The legal nature of market neutrality in the euro area’s monetary policy

Abstract European Central Bank (ECB) staff have repeatedly justified the carbon bias of the Asset Purchase Programme (APP) in terms of “market neutrality”. Yet this term is not included in the Treaties so its meaning and legal nature are unclear. To clarify the meaning of market neutrality in the euro area’s monetary policy we develop a summative content analysis of the textual data contained in relevant legal and policy documents that are publicly available. We conclude that, in the context of monetary policy, the ECB and its staff have used the term market neutrality with two meanings: (i) the minimisation of any impact on the operation of markets and, in particular, on the operation of the price discovery mechanism; and (ii) the mirroring of the composition of a particular market to guide asset purchases. We then examine the legal nature of market neutrality in each of these two meanings. In its first meaning, we argue that market neutrality is the ECB’s definition of the so-called ‘principle of an open market economy’ (‘OME principle’) and it is therefore primary law. In its second meaning, we argue that market neutrality operationalises the OME principle and is therefore secondary law. Our conclusions differ from those reached by the first academic enquiries into the legal nature of market neutrality and open an academic debate on the matter. A clear understanding of the legal nature of market neutrality is also essential to assess the validity of the ECB’s climate change action plan.