Why Lagarde’s ECB Appointment is (Almost Certainly) Unlawful

On 2 July, after three days of infighting and political horse-trading, the European Council reached an agreement on appointments to the EU’s ‘top jobs’. To say that these have been controversial would be an understatement, not least because of the process leading to the appointments. The Council’s decision was reached behind closed doors. There was no public scrutiny of the appointees or their agenda for the Union. The European Parliament was all but ignored, as the Council defied the ‘Spitzenkandidaten’ process to appease the leaders of the Visegrad Group. Even the very liberal and pro-EU Guardian conceded that this isn’t an obvious advertisement for the project.

A lot has already been written on the controversies surrounding the four appointees, including the ongoing probe into von der Leyen’s awarding of contracts at the German’s defence ministry and the various corruption allegations against Josep Borrell, the Council’s pick for the role of High Representative for Foreign Affairs. However, Christine Lagarde – chosen to head the European Central Bank – has been largely immune from those controversies. In this post, I argue that insufficient attention has been paid to the fact that Lagarde was actually convicted of a criminal offence for her role in a major financial fraud case and that this raises serious questions regarding the legality of her appointment. Following a brief summary of Lagarde’s role in the Tapie Affair, I examine the rules governing the appointment of the ECB President under the EU Treaties. Other sources of law may be envisaged, such as general principles of EU or global administrative law. But these are beyond the purview of this post and, as will become apparent, my view is that there is sufficient ground under the EU treaties to argue that Lagarde’s criminal conviction renders her appointment invalid and thus liable to judicial review and annulment.

Christine Lagarde: ‘rock star’ of international finance and convicted felon

The appointment of Lagarde – Managing Director of the IMF and ‘rock star’ of international finance – has been met with nothing short of wild enthusiasm by the liberal media. Poised, capable, highly experienced, a good listener with savvy political instincts and deep connections in global finance, she has been hailed ‘the right choice’ to head the ECB and ‘just what Europe needs’ in these troubled times. Lagarde is also a woman, the first ever to score the top job at global law firm Baker McKenzie, to serve as finance minister of a G7 country, to lead the IMF, and now poised to break yet another glass ceiling. A remarkable individual by any measure which, compared to other appointees, may at first glance appear squeaky clean.

Yet, whereas other appointees are tainted with allegations of wrongdoing, Lagarde was actually convicted for her role in the Tapie Affair – a long-running political scandal in which the French state was cheated by nearly half a billion euros through a rigged arbitration. Largarde – who was finance minister at the time – approved a massive payout to French oligarch Bernard Tapie and refused to appeal the arbitral award. This was done against her advisers’ recommendation and in the face of serious corruption allegations which eventually led to the award’s annulment. In what is widely suspected to be part of a secret pact between Tapie and Sarkozy involving a huge payout in return for election support, Largarde was found guilty of gross criminal negligence causing the misappropriation of public funds.

As is all too familiar with white-collar establishment criminals, Lagarde did not receive a formal punishment on account of her ‘international reputation’ and the ‘context of global financial crisis’, causing intense controversy in France and once again proving Jean de la Fontaine’s maxim ‘selon que vous serez puissant ou misérable, les jugements de cour vous rendront blanc ou noir’. Yet her criminal liability was definitively established and her conduct was deemed a ‘decisive cause’ (page 15 of the judgment) in the conspiracy to defraud the French state.

The EU Treaties and the Appointment of the ECB President

The appointment of the EU’s top officials is a notoriously political affair in which EU leaders strike complex compromises based on national preferences, geographical representation, support by leading political parties and policy considerations. Yet the EU remains – as the saying goes – a Union of law, where decisions must have a basis in the constitutive treaties and are made within an agreed legal framework. This goes for technical regulations concerning banana curvature as it does for big political decisions such as top-job appointments. What then do the EU treaties tell us about the appointment of the ECB President? In truth, not much.

The process for appointing the ECB’s Executive Board (including the President) is laid out in article 283 TFEU. The Board is appointed by the European Council, acting by a qualified majority, after consultation of the European Parliament and the ECB’s Governing Council. Yet when it comes to the person specifications for what is in essence one of the most powerful positions in the EU, the Treaties are remarkably short on detail. They lay out only two basic principles: the ECB President must hold the nationality of a Member State; and they must be appointed ‘from among persons of recognised standing and professional experience in monetary or banking matters’ (art. 283(2) TFEU).

As a French national, Lagarde clearly meets the first condition. Whether she satisfies the second is a lot less evident and requires some careful consideration of the meaning of relevant treaty provisions. To be clear, I am not interested here in whether, as a politician with no central banking experience, Lagarde possesses the required qualifications to lead the ECB. Leaving aside the question’s sexist undertone (would we really be asking this if Lagarde was a man?), the ECB has come to assume a highly political role, especially since the Eurozone crisis, and economics are in any event far too important to leave to narrowly focused professional economists.

My concern here is whether, given her conviction in a major financial crime case, Lagarde can reasonably be said to be a ‘person of recognised standing’. To answer this question, one must ascertain the meaning of the term ‘standing’ in the TFEU. ‘Standing’, in the English language, normally refers to a person’s social position, status or reputation. Standing here is axiologically neutral. One can be in good or bad standing. In this acception, ‘person of recognised standing’ may simply denote a person with an established career in the world of finance, a known figure with significant professional experience and competence in areas of relevance to the ECB. However, standing is also often used in a more normative sense to denote a person with good social or moral credentials, an individual commanding respect or admiration because of their positive contribution or influence. In the UK, for instance, passport applications must be countersigned by a ‘person of standing’ in the community, meaning a ‘person of good standing’, the two terms often being used interchangeably.

Looking at non-English versions of the TFEU, it appears plausible that the parties may have intended to use the term standing in this second acception. The French version of the TFEU does for instance use the term ‘autorité’, which indicates a person serving as a reference for others owing to their excellence or seriousness, whilst the Spanish text uses the term ‘prestigio’, a notion with a positive connotation used to describe the respect and admiration resulting from a person’s reputation for high quality, success or social influence.

In the absence of a plain ordinary meaning or clear party intention, the rules of treaty interpretation require taking into account the context of the treaty, including subsequent agreements between the parties and subsequent state practice. In ascertaining the meaning of article 283(2) TFEU, it is helpful to look at the manner in which member states have construed the concept of ‘standing’ in their own legislation, including the statute of their national central banks [NCBs]. NCBs form an integral part of the ESCB (European System of Central Banks, see art. 282(1) TFEU) and their statutes were all revised following the adoption of the Maastricht and Amsterdam Treaties. They therefore constitute implementing legislation and, as such, are highly relevant to the interpretation of the EU treaties.

Looking at NCB statutes, it is fairly apparent that members of the banks’ governing bodies are expected to possess standing not simply in the axiologically neutral sense of competence or eminence, but also in the sense of integrity and honesty. Whilst a few statutes are silent on the question of governors’ credentials (Denmark, Germany, Netherlands, Portugal, Slovenia, Sweden), most indicate that only persons of high integrity are fit to serve on NCB governing bodies. Consider the following examples:

• ‘members of the Governing Council shall be elected and appointed only among persons of the highest integrity’ (Bulgarian statute, art. 11(3));
• Only a citizen ‘who is of integrity’ and ‘who has not been lawfully convicted of a criminal offence’ is appointable (Czech Republic, art. 7);
• The Board is composed of persons ‘whose reputation must be unblemished’(Estonia, art 4(2));
• A person cannot be appointed as Governor if ‘convicted of an offence’ (Ireland, section 19);
• Persons who are the object of a ‘conviction for a criminal offence’ cannot be appointed as Councillors (Greece, art. 14);
• The Director ‘shall be selected among persons […] who meet the requirements of integrity’. Candidates ‘cannot have sustained a conviction, even one still subject to appeal’ (Italy, art. 16);
• Bank commissioners ‘shall have a clean criminal record’ (Hungary, art. 79);
• ‘no person shall be appointed a director who […] under the law of any country has been […] convicted of a crime affecting public trust or of theft or of fraud’ (Malta, art. 9(3));
• ‘a member of the board must be a natural person who is […] of good repute [i.e.] has not been convicted by a final judgment of a deliberate crime’ (Slovakia, art. 7).

Statutes that do not explicitly list integrity as a requirement at the point of hiring typically contain dismissal clauses in case of serious misconduct whilst in office (Belgium, Spain, France, Croatia, Cyprus, Lithuania, Luxembourg, Austria, Poland, Romania, Finland, UK). The above demonstrates that member states have through their subsequent practice taken the view that serious misconduct – and especially criminal conviction – is incompatible with high office at a central bank. It would therefore appear inconsistent to interpret the requirement of ‘recognised standing’ in art. 283(2) TFEU in a narrow, axiologically neutral sense. If integrity is required of those heading NCBs, then surely the same ought to be expected – as a bare minimum – of the ECB President, given the ECB and NCBs together form part of the same European banking system.

The narrow interpretation of ‘recognised standing’ would also, I argue, be inconsistent with subsequent instruments adopted by the ECB itself. In 2015, the ECB adopted Decision 2015/433 on the establishment of an Ethics Committee and its Rules of Procedures. This affirms that ‘the increased level of public awareness and scrutiny requires the ECB to […] strictly adhere to state-of-the-art ethics rules in order to safeguard the ECB’s integrity and avoid reputational risks’. It also adds that ‘the ethics rules for members of [governing] bodies […] should be proportionate to the addressees’ respective responsibilities’, suggesting that persons at the highest echelons of power are to be subject to the strictest ethical rules.

This is confirmed in the ECB’s Code of Conduct for High-Level Officials, which affirms that:

‘as an institution of the EU, the ECB is required to serve the public interest and ensure the highest standards of integrity […] Adherence to these principles is a key element of the ECB’s credibility and […] a key prerequisite for safeguarding the reputation of the ECB’.

Whilst the Code of Conduct is concerned primarily with officials’ integrity in their discharge of duty, it also contains specific post-employment rules. It would be incoherent for ECB officials to be subject to the highest ethical standards during and after their term of office, whilst being free from any ethical requirement at the point of recruitment.

Under the Code of Conduct, high-level officials are expected to ‘lead by example and inspire employees […] to uphold [the highest ethical standards]’ and adherence to these principles is seen as ‘vital to securing the trust of European citizens’. It is hard to see how a person convicted for their role in a major fraud case could inspire others to act with integrity and foster public trust in EU institutions.

Cumulatively, the argument that the concept of ‘recognised standing’ under art. 283 TFEU is void of ethical content is extremely difficult to sustain. The correct reading of this provision is that it requires – at minimum – a high level of integrity and professionalism, both of which appear highly unlikely in the case of a person convicted of criminal negligence. Under this interpretation, Lagarde’s appointment – if confirmed after consultation of the European Parliament in September – would fall foul of the EU Treaties and would therefore be liable to judicial review and annulment.

It has been suggested to me that a point of distinction might exist between crimes of intention – which clearly speak to a person’s integrity – and crimes of negligence – which speak less to integrity than competence. I am happy to take on this argument in the comments section (the editors – who drew my attention to the issue – also drew my attention to the word limit…). Suffice it to say here that, although the argument may have some theoretical traction, it is rendered largely moot by the fact that, if my interpretation is correct, art. 283(2) TFEU requires both integrity and competence. Other questions, including who may have standing (no pun intended) to challenge Lagarde’s appointment before the ECJ, will also have to be addressed separately.

Conclusion

‘No, no, no, no, no’ is what Lagarde is reported to have said last year when asked if she was interested in running the ECB. ‘No, no, no, no, no’ is what any sensible advisor should have told members of the European Council when they first contemplated Lagarde for the role. Yes, compared to some of the other appointees, Lagarde appears competent. And yes, she is a woman, with undeniable qualities. But Lagarde’s judicial antecedents place her squarely in the shady circle of male politicians who, for decades, have continued to prosper despite allegations and convictions of wrongdoing. As noted by one commentator, ‘the female fiscal ‘rock star’ has done well to haul herself up a greasy and frequently dishonourable career pole, but this by no means suggests she is somebody to be admired’. Gender parity is good. Political integrity is better.