Legalizing European Central Bank Bond Purchases: How the Ecb Can Protect Its Own Legitimacy and the Future of the Euro
Duncan, Eric, The George Washington International Law Review
In the wake of the 2008 global economic meltdown, Europe has struggled with a severe debt crisis, under which many eurozone1 countries have had limited access to credit to finance their govern- ment activities.2 In response to that crisis, the European Central Bank (ECB) has circumvented its legal charter by implementing programs to purchase European sovereign bonds, which threatens to undermine the ECB's legitimacy.3 As a result, the current crisis threatens not only Europe's economic stability, but also the credi- bility of, and confidence in, Europe's regional institutions.4
In 2010-in an attempt to shore up credit markets and make it easier for eurozone countries to issue new debt-the ECB imple- mented its Securities Market Programme (SMP).5 Through the program, the ECB purchased sovereign debt (in the form of bonds) issued by weaker eurozone countries like Greece, Italy, and Spain, whose bond markets had been hit hardest by the crisis.6 In September 2012, the ECB expanded its sovereign bond purchases under a new program called Outright Monetary Transactions (OMTs).7
These bond-purchasing programs, while arguably necessary to stem the tide of the debt crisis, are almost certainly illegal under the ECB's founding treaties.8 By implementing such legally ques- tionable programs, the ECB undermines its own integrity and cre- ates uncertainty about the actions it can and will take. Furthermore, the ECB has implemented such programs only inter- mittently, and often tentatively, largely because of political criti- cism and concerns about their legality.9 As a result, the bond- purchasing programs have only been partly successful in helping stem the crisis.10 By circumventing its legal mandates, the ECB operates in a gray area, where its actions are not only legally sus- pect, but are also tentative and not entirely effective.
The eurozone debt crisis is itself the result of waning investor and creditor confidence in the ability of eurozone governments to pay back their debt.11 Investor fears will only be exacerbated by a lack of credibility in eurozone institutions.12 In fact, investors and analysts have already begun to doubt whether the European Union and institutions like the ECB are legally and politically capable of bailing out struggling eurozone member states like Italy and Spain should these countries default on their loans.13
The ECB, with its large capital reserves, is perhaps best situated to shore up investor confidence and solve this crisis;14 however, its hands are legally tied by its founding documents: the Treaty on European Union (E.U. Treaty) and the Treaty on the Functioning of the European Union (TFEU) .1S These treaties create legal hur- dles to bond-purchasing programs that might otherwise alleviate investor concerns and help cure the crisis.16 Moreover, the treaties have proven insufficient to actually prevent the ECB from imple- menting such programs.
This Note argues that eurozone member states should vote to amend the ECB founding treaties to explicitly allow for bond purchases in such times of economic crisis. In particular, the E.U. Treaty and the TFEU should be amended to include an emergency provision that allows the ECB to make large-scale sovereign bond purchases on secondary markets in cases of significant debt crises. As a foundation for this proposal, Part II of this Note outlines key aspects of the legal framework that created the ECB and lays out the ECB's relevant legal responsibilities and limitations under cur- rent law. Part III then provides background on the origins of the current eurozone debt crisis, explains the steps the ECB has taken thus far in purchasing sovereign bonds, and details specific legal criticisms of these ECB programs. Finally, Part IV argues that the bond-purchasing programs amount to illegal monetary financing under the current treaty and then details and defends a proposal to amend the ECB founding treaties to legalize ECB bond purchases during times of economic crisis. …