⁰¹ Instead of the procedural and deferential scrutiny applied by the CJEU to the ECB’s statement of reasons, the German Court asked for a substantive review of the PSPP programme to be able to effectively check whether the ECB’s actions were contained within its mandate.¹⁰²

However, taking an austerity case to Luxembourg might prove a risky strategy for the Portuguese Court. At that time, the Court had not developed yet a doctrinal framework to frame the relationship between national constitutional law and EU law, particularly in cases of conflict. Whereas its German counterpart had been building a solid dogmatic frame since the Solange cases, and later, in relation to the link between the democratic principle and European integration, since the Maastricht ruling, and had at its disposal a tripartite framework to handle the relationship between the two legal orders, the Portuguese Court only in 2020 expressly dealt with the issue of primacy of EU law over national law, including constitutional law, and still in the exclusive frame of fundamental rights’ issues. In some of its austerity rulings, the Court vaguely alluded to the concept of ‘constitutional identity’, but, to this day, ultra vires review has never been addressed nor articulated in the case law, and it is doubtful that the judges accept it as a valid tool to check power grabs by EU institutions. Ultra vires review, as enforced by the Bundesverfassungsgericht, implies a substantive reading of the democratic principle that makes it one of the central normative tenets of the constitutional order, but it is not replicated in the constitutional case law of other Member States.

The nationalization of the conflict by the Constitutional Court also explains why the case law was unable to substantively contest the overarching choices of the financial assistance programme implementing a regressive economic policy: not only was accountability delivered through piecemeal litigation, but there were also structural limits with regards to the effects that judicial decisions can produce at the level of economic policies, particularly in the case of Portugal, where the Constitutional Court is not equipped with decisional remedies able to address systemic and structural failures.¹⁰³

The lessons provided by the Eurocrisis show that domestic constitutional law can provide an avenue for legal accountability of financial assistance. A future financial assistance programme would be granted in the framework of the ESM, which still has not been brought into the fabric of EU law.¹⁰⁴ Given its intergovernmental nature, review of conditionality would not be problematic to the PCC, as it acknowledged in relation to the nature of the Fiscal Stability Treaty.¹⁰⁵ Conditionality has, in the meantime, expanded its influence on other policy areas such as EU funds.¹⁰⁶

Moreover, the Constitutional Court has been incrementally developing a doctrinal toolbox to address the relationship between domestic constitutional and EU law.¹⁰⁷ Although the PCC has expressly outlined the constitutional principle of friendliness towards EU integration, it has reserved the right to have the last word on the constitutional limits of the applicability of Union law on the Portuguese legal order. Should the EU standard of protection of fundamental rights fail to provide equivalent protection, in systemic terms, to the one delivered by the national Constitution, the Court may agree to review EU law or to strike down domestic legislation within the scope of EU law. Given the dominant perception of the EU judges that economic emergency and financial stability justifies the abridgement of social and economic rights, and a potential new crisis in the euro area, new lines of tension will possibly emerge in the future.

12 Human Rights Accountability in European Financial Assistance

Anastasia Poulou

12.1 Introduction

Affected by the European financial crisis that erupted in 2008, several EU Member States were dependent on financial assistance beyond the financial markets. In order to have access to financial assistance, EU Member States had to adopt structural adjustment programmes aiming inter alia at the reduction of public expenditures. As a consequence, a number of social security benefits were reduced and a great number of structural reforms were introduced, since expenditures on social security benefits and public healthcare were considered to have a strong impact on the public budget’s macroeconomic balances.¹ Despite their differences, common feature of all financial assistance schemes was the combination of supranational and international legal instruments and institutions. Newly created financial assistance mechanisms, such as the European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM), were created under international law and all financial assistance packages included the participation of the International Monetary Fund (IMF). This hybrid nature of European financial assistance raises the question of whether the actors involved in the award of the assistance are bound by EU human rights.

Against this background, this chapter first exposes the doubtful legitimacy of European financial assistance. Second, it analyses the Court of Justice (CJEU) case law on financial assistance conditionality from a human rights perspective, aiming to respond to the question of whether European actors were and could be bound by human rights when preparing financial assistance conditions. Third, it investigates the possibility of conceiving a legitimate role for courts in applying the procedural and substantive dimension of human rights accountability in times of crisis.

12.2 The (Non) Delivery of Accountability Goods in the Making of European Financial Assistance Conditionality

During the Eurozone crisis, the constitutional balance between the different institutions had been significantly altered in a way that the delivery of the normative goods of accountability was severely hindered. Financial assistance conditionality resulted in intrusive social governance, left at the discretion of executives, and insulated from public debate and parliamentary scrutiny. The phenomenon of executive dominance side-lining the institutions of representative democracy, observed in times of crisis, was highly repeated in the Eurozone crisis experience. Decision-making was concentrated in supranational (Commission) and national (Eurogroup) executives at the European level, accompanied by the input of expert bodies (European Central Bank (ECB) and IMF). The big shift towards executive politics was reflected by the simultaneous decrease in power of both the European Parliament (EP) and national parliaments, which traditionally serve as checks on executive power.²

All phases of the adjustment programme-drafting were indeed lacking in transparency and democratic oversight. From the preparatory phase of negotiations, to the development of mandates and the formulation of specific measures the European Parliament was until 2013 completely marginalised.³ On the national level, it is doubtful whether formal documents were clearly communicated to and deliberated in due time by the respective domestic parliaments.⁴ Negotiations were held behind closed doors, without the presence of social partners, a deficiency explicitly criticised by the International Labour Organization (ILO).⁵ In fact, the absence of prior consultation with trade union organisations has been officially admitted by the Greek government and has been ascribed to the complexity of economic and political issues and the conditions under which the European support mechanism for Greece has been formulated.⁶ The adoption of Regulation 472/2013 did not bring adequate change in this regard, since the rights to information and discussion awarded to the EP and the domestic parliaments do not amount to rights to participation in the decision-making process. As a result during the adjustment programme-drafting, both the EP and national parliaments were neither able to serve the good of openness, through transparent and contestable public actions, nor the good of publicness, which would encompass the consideration of different societal interests and perspectives.

The loss of democratic oversight was not only depicted in the rudimentary role of the EP and national parliaments but also in the increasing tendency towards informal governance.⁷ The outcome of staff-level meetings was often decided beforehand in bilateral meetings of the most important players. Even more strikingly, national authorities seem to have received the implementation guidelines on conditions included in the Memoranda of Understanding (MoU) through simple email exchange with the Troika. Such opaqueness and informality levels exclude the transparency and consultation necessary for the genuine involvement of citizens and social partners in EU decision-making to take place. Therefore, the EP has repeatedly called for transparency in the MoU negotiations.⁸ Overall, this rise of informal governance seriously affected the ability of democratic institutions to ensure the delivery of the accountability goods of openness and non-arbitrariness, since they could not apply due process guarantees in the making of financial assistance conditionality.

In sum, the institutional framework for awarding financial assistance shows profound structural shortcomings in terms of both procedural and substantive accountability. By the expansion of democratically questionable supranational decision-making, social interests were extremely marginalised and certain views, such as those of social partners, profoundly underrepresented.

12.3 Human Rights Accountability as Institutionalised through Courts

Respect of human rights by decision-makers is an important factor for the delivery of accountability goods. More precisely, the accountability good of non-arbitrariness can be procedurally delivered through the adoption of procedures to ‘mainstream’ rights-based limitations in policy-making, that is, through impact assessments, by which officials may demonstrate that human rights have been taken into account. Substantively, human rights serve the good of non-arbitrariness, by ensuring that an adopted policy does not discriminate against a given group in society or does not infringe on the rights of individuals. Moreover, human rights endorse the delivery of the accountability good of publicness, by orientating the conduct of decision-makers towards the pursuit of a common, legitimate aim.

One of the main accountability forums able to examine decision-makers’ conduct in line with the accountability goods of non-arbitrariness and publicness are courts through human rights review. First, courts are able to verify whether a rights-based impact assessment was conducted. Furthermore, through human rights review courts can make sure that a policy adopted does not result in the violation of rights of individuals. Lastly, through their proportionality review, courts ask decision-makers to demonstrate that their policies restrict rights only in pursuit of a legitimate aim and in absence of less restrictive measures.

Against this background, how did courts act as ‘accountability-rendering actors’ in the context of the Economic and Monetary Union (EMU)? In fact, the far-reaching reforms in fields such as social security and healthcare were in many cases experienced as violations of human rights by the respective right-holders, who sought for legal protection before national and international courts. As a result, many national constitutional courts but also the Court of Justice of the EU issued a series of rulings on the conformity of the reforms initiated during the Eurozone crisis with human rights. Hence, which was the CJEU’s actual response though to the alleged human rights violations?

The Medium-Term Financial Assistance (MTFA) Facility and the European Financial Stabilisation Mechanism (EFSM) are clearly EU financial assistance mechanisms: they were established through EU Regulations on the basis of the EU Treaties and have an institutional underpinning, which entrusts major tasks to EU institutions.⁹ Financial assistance conditionality is laid down in two types of legal documents: on the one hand, in an MoU, and on the other hand, in Decisions of the Council of the EU. The MoU is signed by the recipient state and the European Commission. As EU institutions acting under EU law, the Commission, the ECB, and the Council of the EU should be undisputedly bound by EU fundamental rights when negotiating, drafting, and monitoring financial assistance conditionality. The question of the application of EU fundamental rights is only partly complicated when it comes to MoUs containing financial assistance conditions. This is because the character of the MoUs as binding legal agreements is disputed. If the MoUs are not binding legal documents, how could they be measured against human rights standards?

The legal status and effects of MoUs in the context of the MTFA (article 143 TFEU) were addressed by the CJEU in Florescu,¹⁰ a case that originated in the context of the first financial assistance programme to Romania, following Council Decision 2009/458/EC.¹¹ The core terms of the Romanian bailout were laid out in Council Decision 2009/459/EC¹² and subsequently elaborated in the MoU concluded between the European Union, represented by the Commission, and Romania.¹³ The applicants in the main proceedings were judges who also held teaching positions at the university, as the law permitted at that time. The contested measure at issue in the main proceedings prohibited the combining of the net pension with income from activities carried out in public institutions if the amount of the pension exceeded a certain threshold, fixed at the amount of the national gross average salary. The persons affected sought to argue that article 17 of the Charter (right to property) should be interpreted as precluding national legislation, such as that at issue in the main proceedings, which prohibited the combining of a net public-sector retirement pension with income from activities carried out in public institutions if the amount of the pension exceeded a certain threshold.

In Florescu the CJEU ruled that the MoU ‘gives concrete form to an agreement between the EU and a Member State on an economic programme, negotiated by those parties, whereby that Member State undertakes to comply with predefined economic objectives in order to be able, subject to fulfilling that agreement, to benefit from financial assistance from the EU’.¹⁴ The Court held that the legal bases of the MoU lay in article 143 of the TFEU and Regulation 332/3002 and that it was concluded, in particular, by the European Union, represented by the Commission. Hence, the CJEU reached the conclusion that the MoU ‘constitutes an act of an EU institution within the meaning of 267(b) TFEU’ and may thus ‘be subject to interpretation by the Court’ through a preliminary ruling.¹⁵ Furthermore, the Court added that the objectives set out in article 3(5) of Decision 2009/459, as well as those set out in the MoU, were sufficiently detailed and precise to permit the inference that the purpose of the prohibition on combining a public-sector retirement pension with income from activities carried out in public institutions, stemming from Law No 329/2009, was to implement both the MoU and that Decision and, thus, EU law, within the meaning of article 51(1) of the Charter; therefore, the Charter was applicable to the dispute in the main proceedings.¹⁶

Building on the outcome of Florescu, one can reach the conclusion that the MoUs concluded within the EU legal order, meaning in the MTFA and EFSM framework, are to be qualified as Union acts within the meaning of article 267(1)(b) of the TFEU and, thus, are amenable to a request for interpretation under article 267.¹⁷ Moreover, the EU institutions involved in the making and conclusion of those MoUs are unavoidably bound to respect human rights, since the Charter definitely applies to EU institutions undertaking Union acts.

More difficult though is the question of whether the Charter applies in the EFSF and ESM framework. How did the CJEU respond to the question of whether the Charter is applicable in the context of European financial assistance or whether the EU institutions involved are freed from the obligation to respect the fundamental rights of the Union? The respective case law of the CJEU has to be presented separately, since it relates to different EU institutions and bodies involved in the complicated framework of European financial assistance.

12.3.1 The Applicability of the Charter to the Eurogroup

In the context of European assistance, the Eurogroup is usually entrusted with general guidelines with regard to economic policy and not with the formulation of detailed financial assistance conditions. During the eurozone crisis, it determined the strategic choices of the economic adjustment programmes, such as the voluntary debt haircut in the case of Greece.¹⁸ With regard to specific conditionalities though, it relied on the recommendations of the Troika. A notable exception to this rule was the case of Cyprus, in which the restructuring of the Cypriot banking sector was first decided by the Eurogroup before the Troika reached an agreement with domestic authorities.¹⁹ The Cypriot rescue package is of particular interest, since it marks the first time that bank depositors were targeted as part of a European bailout deal. In exchange for the loans received by the ESM and the IMF, Cyprus had inter alia to wind up its second-largest bank, the Cyprus Popular Bank (also known as Laiki Bank), and to recapitalise its biggest bank, the Bank of Cyprus, at the expense of shareholders, bondholders, and depositors. In the winding up of the Cyprus Popular Bank, uninsured deposits exceeding the amount of €100,000 were completely liquidated. In the recapitalisation of the Bank of Cyprus, the depositors lost 47.5 per cent of their uninsured deposits.²⁰

Given their substantial financial losses – the result of the extensive write-off of their bank deposits – uninsured depositors sought judicial protection before the courts of the EU, challenging the validity of the Eurogroup statement outlining the conditions of the bailout. Nevertheless, all their actions for annulment have been unsuccessful.²¹ In fact, in the CJEU case Mallis and Others v Commission and ECB, the Court confirmed the orders of the General Court holding that the Eurogroup, which is an informal forum for discussion between ministers of the Member States whose currency is the euro, cannot be classified as a body, office, or agency of the EU within the meaning of article 263 of the TFEU.²² Thus, a statement by it cannot be regarded as a measure intended to produce legal effects with respect to third parties, and can, therefore, not be annulled on the basis of article 263 of the TFEU.²³ Moreover, in Mallis the CJEU rejected the argument that the Eurogroup is under the factual control of the Commission and the ECB, when it comes to meetings related to the ESM, and thus held that Eurogroup statements containing financial assistance conditions cannot be imputed to the EU institutions.²⁴

In Council v K. Chrysostomides & Co. and Others, the CJEU went even further, stating that the Eurogroup is not an institution within the meaning of article 340 par. 2 TFEU, such that its actions cannot trigger the non-contractual liability of the Union.²⁵ This is because, according to the Court, the Eurogroup was created as an intergovernmental body, outside the institutional framework of the EU, a fact that was not slightly altered by the formalisation of the existence of the Eurogroup and the participation of the Commission and the ECB at its meetings through article 137 TFEU and Protocol No 14.²⁶

Nevertheless, in view of the serious interference with the fundamental rights of individuals, which might remain without legal remedy as is illustrated by the Cypriot case, the question arises whether the Court could have decided differently, stating the Eurogroup is bound by the Charter when formulating financial assistance conditionality. The scope of the Charter is determined by article 51(1) of the EUCFR, which reads: ‘The provisions of this Charter are addressed to the institutions, bodies, offices and agencies of the Union with due regard for the principle of subsidiarity.’ Not being one of the seven EU institutions listed in article 13(1) of the TEU, the Eurogroup may be bound by the Charter only if it could be regarded as a body, office, or agency of the or as a configuration of the Council of the EU. As pointed out in the explanation accompanying article 51 of the EUCFR, the expression ‘bodies, offices and agencies’ is commonly used in the Treaties to refer to all the authorities set up by the Treaties or by secondary legislation.²⁷ The Eurogroup is explicitly mentioned in article 137 of the TFEU, which, with respect to its composition and the Union arrangements for its meetings, refers to Protocol No 14 annexed to the TFEU. This Protocol provides that the Eurogroup consists of the finance ministers of the euro area Member States, who ‘shall meet informally … to discuss questions related to the specific responsibilities they share with regard to the single currency’. As the Court has held, this provision presents the Eurogroup as ‘a forum for discussion, at ministerial level, between representatives the Member States whose currency is the euro’, and not as a ‘decision-making body’.²⁸

Furthermore, the Eurogroup is not among the different configurations of the Council of the EU provided by article 16(6) of the TEU and enumerated in Annex I to the Rules of Procedure of the Council.²⁹ Besides not being classified as such by the TFEU, the classification of the Eurogroup as a configuration of the Council would not be in line with the different functions that each of them performs. As Advocate General Wathelet observed in his Opinion on Mallis, while the Eurogroup is an informal forum for discussion between euro area Member States on questions specifically related to the single currency, the Council’s functions pursuant to article 16(1) of the TEU are far broader and include the exercise, in conjunction with the Parliament, of legislative power within the EU and the other decision-making powers conferred on the Council alone by the TFEU.³⁰

Since it can neither be equated with a configuration of the Council nor classified as a formal decision-making body, office, or agency of the EU,³¹ the Eurogroup does not fall under the scope of the Charter as defined in article 51(1) of the EUCFR. In view of the fact that, despite its informal nature, the Eurogroup very often predetermines and shapes crucial decisions in the framework of financial assistance, the conclusion that its acts cannot be assessed against the Charter is very problematic for the delivery of accountability goods. First and foremost, decisions taken under such an informal setting undermine the accountability good of openness, by depriving citizens of official information and transparent decision-making procedures. Furthermore, being left outside the scope of judicial review decisions of the Eurogroup can neither be assessed as to their non-arbitrariness nor as to their pursuit of common goals. As a result, the lack of human rights review with regard to decisions taken by the Eurogroup puts also the accountability goods of non-arbitrariness and publicness into peril.

12.3.2 The Applicability of the Charter to the Commission and the ECB

The next question relates to the case law of the CJEU with regard to the applicability of the Charter to the Commission and ECB, which as members of the Troika, had an important say in formulating and monitoring financial assistance conditionality.³² Since Troika is a cooperation body and hence a subject that cannot be as such held accountable under international or EU law,³³ its actions have to be regarded as joint measures of EU institutions and subjects of international law (Commission, ECB, and IMF), whose commitment to human rights must be assessed separately.

The CJEU was confronted with the applicability of the Charter to the Commission and the ECB (when they negotiate and conclude the MoU) in 2016, in the seminal case Ledra Advertising.³⁴ On appeals against decisions of the General Court, which had dismissed as inadmissible actions for annulment and compensation raised after the restructuring of Cypriot banks, the CJEU clearly spelt out the obligation of EU institutions to respect human rights when formulating financial assistance conditionality. Filling the gap left on this issue in Pringle, the CJEU followed the Opinion of Advocate General Kokott,³⁵ explicitly stating that the Charter binds EU institutions in all circumstances, even when they act outside the EU legal framework.³⁶ In this vein, the Court clearly underlined that, in the context of the adoption of an MoU, the Commission is bound under both article 17(1) of the TEU – which confers upon it the general task of overseeing the application of EU law – and article 12(3) and (4) of the ESM Treaty – which requires it to ensure that the MoUs by the ESM are consistent with EU law – to ensure that such an MoU is consistent with the fundamental rights guaranteed by the Charter.³⁷

Although article 51(1) of the EUCFR should have been mentioned, together with article 17(1) of the TEU and article 13(3) of the ESM Treaty, among the provisions that oblige the EU institutions to ensure that the MoUs are consistent with EU fundamental rights, the clear reference to the pertinence of the Charter to actions of EU institutions in the making of financial assistance conditionality constitutes a milestone for the protection of human rights in the context of post-crisis European financial assistance. Ledra Advertising leaves no doubt that – even if in the EFSF and ESM framework the Commission and the ECB act under powers conferred on them by intergovernmental agreements – their commitment to the Charter does not cease to exist.

Nevertheless, when deciding on the substance of the case, the CJEU ruled against the plaintiffs. More precisely, the Court concluded that the bail-in implemented in the Cypriot banking sector did not constitute a disproportionate and intolerable interference with the substance of the appellants’ right to property, given the imminent risk of financial losses to which depositors with the two banks concerned would have been exposed, if the latter had failed. Having found no unlawful conduct on behalf of the Commission, when permitting the adoption of the bail-in, the Court dismissed the appellants’ claims for compensation (articles 268 and 340 TFEU) as lacking any foundation in law.

12.3.3 The Applicability of the Charter to the Council of the EU

The Council of the EU approves financial assistance conditionality in the form of Council Decisions.³⁸ The CJEU was confronted early on with the assessment of Decisions of the Council containing financial assistance conditionality after actions for annulment launched under article 263 of the TFEU. More precisely, the legality of Decision 2010/320/EU was questioned, on the one hand, due to the reduction of Easter, holiday and Christmas bonuses³⁹ and, on the other hand, due to the increase in the retirement age and the reduction of the pensions of civil servants.⁴⁰ Council Decision 2011/57/EU was challenged on the basis of its provision improving the management of public assets,⁴¹ introducing means-testing of family allowances⁴² and limiting recruitment in the whole general government to a ratio of a maximum of one recruitment every five retirements or dismissals, without sectoral exceptions.⁴³

In order for the actions for annulment to be admissible, the applicants had to prove that the regulatory acts were of direct and individual concern to them pursuant to article 263(4) of the TFEU. The Court held that the challenged provisions were indeterminate and left a margin to the Greek State as to the way they were implemented, and thus could not directly affect the applicants.⁴⁴ It is only the content of the national implementing measures, which determine to what extent the applicants will suffer reductions, that might directly affect their legal situation. As a result, both actions were rejected as inadmissible.

As far as some of the contested measures are concerned, the arguments of the General Court are persuasive. Indeed, some of the provisions, such as the provision that provided for ‘better management of public assets, with the aim of raising at least EUR 7 billion during the period 2011–2013’⁴⁵ and the provision on means-testing of family allowances, which stipulated ‘means-testing of family allowances from January 2011 on yielding savings of at least EUR 150 million (net of the respective administrative costs)’,⁴⁶ were vague and left it to the discretion of national authorities to specify the details of their implementation. As a result, the General Court convincingly held that those provisions were not of direct concern to the applicants within the meaning of article 263 para 4 TFEU.

In contrast, less convincing is the outcome in relation to other contested measures. The ‘reduction of the Easter, summer and Christmas bonuses and allowances paid to civil servants with the aim of saving EUR 1,500 million for a full year (EUR 1,100 million in 2010)’⁴⁷ and the provision on ‘an act that limits recruitment in the whole general government to a ratio of not more than one recruitment for five retirements or dismissals, without sectoral exceptions, and including staff transferred from public enterprises under restructuring to government entities’⁴⁸ are detailed provisions, which specified the way in which they were to be implemented by the Member State concerned. Hence, in this case, the requirement of direct and individual concern of the applicants within the meaning of article 263 para 4 TFEU should have been regarded as met.

In view of the above, it is obvious that CJEU denied the applicants’ legal standing, approaching the cases on cuts in wages, pensions, and social benefits only in a procedural manner without proceeding to the assessment of their compatibility to human rights. Nevertheless and regardless of the procedural question of whether the Decisions are of direct and individual concern to individuals, pursuant to article 263(4) of the TFEU, the Council of the EU is undoubtedly included among the EU institutions which are bound by the Charter according to article 51(1) of the EUCFR read together with article 13 of the TEU. In addition, the Decisions of the Council fall under the types of secondary legislation listed in article 288(4) of the TFEU. Thus, the Decisions of the Council adopted under the framework of European financial assistance are unilateral, legally binding acts of an EU institution and as such fall under the scope of the Charter. The fact that their content arguably reflects a negotiated agreement between different actors does not impact on their legal nature as acts of secondary EU law within the meaning of article 288 of the TFEU.⁴⁹ Against this background, it is very unfortunate to realise that individuals concerned may experience procedural hurdles when launching an action for annulment against a decision entailing lending conditions, when at the same time these decisions must be in conformity with the Charter.

Nevertheless, when, later on, the CJEU decided on the substance of financial conditions laid down in Council decisions, it held that restrictions on human rights were justified. Indeed, in case Sotiropoulou and Others v Council⁵⁰ the General Court dealt with an action for compensation under article 268 TFEU in respect of the loss and harm, which the applicants had allegedly sustained, as a result of the reduction of their main pensions due to the adoption of a series of Council decisions under articles 126 (9) and 136 TFEU on pension reform in Greece.⁵¹ In support of their action, the applicants relied on two pleas in law. First, the applicants claimed that, in adopting the contested decisions, which concern inter alia the laying down of detailed measures in the social security and pension system, the Council exceeded the powers conferred by the Treaty and infringed the principles of conferral and subsidiarity as laid down in articles 4 and 5 TEU in conjunction with articles 2 to 6 TFEU. Second, the applicants contended that the contested decisions of the Council required the introduction of drastic pension cuts that fundamentally disturbed the applicants’ financial situation and resulted in the reversal of situations which they had sought in good faith. As a result, the applicants claimed that the enactment and implementation of the reductions at issue resulted in direct infringement of their right to human dignity, their right as elderly persons to lead a life of dignity and independence, and their right to social security benefits and social services providing protection in cases such as old age, laid down in articles 1, 25 and 34 CFREU, respectively.

As to the first plea in law, the General Court held that the principles of conferral and subsidiarity concern the division of responsibilities between Member States and the EU and cannot be regarded as conferred rights on individuals. Consequently, any breach of these principles is not in itself sufficient to establish the non-contractual liability of the Union.⁵² In any case, the contested decisions do not infringe the principles of conferral and subsidiarity, as they were issued with a view to reinforcing and deepening the fiscal surveillance and giving notice to Greece to take measures for the deficit reduction judged necessary to remedy the situation of excessive deficit. As a result, the General Court held that the contested decisions were adopted in the context of the exercise of powers expressly conferred on the Council by article 126 (9) and article 136 TFEU.⁵³

By their second plea in law, the applicants claimed that the sum of the pension cuts appears excessive and disproportionate and does not strike a fair balance between the requirements of the general interest and the protection of their fundamental rights enshrined in articles 1, 25, and 34 CFREU, namely the right to human dignity, the rights of the elderly and the entitlements to social security benefits and social services respectively. As to this complaint, the General Court held that, to the extent that the allegedly violated provisions of the Charter constitute rules of law intended to confer rights on individuals, it must be considered whether any breach of them could substantiate the Union’s liability in this case.⁵⁴ Furthermore, the Court stated that, according to settled case law, when assessing the non-contractual liability of the Union, the Court has to take into account, inter alia, the complexity of the situations to be regulated, the difficulties in the application or interpretation of the legislation and, more particularly, the margin of discretion available to the author of the act in question⁵⁵ More precisely, the decisive criterion for establishing a sufficiently serious breach of a rule of law intended to confer rights on individuals is whether there has been a manifest and grave disregard by the institution concerned of the limits of its discretion.⁵⁶ In the case at stake, the contested decisions constitute an exercise of the powers conferred on the Council by articles 126 (9) and 136 TFEU in the context of the excessive deficit procedure of an Eurozone Member State. This competence mainly involves economic policy choices for which it is justified to provide a wide margin of discretion. Hence, those provisions specify only the type of measures to be taken, which may be included in the recommendations from the Council to a Member State for the attainment of a specific objective.⁵⁷ Against this background, the General Court stated that it was necessary to assess whether the Council adopted the decisions at stake in a manifest and serious breach of the limits of its discretion.⁵⁸ As reminded by the Court, the contested decisions were issued following the conclusion of the Council that an excessive deficit exists in Greece⁵⁹ and the budgetary measures included had been extensively discussed with the Greek government and commonly agreed by the European Commission, the ECB and the IMF.⁶⁰ In light of the above, the General Court held that it was not manifestly unreasonable to envisage various cost-saving measures, including pension cuts. Therefore, in adopting the contested decisions, the Council did not exceed the limits of its wide discretion.⁶¹

Moreover, the Court underlined that even if the contested decisions were in fact capable of causing the alleged damage to the applicants, the rights to access social security benefits and social services are not absolute, since their exercise may be subject to restrictions justified by objectives of general interest pursued by the Union, as provided for in article 52 (1) CFREU.⁶² In this vein, measures to reduce the size of pensions meet objectives of general interest, namely the ensuring of fiscal consolidation, the reduction of public expenditure, and the support of the pension system of the Member State concerned.⁶³ Consequently, the General Court held that these measures also met objectives of general interest pursued by the Union, namely the ensuring of budgetary discipline of Member States whose currency is the euro and the ensuring of the financial stability of the euro area.⁶⁴ In view of those objectives and the imminent risk of insolvency of the Member State concerned, the General Court came to the conclusion that the contested measures, which were specified in Greek national laws,⁶⁵ cannot be regarded as unjustified restrictions of the rights claimed by the applicants, since they do not constitute a disproportionate and intolerable interference impairing the very substance of these rights.⁶⁶ In light of the above considerations, the General Court held that the applicants did not establish that the Council had committed a serious breach of a rule of law which confers rights on individuals. Hence, in absence of one of the cumulative conditions for establishing the non-contractual liability of the Union provided for in article 340 para 2 TFEU, the action was dismissed in its entirety.⁶⁷

12.3.4 The CJEU as an ‘Accountability-Rendering Actor’?

The overview of the supranational jurisprudence shows that the CJEU held a hesitant stance towards the protection of human rights during the Eurozone crisis. First, the CJEU declined to take up the merits of cases that questioned the compatibility of crisis-driven measures with Charter-guaranteed human rights, thus shying away from the task of delivering accountability goods. More precisely, leaving conditionality measures outside the scope of human rights review, came to a detriment of the accountability good of non-arbitrariness, since decision-makers were left free to not take into account right-based limitations in their policy-making. Furthermore, the accountability good of publicness was left without protection, since the court did not review whether consultation existed in the making of the measures or if the policies were in line with the principle of proportionality.

Second, even during the second phase of crisis-driven case law when the CJEU finally addressed the substantive questions put to it, it did not rule in favour of the plaintiffs. The CJEU weighed their claims against the perceived need for budgetary discipline by Eurozone Member States, the precarious financial stability of the euro area and the imminent risk of insolvency of the Member State concerned, concluding that the contested measures did not comprise unjustified restrictions on human rights. As a result, the CJEU guaranteed a very low level of protection of the accountability goods of non-arbitrariness and publicness, since the protection of human rights was put under a very weak judicial review. Altogether, these decisions mean that the CJEU will not be remembered for its defence of accountability goods during the European financial crisis but rather for the judicial self-restraint that it exercised in the field.

12.4 The Call for a Combination of a Procedural and Substantive Understanding of Human Rights Accountability

The stance of the Court during the crisis reflects the general concerns about courts competing with other decision-making institutions for the ultimate say on polycentric political issues. Judges, the argument goes, are ill-suited to make decisions in matters with complex budgetary and political⁶⁸ Furthermore, courts are warned against interfering with collective policy decisions made by political fora such as parliaments, whose democratic accountability makes them better equipped to aggregate, mediate, and balance the affected interests.

The general rule of task-distribution between constitutional institutions, courts, and parliaments, applies, however, in times of proper functioning of democracy. During the current Eurozone crisis though, the constitutional balance between the different institutions had been significantly altered. As noted above, financial assistance conditionality resulted in intrusive social governance, left at the discretion of executives, and insulated from public debate and parliamentary scrutiny. Traditional fora of deliberation, such as parliaments, where social policies could be defended, were substantially weakened. In this context, the basic premise of democratic legitimacy, that binding collective decisions should result from procedures that allow for the effective and equal participation of the largest possible number of the actors affected, is frustrated.⁶⁹

Under these circumstances, applying the general rule that courts should not interfere with complex choices of political bodies regarding financial assistance, would mean that the exclusion of subjects affected and the eventual violation of their human rights, would be left without any effective remedy. In a situation where the conduits of democratic participation are blocked or ineffective, courts should thus actively undertake the task to institutionalise both procedural and substantive accountability of the decision-makers.

In order to serve accountability and more precisely the good of publicness in a procedural manner, courts should review the procedural conditions under which decisions were taken, that originate from financial assistance conditionality and drastically interfere with human rights. That is, whether these decisions emerged from deliberative and inclusive procedures, which included the views of those affected.⁷⁰ Courts should particularly ask decision-makers to elaborate on how decisions were made, which social actors were consulted, and to what extent affected individuals could be heard. This role of courts should not be understood as simply a scrutiny of procedural conditions of bare majoritarianism. Through this scrutiny, courts ensure that rights of minorities and politically marginalised groups, such as the young generation, are not violated by majoritarian decision-making.

The relevance for the legal assessment of the participation or not of the affected actors is reflected in Regulation 472/2013,⁷¹ which explicitly requires the involvement of social partners and relevant civil society organisations in the preparation of the adjustment programmes, with a view to contributing to building consensus over its content.⁷² Moreover, in its decisions concerning pension schemes in Greece mentioned, the European Committee of Social Rights (ECSR) included the democratically questionable procedures to a factor that contributed to the violation of the Social Charter, noting that the Greek government has not discussed the pension reforms with the organisations concerned, despite the fact that they represent the interests of many of the groups most affected by the measures at issue. Thus, the ECSR ruled that, even though the controversial restrictions would under certain conditions not breach the Charter, ‘due to the cumulative effect of the restrictive measures and the procedures adopted to put them into place’, they do amount to a violation of the right to social security (article 12 para. 3 ESC).⁷³

With regard to the institutionalisation of accountability in a substantive manner, courts should proceed to an ad hoc basis assessment of the conformity of a specific measure with the human rights affected. Nevertheless, some prominent examples illustrate the substantive red lines that could be drawn by the judiciary. For example, in Greece, a series of financial assistance conditions were especially addressed to the labour rights of the young generation, introducing differentiated treatment on the ground of age. In both the first and the second economic adjustment programmes, the Greek government assumed the responsibility to introduce sub-minima wages for groups at risk such as young people.⁷⁴ Minimum wages established by the national general collective agreement had to be reduced by 22 per cent, for youth though – namely for ages below twenty-five – wages had to be reduced by 32 per cent.⁷⁵ This differentiated treatment of young workers obviously touches upon the right to fair and just working conditions (article 31 CFREU) on the protection of young people at work (article 32 CFREU) and the rule of non-discrimination (article 21 CFREU).⁷⁶ Indicative is also the fact that the European Committee of Social Rights (ESCR) ruled in its decision 66/2011 that the differentiated reduction of the minimum wage of people under 25 constitutes a violation of article 4§1 (right to a fair remuneration) of the European Social Charter (ESC) read together with the non-discrimination clause of the Preamble to the ESC, which corresponds to articles 31 and 21 CFR. In that case, the ESCR found disproportionate discrimination against young employees, whose minimum wage was reduced below the poverty level.⁷⁷

Moreover, drawing on the understanding of legitimacy and democracy in EU law, this chapter suggests that a democratically legitimate role of courts can be conceived, if a link between the procedural and the substantive dimension of human rights accountability is established. The basic principle is that, in order for courts’ judgement in disputed financial assistance cases to be legitimised, judges should assess the observance of the procedural dimension of human rights and, depending on the outcome, calibrate the standard of review on the basis of the substantive dimension of the respective rights accordingly. More precisely, starting from the premise that the political process is, in principle, better suited for the formulation of social policies, courts should first focus on the decision-making process rather than on the content of a contested policy choice. In this vein, judges should review whether the contested measure, which allegedly represents a majority decision, has indeed been the result of a participatory and deliberative decision-making process or whether the affected individuals were excluded from the relevant procedure.

12.5 Conclusion

The overview of the supranational jurisprudence shows that the general pattern during the Eurozone crisis was that the CJEU shied away from the difficult task to overrule conditionality-driven decisions over complex social policy issues and, thus, to ensure accountability goods. In the majority of cases, the courts deferred to the legislator leaving the final say on choices regarding social policy and resource allocation to them. The application of this general rule of task-distribution between courts and parliaments relies on the assumption that the non-neutral choices of political bodies were made after the consultation and participation of all affected individuals and vulnerable groups.

Nevertheless, it is only through taking both process and substance seriously that human rights accountability can effectively be applied and at the same time ensure a democratic role for courts. Courts should review the observance of substantive guarantees of human rights in connection with compliance with the procedural conditions inherent in a democratic legislative process. In this way, decisions on substantive political and social issues would in principle remain at the disposal of the respective political institution, which would bear the weight of defending them before the judiciary. The court would be reviewing complex policy choices, with the aim to protect human rights and ensure the delivery of accountability goods.

13 Constitutive Powers and Justification The Duty to Give Reasons in EU Monetary Policy

Joana Mendes

13.1 The Mandate of the ECB and the Limits of Law

The withdrawal of monetary policy from the realm of democratic politics is a pillar of the ‘constitution of money’ in the Economic and Monetary Union (EMU).¹ A choice that appeared relatively uncontentious in the early 1990s has become the core of the ECB’s legitimacy conundrum. While monetary policy was never a-political, it has until recently been perceived mostly as such, largely because of the neo-classical politico-economic premises of independence and inflation control that the Maastricht Treaty enshrined. The ECB’s decisions during the EU’s sovereign debt crisis were but part of an evolution of central banking that is in tension with that model.²

The ‘whatever it takes’ of 2012 was both the epitome of a crisis intervention and a first moment of a change that has had a much longer-term duration. The still-called unconventional monetary measures continued in place well beyond the heat of the crisis. The second and third moments signal what has been perceived as a radical change in the role of the ECB followed in 2020 and 2021. In 2020, when the Covid pandemic forced an unprecedented freeze of the economy, extraordinary fiscal and monetary stimulus, as much as vaccines, were essential ingredients to recover from economic collapse at the pace of resurgent pandemic waves. The ECB’s pandemic emergency programme (PEPP) was crucial to inject the liquidity desperately needed to prevent further economic meltdown.³ The support of economic policy – the ECB’s secondary mandate – came squarely to the forefront, much beyond the narrow price stability that had been the purview of its monetary policy up to a decade before.⁴ At the time when this emergency action arrived, the ECB was engaged in a major overhaul of its mandate through a strategic review process, which came to an end in 2021. The acute awareness of the world’s fragilities, as the climate crisis compounded with a health crisis, made this discussion turn not only on monetary policy objectives in a context of deflation but also on how far the ECB should become an actor for climate protection.⁵ This evolution is part of a larger phenomenon. Decarbonisation, digital transition, and inequality became part of the agendas of central banks, as, throughout the world, governments and central banks considered who has the necessary and most suitable instruments to tackle the political goals of the early twenty-first century.⁶ In the case of the EU, in particular, the ECB has at crucial points stepped in to occupy a space vacated by politics.

This evolution in little less than a decade remains politically contested. Even as central banks re-focused their attention on inflation, it revealed the centrality of central banks in our systems of government. Because it occurred within the unchanged Treaty strictures, the political conflict eventually reached the courts. The judgments of the Court of Justice of the European Union (CJEU) in the cases of Gauweiler (2015) and Weiss (2019) brought to the foreground fundamental constitutional questions on the vertical allocation of competences between the EU institutions and the Member States (and hence on the very design of the EMU), on the tension between democracy and independent executives but also on the possibilities of judicial and political accountability over an ever-expanding ECB on whose controversial decisions the survival of the euro rested. The disparity between the CJEU’s and the German Constitutional Court’s position regarding the degree of judicial review, in particular in the case of Weiss, stirred the discussion on the limits of law-based accountability. At stake was, in particular, the scope of the principle of proportionality and the justification based on the ECB’s duty to give reasons. While both proportionality and reason-giving have a long-standing pedigree in EU law – with regard to the judicial review, both of legislation and of discretionary administrative action – and are formally applicable to all actions of the EU institutions, both strictures treaded on uncertain ground when applied to monetary policy measures with salient economic policy implications.

These difficulties manifestly opened fundamental questions, pertaining not only to the role of courts and of their instruments of review in relation to monetary policy, but also, and more deeply, to the role of law in the government of money. Just like other EU bodies, the ECB interprets its mandate and makes policy choices when exercising discretion. From this perspective, it presumably should be subject to control through the public law principles that have become a cornerstone of the EU’s administrative rule of law.⁷ But, unlike fields where judicial review is unquestioned and courts have progressively refined their techniques of control, the ECB operates in a sensitive policy field and displays a momentous power that diffusely and indirectly touches virtually every household and business (without mentioning the external aspects of its action). Due to the interaction between monetary and fiscal policy, its measures touch on the core of political decisions that in democracies are the premise of politically accountable governments and are largely outside the purview of courts (not least for reasons of standing).⁸ In these conditions, can law support political accountability, irrespective of concrete instances of judicial review? While this question is posed here in relation to monetary policy and to the ECB’s evolving role, it has a broader relevance. How law operates in relation to executive bodies should not be limited to its judicial enforcement, not least because of the political stakes involved in the interpretation of the law when it comes to the delimitation of competences in the EU legal order.

This chapter addresses this question by analysing the functions of the duty to give reasons in relation to the powers of the ECB. It starts by characterising the ECB’s powers as a specific instance of constitutive powers. Constitutive powers are not a prerogative of the ECB, but given its potentia as holder of the modes of money creation and the constitutional design of the EMU, they raise particular concerns regarding the legality of its actions (Section 13.2). The constitutive character of the ECB’s powers explains the conundrum of the degree of judicial review over matters involving monetary policy. The judicial clash in Weiss on the role of courts in relation to the actions of the ECB shows that both full and limited review are, for different reasons, untenable or, at least, the CJEU and the FCC judgments confirm the limited role of courts in ascertaining the law in matters of monetary policy, irrespective of the degree of judicial review they chose to apply (Section 13.3). The existence of constitutive powers and, in particular, the specific circumstances that turned the constitutive powers of the ECB into a virtually intractable constitutional challenge postulate a shift in understanding the role of law in relation to the action of executive bodies. The legal and constitutional scope of the duty to give reasons in EU law will demonstrate that law can and must operate in the absence (or irrespective) of judicial review (Section 13.4). In particular, this perspective shows that the duty to give reasons, in its legal and constitutional vein, can support political accountability of the ECB’s actions, substantively and not only procedurally. The chapter concludes by situating the limited relevance of the path proposed here to the democratisation of the government of money in the EU (Section 13.5).

13.2 The ECB’s Distinct Constitutive Powers

13.2.1 The Constitutional Question and What Lies Beneath

The debate on the legality of quantitative easing (QE) was mostly motivated by the economic implications of this type of instruments. There lies the dividing line between considering the QE ECB programmes as still being part of its monetary policy mandate or, on the contrary, falling under the realm of economic policy, in relation to which the ECB has only a supporting role.⁹ The vertical allocation of powers defined in the Treaty turned a political-economic discussion over the characteristics of monetary policy programmes into a fundamental constitutional question with profound consequences. Far from being only a matter of legality, the delimitation of competences squarely put the finger on the structural flaws of the EMU (specifically on the lack of a fiscal union), as well as on the limits of the model of central bank independence, the degree of which is inversely proportional to the scope of central bank mandates.¹⁰

The democratic implications of the interplay between monetary policy and fiscal (economic) policy – the first assigned to a supranational independent institution double-removed from democratic politics, the second, to Member States’ governments – make the delimitation of the ECB’s competence a particularly pressing constitutional question. The EMU constitutional framework combined with the politico-economic significance of quantitative easing as a mode of money creation makes this a fundamental political issue where the boundaries of democratic politics are at stake.

But lurking beneath the discussion on the limits of the ECB’s mandate is also the broader question of the role of law in structuring and controlling the powers of executive bodies which are either independent or placed at arms-length from democratic politics. The interplay between law and administration in contemporary polities is perhaps less dramatic than the pressing questions facing the ECB, and the spectacular clash between two high courts over the boundaries of monetary policy and on how to review them. Yet, it is equally significant to understand, first, whether key public law assumptions hold in policy areas where administrative institutions shape today’s societies and, second, to devise solutions for the flaws of current institutional designs and for suitable judicial and political accountability.

13.2.2 A Functional Analysis of the ECB’s Powers

Setting for now aside the constitutional and political specificities of monetary policy and of the ECB’s institutional setting, its powers have the following functional characteristics in common with other executive bodies: first, its mandate (whether narrowly or broadly interpreted) requires it to act in situations of uncertainty, reacting to the information that it collects and analyses, with a view to defining the best course of action on the basis of prognostic assessments that only the ECB/ECSB is both technically and legally competent to undertake; second, its decisions involve arbitrating between competing interests (that the conflicting objectives within its mandate mobilise), as well as assessing the effectiveness of the public action that, while taken by other institutions, can impact on the goals of its measures;¹¹ third, its mandate is delimited and concretised by resorting to open-textured norms whose meaning depends on the interpretation of evaluative and goal-oriented terms, and varies according both to the specific contexts in which the ECB needs to act and to the prevailing (even if contentious) perceptions of what the scope and direction of its actions should be; and fourth, the long-term effects of its decisions will be fundamental for its credibility.

These characteristics give the ECB constitutive powers.¹² Constitutive powers entail a circular and reflexive process between law application and law creation: legal norms define the mandates of executive and administrative bodies, but the meaning of those norms is determined through the action of those bodies; at the same time, the public interests that those bodies are meant to protect only come to bear through that very same action. Constitutive powers do not exist without the legal norms which executive and administrative bodies interpret and which allow them to exercise discretion. Yet, two factors, in particular, blur the distinction between interpretation and discretion in these instances and, therefore, break down the boundaries between law creation and law application. First, the executive or administrative body produces or catalyses the knowledge that is needed to interpret the norm. The intricate relationship between, on the one hand, the concepts that the legal norm uses to delimit the administrative and, on the other, the complex facts that the norm regulates,¹³ makes the interpretation of the norm depend on the specification of technical terms and, hence, on the factual assessments that the administrative body was set up to make. It is the technical competence of the executive or administrative body that justifies the legal competence that it is given, within the constraints of a mandate that is both constitutionally and politically conditioned. Second, the attribution of meaning presupposes an understanding of the concrete aims of executive action and of how a particular factual situation may challenge those aims. Defining the meaning of the norm (e.g. price stability) is intertwined with shared normative understandings on what the role of that body should be in reaction to socio-economic and political realities and perceived needs of public action (e.g. what in each period price stability entails and how it can be articulated with other public policy objectives). Such definition of meaning has two intertwined effects. It generates and stabilises normative expectations (e.g. defining what is price stability sets the terms of what will be considered legally compliant measures). It gives existence to the public interests that delimit the legal mandate and that justify the existence of the administrative institution, and of its powers and instruments of action (e.g. price stability is also the public interest that the ECB needs to protect and achieve). Given their indeterminacy, these public interests only come into being retrospectively, through administrative action (e.g. price stability only becomes tangible through the action of the ECB). Ultimately, by acting, the administrative institution construes the legal norms that also ground what they may lawfully do.

Constitutive powers are not a prerogative of the ECB. These can arise in the conditions set out above, which apply to other administrative entities with rather different institutional characteristics and constitutional constraints.¹⁴ They acquire, however, a specific dimension in the case of the ECB, as will be seen in more detail below, and shed light on the difficulties of judicial review. They are also relevant for the discussion over the distinction between the existence and the exercise of a competence, which stemmed from the contrasting Weiss judgments of the CJEU and of Germany’s Federal Constitutional Court (FCC) on proportionality. In fact, this controversy brought to light the constitutive nature of the ECB’s powers. One of the many points of criticism directed against the FCC judgment in Weiss was that it applied wrongly the principle of proportionality, not only because of its self-referential way of approaching proportionality and of a misplaced degree of judicial review but also because, according to the Treaty, a proportionality assessment of competences only pertains to their exercise, not to their existence.¹⁵ That is indeed what stems from Article 5(4) TEU, but – as others have also pointed out – the mandate of the ECB is such that can be delimited only through its action, that is, through the exercise of competence.¹⁶ Its constitutive powers mean that it construes the legal norms that also ground what it may lawfully do. The distinction between the existence and the exercise of a competence then breaks down.

13.2.3 The Blurred Boundaries of Legality

It follows from the above that the ECB is deciding on the scope of its mandate and, hence, it is deciding on its own competences. The FCC was, therefore, accurate in its diagnosis.¹⁷ But it pointed at the wrong causes. The ECB’s actions are jurisgenerative not for lack of suitable judicial review of its actions (though there is certainly room to criticise the CJEU in this regard).¹⁸ They are jurisgenerative because of the functional nature of their powers in the conditions in which they must be exercised.¹⁹ For this reason, the existence of constitutive powers is not a pathology that must be corrected. But that does not mean that it is unproblematic.

Constitutive powers denote a fundamental tension within the very structure of constitutional democracies, which attribute to law a quality which it cannot have (or that it can only imperfectly achieve) in the circumstances in which central banks (and other administrative institutions) act: the ability to contain and constrain substantively the future-oriented powers of administrative entities acting in conditions of technical and political complexity and uncertainty. As the characterisation of constitutive powers indicates, this does not mean that law is meaningless. As mentioned, these public powers can only exist because the law provides for their existence: constitutive powers presuppose the very legal norms whose meaning executive bodies get to define. But, in a fundamental way, law does not have the capacity to contain and constrain their exercise as the rule of law strictures prescribe. For the same reason, but from a different perspective, also the role that economists attribute to rules in the debate between rules-based and discretionary monetary policy – in which the former is linked to the defence of a narrow mandate of independent central banks and the latter is held to be incompatible with this model role of central banking – is misguiding. And, yet, the characterisation of the ECB’s mandate along the model of a rules-based monetary policy continues to underpin the ECB’s constitutional status of independence.

None of the above means, however, that legal substantive strictures are irrelevant to ascertain whether the ECB (or other bodies whose powers have the same functional characteristics) has acted within or outside its mandate. If constitutive powers only exist because legal norms can lawfully authorise their holders to act, legal norms must, to some extent at least, structure the way in which meaning will be given.²⁰ The concept of constitutive powers points, rather, to the concrete nature of the law that governs administrative and executive actions in the areas where they emerge. This law varies according to normative understandings of problem definition and on adequate responses generated in institutional settings where abiding by legal norms merges with the need to ensure the social acceptance of the interpretations and solutions that the administration adopts.²¹ Without those normative understandings, which the administrative bodies translate into legal forms, legal norms would be inoperative. So, as much as a specific conception of the relationship between monetary and fiscal policy has underpinned the current Treaty framework and the norms that delimit the mandate of the ECB, also a different understanding of that relationship has enabled the ECB to claim – and the CJEU to ascertain – that its quantitative easing programmes are within its mandate of price stability. That such understandings are contested is something that the Weiss saga (as much as the Gauweiler judgments before) has clearly revealed to the legal world. But, in the specific circumstances in which it acted, that contestation did not prevent the ECB from acting according to the normative understandings that formed in its institutional environment in relation to the meaning and scope of monetary policy. It is noteworthy that this process is deeper and more complex from the often too easy criticism of competence creep. As much as constitutive powers may lead to expansive interpretations of the scope of an entity’s mandate – as was the case with the ECB – they can be constitutive in exactly the opposite sense.²² As I will explain next, the empowerment of the ECB does not necessarily follow from its constitutive powers.

13.2.4 A Distinct Instance of Constitutive Powers

Constitutive powers point to a relationship between law and administrative power that is different from accepted conceptions on the role of law in liberal democratic polities (a direction that requires further inquiry as to its legal and normative implications). Characterising the powers of the ECB as an instance of constitutive powers arguably helps approach in a more accurate way the question of the legality of its action. Yet, this proposed angle of analysis must not overshadow what is distinctive about the ECB’s powers and their evolution.

The ECB has the ability to control the means of money creation and to influence fundamentally the fiscal policy decisions of elected governments (as any central bank, given the interrelation between monetary and fiscal policy). This immense political power (in the sense of potentia) sets it apart from other administrative institutions. Compounded with constitutive powers, this trait manifestly makes it an excessively powerful institution and can only be constitutionally justified – if at all – if those powers can be subject to suitable forms of control. Its potentia allowed it to engage in an expansion of its mandate unimaginable when the ECB was set up in 1992.²³ In the political-economic context of the 2010s and in the very first years of the 2020s, the constitutive nature of its powers meant an unparalleled expansion of its monetary policy mandate, following an interpretation of its role, which at first it took on hesitantly, in the midst of the sovereign debt crisis (with the political support of national governments sitting in the Council), and is in the process of consolidating as a settled way of approaching its mandate. This is not the place to retell this story.²⁴ It is, however, important to underline, that the empowerment that the ECB has witnessed in the last decade is not a necessary consequence of the existence of constitutive powers.

That empowerment was only possible because of a complex combination of different economic and political circumstances that, while part of a broader change in central banking, raise specific constitutional and political difficulties in the EMU.²⁵ The very assessment of the legality or illegality of the ECB’s quantitative easing programmes – whether they are still in the realm of monetary policy (whether legitimately or illegitimately) or, on the contrary, make illegal (and illegitimate) inroads into economic policy – is politically loaded (as the political curricula of some of the plaintiffs in Gauweiler and Weiss clearly show). Claiming, for instance, that – while the ECB’s QE programmes were justified in the aftermath of the sovereign debt crisis and, hence, could be legally upheld as such – as soon as conditions of normality would be reached, the ECB needed to retreat to the narrow monetary policy mandate that it had pursued prior to the crisis, lest it being in breach of the Treaty, is entering a political battlefield. Here, legality is but one factor in a politico-economic (and also geo-strategic) discussion that touches on the very terms in which the EMU could be created in 1992.

That was the battlefield that the CJEU entered – almost inadvertently, it seems – with its Weiss judgment of 2019.²⁶ The legal dispute over the ECB’s mandate reflects the fundamental mismatch between the ‘new ECB’ and the political-economic premises that underlie the Treaty’s EMU rules.²⁷ Albeit not always explicitly, this is the background of the different conceptions of the ECB’s normative role within the EMU, and of the boundaries of monetary policy, part of the ongoing debate that heated up considerably after the FCC’s Weiss judgment in May 2020. The terms of the relationship between the two limbs of the ECB’s mandate – the extent to which they are in tension, what the meaning and extent of ‘support’ may be and, hence, the degree of permissible economic intervention – depends largely on which political economy theory one advocates and on how the very design of the ECB mandate meant endorsing a specific political-economic conception of monetary policy (monetarism) and the rejection of another (Keynesianism). That, in turn, impacts on the ECB’s independence and how it can be justified (or not) as democratically legitimate.²⁸ This background and the combination of constitutive powers and the political power (potentia) of the ECB account for much of the difficulties in finding a suitable degree of judicial review of the ECB’s monetary policy, beyond the principled arguments that can be drawn from its technical expertise and its institutionally safeguarded independence.

13.3 The Degree of Judicial Review of Monetary Policy: A Virtually Unresolvable Conundrum?

Monetary policy is an area where few would expect judicial review, or at least that judicial review could have an impactful role. It touches on core aspects of how a society is organised, not least because it conditions how constitutionally protected public goods and fundamental rights can be delivered. Yet, the impact of monetary policy measures is ‘generalised and indirect’, which, in principle, precludes individual standing;²⁹ in addition, their institutional setting – entrusted to an independent central bank vertically detached from economic policies of Member States, and subject to very limited accountability by the EU and national parliaments – arguably makes direct litigation by institutional actors unlikely. In an article analysing the role of administrative law in relation to the US Federal Reserve, the authors noted the ‘rarity of Fed litigation’ and rightly pointed out that this is also a ‘testament to the Fed’s nearly unique power and autonomy’.³⁰

However, like any other area where public authority is exercised, with the limited exception of actes de gouvernement, the possibility of judicial review is a tenet of the rule of law. In the EU, its significance is deeper. The structural principle of attributed competences makes the possibility of judicial review for the respect of the boundaries of the institutions’ competences (ultra vires), in particular, a cornerstone of the whole EU construction. Of course, how that review is conducted matters to define the extent to which the Court will be having a say on how law can be deployed to delimit the powers that law conveys. In the case of monetary policy, behind the law stands not only the relative scope of action of Member States and of the EU institutions (the ECB and the Council coordinating economic policy) but also the tenability of the economists’ rules-bound-view on monetary policy that underpins the mandate of the independent ECB. Such a view presumes that the ECB’s monetary policy be kept strictly bound by economically defined yardsticks, poured into legal norms.³¹

13.3.1 Neither Intrusion nor Deference: The Legal Implications of Full and of Limited Review in Weiss

On the intensity of judicial review over the ECB’s actions, the two courts’ rulings on Weiss could possibly not be further apart (a disparity that the judgments in Gauweiler had already anticipated).³² Like other aspects of the judicial dispute, these differences have been extensively noted in the literature.³³ I take them up here again only to the extent necessary to illustrate the conundrum of judicial review in these matters; that will also point out the weaknesses of the critique addressed to the FCC’s position and of the praise that the CJEU’s judgment got.

The FCC applied what most commentators considered to be a too-stringent gauge incompatible with the discretion that a central bank must have in monetary policy. It did so by drawing on the principle of proportionality and by requiring that its third limb (proportionality stricto sensu) be applied to ascertain whether the limits of the ECB’s monetary policy mandate had been breached.³⁴ In this way, on the one hand, the FCC took the consequences from the premises of the monetarist paradigm that the EMU rules enshrined, as it insisted that the ECB’s narrow mandate be upheld as a matter of law and of democratic legitimacy.³⁵ On the other, it departed from that paradigm, because it demanded that the ‘economic and social policy effects’ of the ECB’s measures, including the impact that ‘a programme for the purchase of government bonds has on, for example, public debt, personal savings, pension and retirement schemes, real estate prices and the keeping afloat of economically unviable companies’ be weighed ‘against the monetary policy objective that the programme aims to achieve and is capable of achieving’.³⁶ Having found that the ECB had not proceeded in this way, it required that it conduct a proportionality assessment and demonstrate that the economic effects of its measures were not disproportionate. This outcome resulted in a difficult compromise between exercising full judicial review, which the FCC held necessary, and, at the same time, giving sufficient leeway to the scope of monetary policy decisions.³⁷ (Dis)proportionate to what exactly is something that was not immediately clear (even if the judgment gave some hints in this regard).³⁸ The ECB needed in any event to ‘[identify], [weigh] and [balance] against one another’ the monetary policy objective of its programme and its economic policy effects.³⁹ In the plentiful commentary that ensued after May 2020, very few agreed with the FCC’s contention that full judicial review was due. Most pointed out that such a degree of review constrains the ECB to a specific way of acting and limits unduly the discretion that the Treaty gives it. The principle of proportionality, applied as the FCC requires, postulates a clear identification of the conflicting positions that must be weighed, something that is not possible in monetary policy.⁴⁰

Be that as it may, the ‘elephant in the room’, when the discretion of the ECB is invoked in relation to the limits to judicial review, is what the ECB’s discretion implies. Weighing different monetary policy alternatives in view of their economic policy effects is not a process that can be delimited by legal norms that identify the public interests to be protected or that specify thresholds of protection. It is a policy-making process where what price stability is and what it requires is defined at each point by the ECB itself (in coordination with political actors) and where various alternatives are open-ended. The lack of a concrete conflict prevents a balancing process that the full application of proportionality requires.⁴¹ This argument has deeper consequences. The presumption that the legal norms could operate in this field and limit public authority as they do in other areas of public law does not hold. Or, put differently, to assume that the Treaty norms can constrain the policy process that the ECB must undertake – that is, that monetary policy can be rules-based as the monetarist paradigm presumes – necessarily restricts the ECB’s scope of action in circumstances different from those that the Treaty framework envisaged. Indeed, proportionality is much more than a legal principle structuring the way to reach an outcome lawfully. How the FCC applied it presumes that it is both possible and legally needed to hold on to the limits that the monetarist paradigm of monetary policy determines and that are specified in the Treaty.⁴²

From the opposite perspective to the one the FCC endorsed – that is, for those who defend that courts should not have a role in matters of monetary policy – the very existence of judicial review ‘qualifies as bold judicial law-making’ of the type that exceeds the boundaries of the judiciary function.⁴³ The fact that the CJEU is confronted with the need to adjudicate on such matters justifies the deferential approach to the ECB’s exercise of discretion that the Court endorsed. Commentators were almost unanimous in this regard.⁴⁴ The two arguments invoked are, in the case of the ECB, overlapping and circular: the legal and technical competence of the ECB and its independence, which the Court must respect. The comparative advantage of the ECB’s expertise is obviously uncontested. But this is a weak argument if not accompanied by a specification of what is special about monetary policy that prevents a more intense judicial review, for lack of expertise, which is possible in other areas where the Court also lacks expertise (where the correct interpretation of the law requires the Court to define, for example, if what financial stability requires in conditions of uncertainty falls within the mandate of the EU financial agencies or of its Single Resolution Board).⁴⁵ Independence and the way the Court had already delimited the boundaries of the ECB’s mandate (by reference to the objectives and to the tools of monetary policy, in Pringle and Gauweiler) come to the rescue. Judicial review is necessarily limited because it cannot impinge on the Treaty-protected independence of the ECB; furthermore, as the Court had also already established in Gauweiler and in Pringle, foreseeable indirect economic effects of monetary policy do not affect the classification of a measure as monetary. The Treaty norms and the Court’s case law, therefore, settle the issue of the degree of judicial review: deferential review limited to verifying whether manifest errors of assessment were committed (or, more specifically, the deference that the Court applied) is the only possible way of controlling the legality of the ECB’s action. That is consonant with the need to preserve the space of manoeuvre that the ECB must have to adapt its instruments to varying circumstances.⁴⁶ In this reading, the Court suitably attuned the application of proportionality to how it can operate in an area of limited judicial review, in accordance with its standard of review in instances of discretion.⁴⁷ The Court was, therefore, right in holding that ‘nothing more can be required of the European System of Central Banks (ESCB) apart from that it use its economic expertise and the necessary technical means at its disposal to carry out that analysis with all care and accuracy’.⁴⁸

This position, however, fails to acknowledge that the way the CJEU reviewed the ECB’s programmes, in light of its discretion means de facto a blanket authorisation to the ECB that only gives legal anchoring to its potentia. The lack of clarity of what are the interests that must be put in proportion in a proportionality assessment does not only taint the third limb of proportionality that the FCC wrongly applied to an exercise of a competence and that the CJEU rightly omitted from its judgment.⁴⁹ It turns proportionality into a ‘free-standing ground of review’ that obfuscates what the Court is doing when applying this principle. ‘Free-standing ground of review’ – a term coined by Kosta – allows the Court to invoke the principle without actually conducting a proportionality assessment, because it does not balance conflicting interests.⁵⁰ That was the critique of the FCC to the CJEU’s Weiss judgment, when pointing out the difficulty in identifying which opposing interests the CJEU had considered and weighed.⁵¹ More than applying low-intensity review, the judgment meant an outright deferral to the economic expertise of the ECB.⁵² In fact, what the CJEU allowed for was what the FCC had already critiqued in its Gauweiler judgment in 2016: it enabled the ECB to ‘decide autonomously upon the scope of [its] competences’.⁵³ That much is confirmed by the assumption that when the ECB acts in controversial monetary policy it must only deploy with care and accuracy its expertise, which either is implicitly considered to be neutral to the political consequences of its measures, or, at least, necessarily incorporates their economic consequences (however classified).⁵⁴ Combined with the judicial interpretation of the delimitation of monetary policy, the result is that it is virtually impossible to judicially prevent possible abuses of law by the ECB.⁵⁵ Ultimately, we are before an instance of judicial abdication.⁵⁶

13.3.2 Beyond the Semblance of Judicial Review

When applied to monetary policy, both full and limited reviews have difficulties that ultimately make them untenable. The judgment showed, thereby, the weaknesses of judicial accountability in this field. In very different ways, both degrees of review amounted only to a semblance of judicial review (as much as this critique appears counter-intuitive when applied to the FCC’s judgment).⁵⁷ At the risk of oversimplifying the intricacies of both judgments, their result in terms of a court’s ability to control the action of a central bank is comparable. They both acted as if their arguments and tools of review could constrain the actions of the ECB to patterns of legality that, at the end, are defined by the ECB itself, given its constitutive powers.

The CJEU sanctioned the ‘whatever it takes’ famously pronounced by Draghi in 2012. It had done so in Gauweiler and took the same position, in very different circumstances – and less comprehensibly – in Weiss, when the programme under scrutiny was not a response to an emergency. The FCC, in turn, ultimately took a decision that, as mentioned above, was, at best, an awkward compromise between stringent review and needed leeway of executive action.⁵⁸ The way out was merely procedural. The Bundesbank was prohibited from partaking in the PSPP, unless within three months, the ECB Governing Council would adopt ‘a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the ECB are not disproportionate to the economic and fiscal policy effects resulting from the programme’.⁵⁹ This result contrasted starkly with the FCC’s spectacular clash with the CJEU and with its harsh critique of the latter’s judgment. Indeed, most commentators, writing and speaking in the immediate aftermath of the judgment, did not expect any substantial impact of the Weiss judgment on the ECB’s monetary policy.⁶⁰ The reasons invoked were mostly of constitutional nature: the ECB is outside of the FCC’s jurisdiction and the intricate way – if not flawed, as most argued – through which the FCC arrived at its conclusion could not, for legal and political reasons, have a bearing on the ECB.⁶¹

But there was another critique to the judgment’s outcome: what the FCC required could easily be met. By collecting information that was even in the public domain, the ECB could satisfy the FCC’s demand for proportionality. It only needed to channel that information institutionally to the German government and parliament and all would be settled. Why then risk a constitutional crisis at the worst possible moment?⁶² Both in institutional and in academic circles, the outcome of the judgment was seen as simply entailing the transmission of information. As soon as the judicial storm would pass, no far-reaching consequences to the actions of the ECB would be longer visible. That was, in fact, what happened.⁶³ What was, in substance, a major disagreement (with potentially immense constitutional consequences) on the way that a reviewing court should mobilise proportionality as an instrument of either full or limited review had no bearing in legal and policy terms. The result, in short, was a clear failure of substantive accountability through judicial control. This conclusion, in turn, also means that the association between full review with substantial accountability, on the one hand, and limited review with procedural accountability, on the other, hides more than it reveals.⁶⁴

Few noted the significance of its judgment laid elsewhere: the FCC had disclosed the deeper constitutional difficulties that the ECB’s action raised for the construction of the EMU.⁶⁵ In terms of accountability, the judgment’s immediate outcome was significant, even if admittedly not consequential (at least in the short-term) for the conduct of monetary policy: the FCC had referred the question back to the political institutions.⁶⁶ So, even if both judgments had shown, in opposing ways, that neither full review nor limited review may be suitable means to control monetary policy, each pointed in a very different direction. While the CJEU empowered the ECB, the FCC stressed the importance of vertical checks by politically accountable institutions.

One question, however, remained unanswered. If the courts have, at the end, little to say in monetary policy matters – either because of the way they interpret the substantive mandates or because of the unsuitability of the tools that can deploy to contain legally the executive action of central banks – can law have a role in structuring and limiting the action of ECB? The answer is positive, but it is far from being straightforward. One must search for legal strictures that must be present irrespective of judicially generated or judicially enforced duties.

13.4 The Duty to Give Reasons

13.4.1 Reasons in Weiss

The FCC censored both a ‘lack of balancing and [a] lack of stating the reasons’ by the ECB.⁶⁷ The German government and the German parliament had failed, as a result, to take suitable measures against the ECB’s Governing Council. They had ‘neither assessed nor substantiated’ whether the PSPP was compliant with EU law.⁶⁸ If the problem was one of proportionality, it was compounded with insufficient documentation and communication of the balancing act that the ECB needs to undertake between the monetary and the economic policy consequences of its actions. In addition to stressing the importance of political accountability in matters of monetary policy, the FCC had also pointed to the relevance of the duty to give reasons. But beneath the fury of criticism it received, these strengths of the judgment were mostly ignored.

It is hardly surprising that the relevance of the duty to give reasons went largely unnoticed. While in EU law it is a constitutional requirement applicable to all legal acts of the institutions, it is often dismissed as a routine practice without significant legal consequences or much noteworthy controversy. It is often invoked in judicial litigation, but hardly ever leads to pronouncements of breach capable of leading to the annulation of the legal act. That is largely due to the balanced approach to the duty of reason-giving that the EU Courts have developed and refined over the decades.⁶⁹ According to the formula that the Court also cited in Weiss, the statement of reasons

must show clearly and unequivocally the reasoning of the author of the measure in question, so as to enable the persons concerned to ascertain the reasons for the measure and to enable the Court to exercise its power of review, [but] it is not required to go into every relevant point of fact and law.⁷⁰

In this way, the Court ‘proceduralises rationality’ and attunes its demands to each litigious situation, considering the need of effective judicial protection in each case.⁷¹ Accordingly, the EU Courts consistently emphasise that the specific requirements of the duty to give reasons depend on the circumstances of each legal act, in particular, on the substance and wording of the measure, the nature of the reasons given, the interests that the persons directly and individually concerned may have in obtaining explanations, the context of the measure, and ‘the whole body of rules governing the matter in question’.⁷² This flexibility built into the duty allows the Courts to modulate their degree of review of compliance with this duty and to avoid the slippery step of turning the review of a procedural requirement into a review of the substantive legality of the act.⁷³ It also allows them to adapt a duty that applies indistinctly to all the legal acts of the institutions to their legal effects, for example, by distinguishing the scope of the duty to state reasons of an individual measure and of a measure intended to have general application.⁷⁴ All this mirrors the function that the duty to give reasons has in judicial proceedings. It operates as a norm of control, which, as the case law indicates, is instrumental for two purposes: to enable the persons concerned to ascertain the reasons for the measure and to enable the Court to exercise its power of review.⁷⁵

13.4.2 Reasons and Integration: Constitutional Foundations

In EU law, however, this duty has a deeper constitutional foundation, which gives it a different political significance and generates different legal implications from those that the case law normally expresses. The general duty to give reasons was meant also to enable ‘Member States and (…) all interested nationals [to ascertain] the circumstances in which the [institutions have] applied the Treaty’.⁷⁶ While related to the need to afford legal protection to persons concerned (eventually through judicial review), this function was distinct from this strictly protective dimension of the duty to give reasons. It was justified because of the limited (attributed) competences of the supranational institutions whose powers had the capacity to constrain the sovereignty of the Member States.

More deeply, in the case of the ECSC, the requirement that the Community ought to ‘publish the reasons for its actions’ was enshrined in a provision where the functions of the Community were outlined (Article 5 ECSC Treaty) and then specified as a legal duty of the High Authority (Article 15 ECSC Treaty). A systematic interpretation of Article 5 ECSC shows that there was an intrinsic link between the transparency that ought to derive from a statement of reasons and the action of the Community’s institutions, in particular of the High Authority at its core.⁷⁷ That the whole Community needed to be a ‘glass house’ was one of the foundational blocks of the integration process.⁷⁸ It was a means of ensuring the acceptance and cooperation of the natural and legal persons subject to the authority of the High Authority and, crucially of the Member States. Politically, without persuading through reasons, the Community would fail. Legally, if the acts of the High Authority needed to be the expression of the objectives of integration set in Article 3 ECSC (binding on the institutions), the statement of reasons was the means to enable a judgment on whether that legal bound was respected. Importantly, those passing that judgment were ‘the Member States and (…) all interested nationals’ who could thus ascertain ‘the circumstances in which the [institutions have] applied the Treaty’.⁷⁹

The political and legal significance of this public understanding (still visible in institutional litigation over the correct use of a legal basis) was overshadowed by how the Court developed the duty to give reasons as a norm of control (suitable for purposes of judicial review of legal acts involving discretion).⁸⁰ Nevertheless, the duty to give reasons was constitutionally, first and above all, ‘a guarantee against arbitrary action, by enabling the public to understand and investigate the actions of the executive invested with important powers’.⁸¹ Its purpose was, hence, to ensure substantive accountability, that is, to demonstrate how the choices made by the institutions ‘plausibly aimed for and achieved non-arbitrary results’.⁸² Importantly, it should ensure the ability of the public to pass that judgment. Of course, this referred to the knowledgeable public, who could have standing before the court (and, possibly, political weight within their Member States). But, nevertheless, the public understanding that the statement of reasons ought to facilitate would allow the High Authority to avert the ‘hostility of certain milieus[,] [those who] had expressed an accusation all the more formidable as obscure of “technocracy”, evoking the intervention of tenebrous powers, which in the modern political mythology have replaced the ancient gods’.⁸³ Not least, the political accountability that the duty served could – and should – be exerted by the parliamentary assembly, which at the time was, nevertheless, a rather weak institution.

This constitutional understanding of the duty to give reasons must be revived for today’s EU, given that the scope of duty to give reasons was broadened by the Lisbon Treaty, the same Treaty that introduced modifications intended to establish a ‘more institutionally solid, democratic and citizen-oriented foundation’ of the Union.⁸⁴ Such revival is particularly needed in the instances in which its executive bodies can have constitutive powers, as is the case of the ECB. Justification, as a guarantee of substantive accountability, must then reflect the balancing of competing interests involved in decision-making and show how different groups and interests are advantaged and disadvantaged by a non-arbitrary decision.⁸⁵ That is a necessary component of generation of the public interests that the decision embodies, in relation to the legal framework in which it is embedded. It is, in other words, a necessary part of the exercise of constitutive powers and must be controllable as such. However, it is, arguably, not the task of the court reviewing the legality of judicially contested measures to enforce this constitutional dimension of the duty to give reasons. That must be primarily realised by the deciding body and by its political overseers.

13.4.3 Reasons as a Norm of Conduct

The constitutional foundation and function of the duty to give reasons means that, beyond the judicially suitable way in which the EU Courts review compliance with this duty, a statement of reasons must enable a public understanding of how public action of the EU institutions is contributing to achieve the objectives of EU integration, as interpreted at each point in accordance with the political priorities set by the competent bodies. From the same perspective, compliance with the duty to give reasons must enable a judgment of the compromise achieved between competing public interests, of the choices made by the decision-maker when defining a specific course of action, established in articulation with (and, hence, constituting) the legally defined purposes. Although this resonates strongly with a proportionality assessment (not surprisingly the duty to give reasons and proportionality often operate in tandem), it is not the same as proportionality. Showing the compromises achieved between competing public interests may be made through a proportionality assessment or not; per se, it does require that the balancing be conducted in the specific terms that the principle of proportionality mandates (in the EU legal order, or in the legal order of any of its Member States).

From this perspective, the statement of reasons is not primarily a means ‘to enable the persons concerned to ascertain the reasons for the measure and to enable the Court to exercise its power of review’, as it is in the hand of courts, where it must be applied with care to avoid turning a procedural requirement into a substantive review of the adequacy of the reasons given.⁸⁶ It does not function as a norm of control, but as a norm of conduct: it is part of the process of normative concretisation inherent in decision-making and, as such, it provides the decision-maker with criteria of action, among others (economic models and parameters, efficacy, political convenience, non-binding international standards).⁸⁷ While being externally binding, it functions as a self-regulatory measure for the deciding body, an instrument to facilitate a substantiated judgment of the conditions, criteria and implications of the acts it adopts, in articulation with the purposes of legal action as defined in the enabling norms. It is also an essential part of its institutional duty of cooperation that the deciding institutions owe to those that, in a democratic polity, must hold them to account: they must make such process explicit to facilitate the action of their political overseers.⁸⁸ As such, the duty to give reasons, understood in this way, places a specific demand to decision-makers when at stake is the adoption of potentially or knowingly controversial measures, such as the quantitative easing programmes of the ECB. Compliance with the duty to give reasons must allow the political institutions to contest, where needed, measures of a controversial nature, that is, it is an essential condition of accountability and it must facilitate it. In the case of the monetary policy measures adopted by the ECB, controversial or not, the constitutional duty to give reasons requires the ECB to show, in its decision-making process, to the Member States and to the European Parliament (as well as to national parliaments, insofar as the economic policy of the Member States is implicated) how the public interests it needs to balance are being concretised, how it reconciles the conflicts among them, in view of the priorities they set in given economic circumstances, and the substantive implications of such balancing and priorities. Taking this position, however, requires a straightforward admission of the unavoidable political dimension of the technical competence of the ECB, which is still only hesitantly recognised – despite the evolution of the past decade – in particular by the EU institutions and by the Member States. It requires admitting that the ECB has constitutive powers that allow it to construe its own mandate and to give meaning to price stability, by mobilising its expertise.

As I argued elsewhere, with reference to the work of Jerry Mashaw, as a norm of conduct the duty to give reasons must reflect a decision-making process that makes legal acts ‘a plausible instance of rational collective action’, in relation to the substantive yardsticks that the applicable norms define.⁸⁹ It also establishes a suitable threshold to allow a meaningful political control. The independent ECB is not exempted from this dimension of the duty to give reasons that flow from the Treaty framework, as ascertained by the origins of the duty to give reasons and extrapolated to a Union purportedly based on democracy. The fact that this dimension of the duty to give reasons has not been concretised through judicial actions does not make it less relevant in EU law. It is a legal duty, which must be enforced as such by the EU institutions that may hold the ECB politically accountable. Being too bound by the Treaties, the European Council, the Council and the European Parliament – the EU’s representative institutions (Article 10(2) TEU) – must develop mechanisms that ensure that the constitutional dimension of the duty to give reasons comes to bear in EU’s institutional practice, for the sake of the public understanding that this duty was initially intended to convey, albeit, of course, in the very different institutional environment of the EU. It is, arguably, this legal and political path that must be developed to ensure that the ECB is subject to substantive accountability, that the ‘normative goods’ of non-arbitrariness can actually be achieved, and that its actions can actually be ‘probed and contested’ (in the sense of ‘substantive openness’ that Dawson and Maricut-Akbik suggest in the introduction to this book).⁹⁰ While the incentives need to induce such a change must not necessarily come from judicial review, clearly the CJEU has also an institutional responsibility in this regard.

At this point, it is pertinent to return to its monetary policy judgments. Referring to the contested nature of the ECB programmes it assessed (the OMT and the PSPP), the CJEU was right to assert both in Gauweiler and in Weiss that ‘the fact that a reasoned analysis is disputed does not, in itself, suffice to establish a manifest error of assessment on the part of the ESCB’.⁹¹ This makes sense from the perspective of a court that adopts a standard of limited review to protect the discretion of the ECB. But it was wrong – straightforwardly wrong, given the political and legal implications of the expansion of the ECB’s mandate – to assert, in the same paragraph, that ‘nothing more can be required of the ESCB apart from that it use its economic expertise and the necessary technical means at its disposal to carry out that analysis with all care and accuracy’.⁹² This passage both reveals and confirms that limited review was, in this case, a hands-off approach with unlimited deference to the ECB’s economic expertise (a judicial version of sorts of ‘whatever it takes’). As the analysis on the duty to give reasons indicates, in legal terms, there is much more to expect from the ECB, even if the role of courts in reviewing monetary policy measures is limited. In a legal system grounded on law – a law that purportedly must have democratic origins or endorsement – law must have a structuring role in the exercise of public authority, even when the nature of the policy field limits considerably the possibilities of control being exerted through courts. Even if courts cannot enforce certain dimensions of the law, they must not dismiss them.

13.5 Not a Fix to the EMU Constitutional Challenges

The reconstruction of the duty to give reasons proposed here draws both on its origins in EU law and on the constitutional framework in which it is now inserted. It shows that the duty to give reasons has an action-guiding role that must facilitate public understanding of how executive action is shaping the public interests that EU executive bodies are mandated to pursue. This is a function of the duty that has been hitherto neglected in EU law and that is particularly pertinent in instances in which the EU executive bodies exercise constitutive powers, as the ECB does. Understood as a norm of conduct, the duty to give reasons defines thresholds of justification different from those required by the Court when applying it as a norm of control in instances where discretion is exercised. The justification that EU law requires from its institutions is primarily a function of the political accountability that also the ECB must be subject to, its independence notwithstanding. This reconstruction shows that law has a life beyond justiciability, to paraphrase an expression of a former EU Ombudsman referring to good administration.⁹³ It provides yet another ‘fix’ to the conundrum that the ECB poses since it became a ‘runaway institution’ that can de facto define the limits of its own mandate.⁹⁴

This chapter indicates a way to delimit the role of law in structuring the exercise of executive powers that goes beyond the role that the Courts can have in relation to monetary policy matters. Whether it is possible to devise a degree of judicial review, that runs neither the risk of doing too much, nor of doing too little, is a question that is most likely to occupy lawyers for a long time to come. No matter the outcome of this debate, its contribution to the democratic legitimacy conundrum of the ECB is likely to be very limited, if any.⁹⁵ Constraining the ECB back into the substantive limits that the Treaty enshrines means pining it down to a political-economic programme that, while politically and technically contested today, remains de jure outside the realm of democratic contestation. Admitting that the ECB can continue acting as it has in the past decade without a Treaty change is to perpetuate zombie rules and the power imbalances that they enshrine, at the expense of leaving the determination of such rules to processes consonant with democratic constitutionalism.⁹⁶

From this perspective, also the path proposed in this chapter cannot be a fix to the constitutional challenges that the EMU poses. The reconstruction of the duty to give reasons presented here can only provide a limited contribution to improve its political accountability, for which law can and must contribute. With the meaning proposed here, accountability through the duty to give reasons carries a ‘promise of control’ because it enhances the possibilities of parliamentary scrutiny and political contestation over the changed role of the ECB and the new interpretations of the law that enable it. It does not carry a ‘promise of democracy’.⁹⁷ Yet, it is clear that the ECB’s accountability must not be understood as a voluntary exercise.⁹⁸ Independence does not shelter the ECB from a duty to give reasons that in EU law is more far-reaching than usually assumed. If judicial review must in principle be confined to the procedural vein of the duty to give reasons, the historical reconstruction of this duty’s rationale shows that, outside of the court, the duty must be understood as a substantive legal stricture that ought to enable political control over the decisions of the ECB, its independence notwithstanding. Justification that permits contestation does not mean that the ECB must follow the views of its political controllers, even if it presumes that the ECB be responsive to the political implications of their decisions.⁹⁹ Admittedly, this is a difficult line to draw. Yet, the analysis above shows that, in what concerns the duty to give reasons, there is no legal necessity to the limited procedural accountability of the ECB.¹⁰⁰ On the contrary, that status quo currently results from the limited understanding of the scope of the duty to give reasons that judicial review conveys and, presumably, is shared in institutional practice. The constitutional dimension of the duty to give reasons highlighted here, if developed institutionally, may secure public-interest-based executive action understood in substantive terms, even if independence places clear limits to the ability of political accountability to induce substantive policy changes.

But, if the analysis in this chapter changes nothing to the premise that remains at the core of the EMU – monetary policy must be withdrawn from the realm of democratic politics – the characterisation of the ECB’s powers as constitutive shows more than just how the law can operate in monetary policy beyond judicial review. It points to the democratic stakes of the decisions that are adopted in this policy field, to the inevitable political character of the ECB’s monetary policy, and hence, to the constitutional difficulties of keeping it in the hands of an institution as strongly independent as the ECB.