Thursday, 19 February 2015

Could Greece sue the ECB?

One thing I've noticed about the European Central Bank (ECB) is that it likes to publish woolly worded documents and then brief its preferred interpretation of them to those who hang around in the lobby. Those then get written up and disseminated to become The Truth in the classic repeated assertion fashion by people who like to get paid and no doubt wined and dined, but not think too much.

Thus the ECB acts in a political fashion as the politically independent entity it is within the European Union.

But it is not legally independent. It is governed by statute and the treaty and importantly subject to the control and jurisdiction of the National Courts within each member state (ECSB Statute Article 35) and the European Court of Justice.

There is a provision within the Treaty (Article 340) that states: "the European Central Bank shall, in accordance with the general principles common to the laws of the Member States, make good any damage caused by it or by its servants in the performance of their duties."

So we come to the thorny issue of Emergency Liquidity Assistance (ELA) and the rules governing it. There is no lender of last resort function delegated to the ECB within the ECSB Statute, and that means that function is delegated to the National Central Banks (ECSB Article 14.4).

The preferred interpretation of the rules put out by the ECB is that the National Central Bank has to ask for permission before issuing ELA. That is not how the rules are written. Lender of last resort is a National Central Bank competency and  "Such functions shall be performed on the liability of national central banks and shall not be regarded as being part of the functions of the ECSB".

So when handing out ELA that is not something the ECB has any say over. What it does have say over is whether such an action interferes with the 'Objectives and Tasks of the ECSB'. So what the ECB asks for in this instance is data so that the governing council can decide if things are being interfered with.

Providing that data however is a bureaucratic nightmare, so the rules provide an option to the National Central Bank to allow it to ask the ECB for ELA clearance. It has to refer itself to the governing council to ask for that clearance. What the clearance does is absolve the National Central Bank of the requirement to report ELA transactions until the value exceeds the determined amount.

So the ECB can only direct the National Central Bank to stop making ELA payments if it finds, by vote of the council, that the action would be in breach of the 'objectives and tasks of the ECSB'. Of course if they do that then they collapse the payment system in that member state. Yet Article 3.1 of the ECSB statute states that one of the 'basic tasks' of the ECSB is 'to promote the smooth operation of the payment system'.

It is not within the jurisdiction of the ECB to complain if commercial banks decide to purchase forms of government debt on the open market, or if a national central bank managing those commercial banks considers such debt to be perfectly sound for the purposes of its local operations even if the ECB doesn't for supranational purposes. Those are commercial decisions made by those entities.

IANAL, however I would submit that should the governing council of the ECB decide to withdraw ELA from any member state they are in breach of their duties under the statute of the ECSB and therefore liable for any damage caused to the member state. And they can be sued for that in the national court of the member state concerned.