Published on 5 August 2022
Germany has been resistant to many measures of the European Central Bank, not least the size of its bond-buying programmes and its latest ‘Transmission Protection Mechanism’ approved at the main meeting of July 2022. The aim of the ‘TPM’ is to avoid ‘fragmentation’, meaning the yields on the bonds issued by some Eurozone member states being much higher than others, but for no good reason (in the ECB’s opinion).
The TPM probably does not even exist, but if it were to exist, it would buy bonds of ‘Club Med’ countries and sell those of the northern countries including Germany. This should make the debts of the ‘Club Med’ countries less expensive to maintain, but it could make the debts of the northern countries more expensive.
That could not be packaged up as being in Germany’s national interest, let alone within the ECB’s mandate, but Germany’s ability to block the TPM is very limited indeed.
The decision-making in the ECB Governing Council (GC) is laid down in the Treaty on the Functioning of the European Union (TFEU) Protocol 4. Art 10 is the salient one. In relation to its financial programmes there are three levels, two being versions of Qualified Majority Voting and the other being a simple majority of the members of the GC. None of the levels involve all members of the GC being entitled to vote. There are two types of GC member:
- A ‘governor’, meaning the governor of one of the national central banks (NCBs) in the Eurozone;
- An Executive Director of the ECB, of which there are six: Christine Lagarde, Luis de Guindos, Frank Elderson, Philip Lane, Fabio Panetta and Isabel Schnabel.[1]
Non-Eurozone member states have no involvement in the GC and no voting powers.
Two of the three levels invoke a rotation system. As there are currently 19 Eurozone member states, the rotation system laid down in the first sub-paragraph of Art 10.2 of the TFEU is in operation:
- The 19 governors are allocated to one of two groups
- Group 1: the 5 governors from the 5 largest member states by GDP and size of banking sector, which are Germany, France, Italy, Spain and the Netherlands
- Group 2: the governors from the other 14 member states
- Group 1 has 4 votes in any GC meeting (which occur monthly), and the governors rotate the right to cast a vote amongst themselves, 1 recusing themselves at each GC meeting
- Group 2 has 11 votes in any GC meeting (which occur monthly), and the governors rotate the right to cast a vote amongst themselves, 3 recusing themselves at each GC meeting [2]
Croatia’s joining the euro will add one GC member and 1 member of Group 2. The mechanism only changes when there are 22 governors. From the point of Croatia’s joining Group 2 will comprise 15 governors, still with 11 votes, meaning that 4 will recuse themselves at each GC meeting.
The first level of decision neither invokes the rotation nor involves Executive Director members of the GC. It reserves certain matters to the Eurozone shareholders acting through the governors. All governors vote; there is no rotation of votes between them. This type of vote must be carried by GC members representing NCBs that make up at least 66% of the ECB’s subscribed capital and 50% of the shareholders numerically.
The reserved matters are:
- capital (Art 28)
- keys for subscription of capital (Art 29)
- transfer of foreign assets (Art 30)
- allocation of monetary income of NCBs (Art 32)
- allocation of ECB profit and loss (Art 33)
The TPM is not a reserved matter, and nor are the ECB’s other bond-buying programmes amd its cheap credit to banks called Targeted Longer-Term Refinancing Operations aka TLTRO.
The second level is what we might term an ordinary decision regarding ‘Open market and credit operations’ pursuant to Art 18 that are within the scope of Art 2 ‘Objectives’, and it both invokes the rotation system and involves Executive Director members. A simple majority of the GC is required, meaning of the 6 Executive Director members and the 15 governors acting as per the rotation rules (4 governors from Group 1 and 11 from Group 2). 11 of the 21 GC members must vote in favour for the motion to be carried.
The third level is where the ECB wants to undertake ‘Other instruments of monetary control’ under Art 20. By implication this will be a new type of operation and it requires endorsement through a form of QMV. ‘Other instruments of monetary control’ under Art 20 must also fall within the scope of Art 2 ‘Objectives’.
A super majority of 66% of the GC is required, meaning of the 6 Executive Director members and the 15 governors acting as per the rotation rules (4 from Group 1 and 11 from Group 2). In this case 14 of the 21 GC members must vote in favour.
The communication around the TPM has stressed it as a precondition for the ECB to fulfil its mandate, which is ‘price stability’, the maintenance of which presupposes that the ECB’s monetary policy is transmitted equally through all Eurozone member states and is not disturbed by unwarranted instances of investors selling some member states’ bonds and buying those of others.
Highly tenuous as this logic chain is, its first aim is to argue that the TPM falls within the ECB’s mandate in line with Art 2, by linking it (even if disingenuously) to the things that are defintiely within its mandate. Otherwise the TPM would fall outside the ECB’s powers and would need a change to the TFEU to permit it. No GC meeting can vote to expand the ECB’s powers under the TFEU.
The second aim of the ECB’s logic chain is to characterize the TPM as an ‘Open market and credit operation’ pursuant to Art 18 and not as an ‘Other instrument of monetary control’ pursuant to Art 20.
As long as these arguments are accepted, the TPM need only obtain a simple majority in order to be adopted. Had it only been construed as an ‘Other instrument of monetary control’ under Art 20 while still falling within the meaning of Art 2, a 66% majority of the GC would be needed.
It appears that the ECB got its way. The TPM was accepted, but actually it does not exist because the conditions under which it could exist cannot occur: the bond yields of a member state increasing but for reasons unconnected with any objective financial situation at the said member state. That doesn’t happen, so Germany should have no need to worry that it is completely powerless against the ECB. The dog-that-never-barks – the German Constitutional Court in Karlsruhe – can also return to its deep slumbers.
[1] https://www.ecb.europa.eu/ecb/orga/decisions/govc/html/index.en.html accessed on 15 July 2022
[2] https://www.ecb.europa.eu/ecb/educational/explainers/tell-me-more/html/voting-rotation.en.html accessed on 15 July 2022