Opinion of the European Central Bank of 22 November 2021 on the designation of the Central Bank of Cyprus as an Emergency Civil Planning Agency (CON/2021/35)

OPINION OF THE EUROPEAN CENTRAL BANK of 22 November 2021 on the designation of the Central Bank of Cyprus as an Emergency Civil Planning Agency (CON/2021/35) Introduction and legal basis

On 30 September 2021 the European Central Bank (ECB) received a request from the Minister for Defence of the Republic of Cyprus for an opinion on a draft decree on the designation of the Central Bank of Cyprus (CBC) as an Emergency Civil Planning Agency (ECPA) of 2021 (hereinafter the ‘draft decree’). The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union and the third indent of Article 2(1) of Council Decision 98/415/EC , as the draft decree relates to the CBC. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. Purpose of the draft decree

1.1 The draft decree designates the CBC as an Emergency Civil Planning Agency (ECPA) and calls on the Governor of the CBC to draw up, in consultation with the Minister for Defence or the Central Emergency Civil Planning Authority (CECPA), a detailed emergency plan in accordance with the principles to be included in the general emergency civil planning strategy. 1.2 The explanatory memorandum submitted by the Ministry of Defence states that the main purpose of the draft decree is to enable the CBC to develop the necessary mechanisms for the smooth continuation of its operational functions if the Republic of Cyprus declares a state of emergency, thus enabling the Republic both to continue carrying out, through the CBC, its domestic and foreign payments, and to maintain or increase its defence capabilities. In addition, in order for the CBC to effectively comply with its legal obligations, it will have to examine the procedures regarding the carrying out of critical transactions or payments, as well as the safeguarding of its own assets and subsequently the assets of the Republic of Cyprus. 1.3 The draft decree is to be read together with the relevant legislation currently in force, comprising the Law on Emergency Civil Planning of 2000 (hereinafter the ‘Law’) and the Regulations on

Emergency Civil Planning (General) of 2011 (hereinafter the ‘Regulations’). 1.4 According to the Law, the Council of Ministers must take all measures it deems appropriate from time to time for the purpose of strengthening the defence capacity of the Republic of Cyprus in the face of any hostile actions against it. The Council of Ministers is also granted the power to proclaim, by issuing a decree, any ministry or independent service of the Republic, or any department or agency thereof, and any public or private law body, or any department or agency thereof, as an ECPA, and to call on the relevant minister, director, supervisor or manager, as the case may be, in consultation with the Minister for Defence or the CECPA, to draw up a detailed emergency plan and to undertake the organisation, self-protection and training of the staff of that ECPA in order to be able to apply the plan in a state of emergency. The Law further provides that, notwithstanding the provisions of any other law or regulation or employment contract relating to the terms of service of employees, the staff members of any ECPA and their employers, supervisors or directors must comply with the provisions of the decree issued by the Minister for Defence. 1.5 The Law defines ‘state of emergency’ as a state declared by the Council of Ministers in the event of war or the threat of war in line with Article 183(1) the Constitution of the Republic of Cyprus. According to the latter, in the event of war or any other public danger threatening the existence of the Republic or any part thereof, the Council of Ministers has the power, by a decision taken in this respect, to declare a state of emergency, subject to the right of veto against any such decision that may be exercised, jointly or severally, by the President and the Vice-President of the Republic within forty-eight hours of the date of that decision. 1.6 In addition, the Law provides that the Minister for Defence must prepare and submit to the Council of Ministers for approval a general plan for emergency planning, the purpose of which is to define the basic principles on the basis of which the detailed emergency plans of the ECPAs are drawn up regarding: (a) their organisation and training in peacetime; and (b) their action and self-protection in a period in which there is a valid state of emergency. 1.7 Any violation or non-compliance with any provision of a regulation, decree or directive issued under the Law is an offence punishable by imprisonment of not more than six months or a fine not exceeding five hundred pounds or both. 1.8 The Regulations set out the details regarding the establishment, operation and staffing of the ECPAs and are applicable to all ECPAs and their personnel. The Regulations grant the Minister for Defence, by way of issuing instructions, the power to exercise general oversight and control over the ECPAs and the duty of coordinating and providing the ECPAs with guidance when regulating any matters that need clarification regarding the implementation of the Law and Regulations and the relevant decisions of the Council of Ministers. The Minister for Defence may also monitor whether the ECPAs: (a) have taken all necessary measures for their organisation, staffing, preparation and readiness, as well as the training of their staff, for the purpose of carrying out their mission; (b) have created and operate suitable and equipped infrastructures; (c) coordinate and cooperate with the CECPA; and (d) are supplied with, store and maintain the necessary materials, supplies and other means required to implement their emergency plans.

1.9 Moreover, each ECPA must: (a) comply with the instructions issued by the Minister for Defence; (b) prepare an emergency plan in consultation with the CECPA, within six months of its designation as an ECPA; (c) take any measure it deems expedient or necessary to implement the provisions of the Law and Regulations, the relevant instructions of the Minister for Defence and its emergency plan. This includes measures on: (i) its organisation, staffing, preparation and readiness; (ii) the training of its staff; and (iii) securing the means, supplies, materials or resources necessary to accomplish its mission; (d) participate, when requested, in emergency planning exercises as designated by the Minister for Defence; and (e) notify the CECPA of any change in the official status of any member of its staff in its employment, as well as of any change in the means and material resources at its disposal, provided that the implementation of its emergency plan is directly or indirectly affected, and immediately take appropriate measures, including modifying or revising that plan, in cooperation with the CECPA. 1.10 The Regulations further provide that each ECPA must establish a dedicated department which will be responsible for coordinating the work and fulfilling the assignments of the ECPA in a state of emergency. The head of the department is given a number of responsibilities, including submitting to the manager of the ECPA any measures deemed necessary to better implement, inter alia, the Law, the Regulations, the general civil emergency and the specific emergency plans and the maintenance of a registry listing the personnel of the ECPA and any other relevant information. 1.11 The ECPA’s personnel comprises staff members of the ECPA, as well as any other individuals called into service or for training by the Minister for the Interior, such as National Guard reservists or individuals with a reserve duty to the Civil Defence, or others deemed suitable on the basis of their specialised education, skills or experience. The ECPA’s personnel is obliged, inter alia: (a) to comply with the provisions of the Law, the Regulations and the instructions issued thereunder, as well as their obligations stemming from the applicable emergency plan; (b) to maintain professional secrecy; (c) to notify the dedicated department of any temporary or permanent change to their residence; and (d) to carry with them any device or equipment given to them for the exercise of their duties and not to give access to them to any other person. In the event of a declaration by the Cypriot government of a state of emergency, the ECPA’s personnel may be called into service by the Minister for the Interior, following the approval of the Council of Ministers. The regular employment of any person called into service or for training is suspended for the duration of the service or training. 1.12 In addition, the dependents of any member of the ECPA’s personnel who dies during training or service, and any member of ECPA’s personnel who becomes incapable of performing their employment due to an injury or illness caused while performing their service or training, are entitled to compensation. The members of the ECPA’s personnel are also not to be held liable for any damage caused by any action or omission during the exercise of their duties, provided that such damage was reasonably necessary for the exercise of their duties, except in the event of negligence or fault on their part.

2. General observations

2.1 As previously noted by the ECB , under the Treaty the Union has exclusive competence in the area of monetary policy for Member States whose currency is the euro . Therefore, a Member State whose currency is the euro transfers to the Union its powers in the area of monetary policy and the tasks of the European System of Central Banks (ESCB) enumerated in the Treaty and the Statute of the European System of Central Banks and of the European Central Bank (hereinafter the ‘Statute of the ESCB’). In these fields, Member States whose currency is the euro may not adopt unilateral measures as it is for the decision-making bodies of the ECB alone to take the measures necessary to ensure the performance of the tasks entrusted to the ESCB under the Treaty and the Statute of the ESCB , including contingency planning with respect to the continued performance of these tasks. Furthermore, when exercising their powers and carrying out their ESCB tasks, the ECB and the national central banks (NCBs) act independently, which means that they may not seek or take instructions from any government of a Member State when performing their tasks. The governments of the Member States have undertaken to respect this principle . Moreover, under Article 127(6) of the Treaty and Council Regulation (EU) No 1024/2013 specific tasks concerning the prudential supervision of credit institutions have also been conferred upon the ECB. As previously noted by the ECB, pursuant to the principle of sincere cooperation under Article 4(3) of the Treaty on European Union, the Member States are obliged to assist the ECB in carrying out tasks which flow from the Treaties. This implies that Member States should refrain from taking any measures which could jeopardise the ECB’s or the ESCB’s objectives . 2.2 Article 347 of the Treaty envisages that a Member State may be called upon to take action in the event of serious internal disturbances affecting the maintenance of law and order, in the event of war, serious international tension constituting a threat of war, or in order to carry out obligations it has accepted for the purpose of maintaining peace and international security. However, any reliance on Article 347 of the Treaty must take place strictly in the exceptional cases laid down in the Treaty itself, as interpreted by the Court of Justice of the European Union (CJEU) , in a restrictive manner, and it can therefore be understood only as a ‘hedging clause’ and not as an expression of any residual Member State competence . Moreover, the CJEU has held that, when acting due to urgency in areas of exclusive Union competence, Member States may act only as

‘trustees of the common interest’ and may not bring into force any interim measures except as part of a process of collaboration with the Union . Accordingly, only where the conditions under Article 347 of the Treaty are met, may national authorities be justified in exercising, on a temporary and exceptional basis, powers that fall within the exclusive competence of the ESCB . Due to the exceptional nature of Article 347 of the Treaty, Member States should refrain from adopting preventive legislation in the absence of the conditions prescribed by Article 347 of the Treaty . If the national legislature wishes to rely on this provision, it is for the Member State to ensure that the conditions for applying Article 347 of the Treaty are specifically fulfilled at the time of adopting the measure that conflicts with that Member State’s Treaty obligations. 2.3 The ECB understands that the Law and the Regulations take a holistic approach to national defence, whereby national defence includes not only the actions of specific defence authorities, such as the Council of Ministers, the Minister for Defence, the CECPA and other specifically designated authorities, but also includes within national defence the actions of other public bodies and private persons within their respective fields of competence. As part of such a national defence policy the functions fulfilled by public bodies in usual circumstances, including the central banking function, support the resolution of national defence situations. The ECB notes that this approach must not lead to a breach of the obligations of the Republic of Cyprus under the Treaty and the Statute of the ESCB highlighted above. 2.4 As noted in paragraph 1.8, the Minister for Defence has the power to oversee the ECPAs and issue instructions to the ECPAs, including the CBC, with which the ECPAs have a duty to comply. The rights of government officials to give instructions to NCBs, their decision-making bodies or their members are incompatible with the Treaty and the Statute of the ESCB as far as ESCB-related tasks are concerned . Therefore, while the ECB understands that the powers attributed to the Minister for Defence are intended to ensure compliance with the applicable legal framework on national defence preparedness, it recommends that it should be explicitly clarified in the draft decree, for the avoidance of any doubt, that there should be no interference with the tasks and duties of the CBC as part of the ESCB . 2.5 Finally, it is understood that the exact defence tasks that the CBC will have to undertake are to be specified in the emergency plan to be drawn up by the CBC, in consultation with the Minister for Defence or the CECPA, after the issuance of the draft decree.

3. Specific observations – conferral of new tasks on the CBC

3.1 New tasks of the CBC 3.1.1 By designating the CBC as an ECPA and by virtue of the Law and the Regulations, the draft decree confers upon the CBC a number of tasks, such as preparing and implementing a dedicated emergency plan, ensuring that it is organised, prepared and has the necessary means and resources, and training its staff . The proposed national defence preparedness tasks of the CBC would differ from internal contingency planning undertaken by ESCB central banks such as the CBC. Contingency planning for the discharge of ESCB and other central banking tasks may take the form of an internally-driven process whereby the ESCB central banks evaluate for themselves which resources they would need and how they should prepare for various emergency situations, including situations that could be characterised as defence situations, based on their own targets and strategies. By contrast, the proposed national defence preparedness tasks of the CBC will be driven by external strategic plans and aims set by the Cypriot Government and would require the CBC to take into account considerations external to the CBC, most notably the overarching national defence framework. This could lead to the CBC acquiring resources it might not otherwise have considered relevant, participating in planning processes it would not otherwise have taken part in and/or developing processes it would not otherwise have introduced. This means, in effect, that the new tasks introduce, alongside any internal contingency planning process, an additional process driven by the national defence framework. As such, the proposed new national defence preparedness tasks would differ from an internal contingency planning performed by the CBC, including within the framework of the ESCB, and therefore involves the conferral of a new task on the CBC . 3.1.2 The ECB underlines that a proposed conferral of new tasks on an NCB in the ESCB must be assessed against the prohibition on monetary financing under Article 123 of the Treaty. For the purposes of that prohibition, Article 1(1)(b)(ii) of Council Regulation (EC) No 3603/93 defines ‘other type of credit facility’, inter alia, as ‘any financing of the public sector’s obligations vis-à-vis third parties’. 3.1.3 Ensuring that Member States implement a sound budgetary policy is one of the key objectives of the monetary financing prohibition . Therefore, the task of financing measures, which are normally the responsibility of the Member States, and which are financed from their budgetary sources rather than by the NCBs, must not be entrusted to NCBs. To decide what constitutes financing of the public sector’s obligations vis-à-vis third parties, which can be translated as the provision of central bank financing outside the scope of central bank tasks, it is necessary to carry out, on a case-bycase basis, an assessment of whether the task to be undertaken by an NCB is a central bank task or a government task, i.e. a task that falls within the responsibilities of the Member States.

3.1.4 As part of its discretion in the exercise of its duty, on the basis of Article 271(d) of the Treaty and Article 35.6 of the Statute of the ESCB, to ensure that NCBs honour the obligations laid down by the Treaty, the Governing Council has endorsed criteria for determining what may be seen as falling within the scope of a public sector obligation within the meaning of Article 1(1)(b)(ii) of Regulation (EC) No 3603/93 or, in other words, what constitutes a government task as follows: First, central bank tasks are in particular those tasks that are related to the tasks that have been conferred upon the ECB and the NCBs by the Treaty and the Statute of the ESCB. These tasks are mainly defined in Articles 127(2), (5) and (6) and 128(1) of the Treaty, as well as Article 22 and Article 25.1 of the Statute of the ESCB. Second, as Article 14.4 of the Statute of the ESCB allows NCBs to perform ‘other functions’, new tasks, i.e. tasks that are not related to tasks that have been conferred upon the ECB and the NCBs, are not precluded per se. However, new tasks that are undertaken by an NCB and which are atypical of NCB tasks or which are clearly discharged on behalf of, and in the exclusive interest of, the government or other public sector entities should be considered government tasks. Third, an important criterion for qualifying a new task as atypical of an NCB task or as being clearly discharged on behalf of, and in the exclusive interest of, the government or other public sector entities is the impact of the task on the institutional, financial and personal independence of that NCB. In particular, the following aspects should be taken into account: (a) whether the performance of the new task creates conflicts of interest with existing central bank tasks which are not adequately addressed and does not necessarily complement those existing central bank tasks. If a conflict of interest arises between existing and new tasks, sufficient safeguards to mitigate that conflict should be in place. The complementarity between a new task and the existing central bank tasks should not be interpreted broadly, so as to lead to the creation of an indefinite chain of ancillary tasks. Such complementarity should be examined in relation to the financing of those tasks; (b) whether without new financial resources the performance of the new task is disproportionate to the NCB’s financial or organisational capacity, and may have a negative impact on the capacity to perform properly the existing central bank tasks; (c) whether the performance of the new task fits into the institutional set-up of the NCB in the light of central bank independence and accountability considerations; (d) whether the performance of the new task harbours substantial financial risks; (e) whether the performance of the new task exposes the members of the NCB decisionmaking bodies to political risks which are disproportionate and may also have an impact on their personal independence and, in particular, on the guarantee of term of office set out in Article 14.2 of the Statute of the ESCB. 3.1.5 Based on the criteria set out above, the following paragraphs assess whether the new national defence preparedness tasks of the CBC are in line with the prohibition on monetary financing.

3.2 Tasks related to the tasks conferred upon the ECB and the NCBs by the Treaty and the Statute of

the ESCB

3.2.1 The purpose of the Law and, by consequence, of the Regulations and the draft decree is to

strengthen the defence capacity of the Republic of Cyprus in the face of any hostile actions against

it. The functions of the NCBs under the Treaty and the Statute of the ESCB do not encompass this

aim. The new tasks conferred on the CBC are not therefore related to the tasks that have been

conferred upon the ECB and the NCBs by the Treaty and the Statute of the ESCB.

3.3 Tasks which are atypical of NCB tasks

3.3.1 While the majority of NCBs of the ESCB do not appear to have been assigned national defence

preparedness tasks, NCBs in several Member States have been assigned national defence

preparedness tasks which are similar to the new task assigned to the CBC . Based on this the

proposed national defence preparedness task of the CBC could be considered to be a task which is not atypical of NCB tasks. In several Member States the related costs for the NCBs are required to be reimbursed by the central government . 3.4 Tasks clearly discharged on behalf of and in the exclusive interest of the government 3.4.1 As noted above, the purpose of the Law and, by consequence, of the Regulations and the draft decree is to strengthen the defence capacity of the Republic of Cyprus in the face of any hostile actions against it. The CBC’s proposed national defence preparedness task would therefore be clearly discharged on behalf of and in the exclusive interest of the Cypriot government . 3.5 Extent to which performance of the new tasks create conflicts of interest with existing central bank

tasks

3.5.1 The performance of the national defence preparedness task would be unlikely to give rise to any conflicts of interest with the CBC’s existing central bank tasks. However, it should be ensured that the assignment of national defence tasks to the CBC does not conflict with Union law (see paragraph 2.1) . 3.6 Extent to which performance of the new tasks are disproportionate to the CBC’s financial or

organisational capacity

3.6.1 As previously noted by the ECB , the principle of financial independence requires that Member States may not put their NCBs in a position where they have insufficient resources to carry out both their ESCB-related tasks and their national tasks, from an operational and financial perspective. Furthermore, when allocating specific new tasks to NCBs, each NCB concerned should have sufficient financial and human resources at its disposal to ensure that the tasks can be carried out without impacting on the NCB’s financial or operational capacity to perform its ESCB tasks. In order to ensure that the CBC’s capacity to perform its ESCB-related tasks is not impaired, the CBC must, therefore, be in a position to avail itself of the necessary resources to carry out its duties under the draft decree, together with the Law and the Regulations. At this stage, it is not possible for the ECB to assess what additional resources the CBC will require in order to perform its new tasks under the draft decree, together with the Law and the Regulations. Nevertheless, it is noted that the draft decree does not provide for the CBC being reimbursed for the costs of carrying out these new tasks as is the case in at least three Member States where reimbursement mechanisms for the performance of similar tasks have been included in the relevant national legislation (see paragraph 3.3.1). Although the ECB is not aware of whether the potential financial burden on the

CBC will be significant, the ECB invites the consulting authority to consider the impact of the draft decree, together with the Law and the Regulations, on the resources of the CBC, and include a reimbursement mechanism in the relevant legislation in order to avoid any potential breach of Article 123 of the Treaty . 3.7 Extent to which performance of the new task fits into the institutional set-up of the CBC, in the light of central bank independence and accountability considerations 3.7.1 The potential impact of the new tasks on the institutional, financial and personal independence of the CBC must also be taken into consideration. In particular, consideration is given to the power granted to the Minister for Defence to exercise general oversight and control over the fulfilment of the new tasks and to give the CBC instructions in this regard. While it is understood that this power is aimed at compliance with the national defence preparedness framework, it should be ensured that, as far as the fulfilment of ESCB-related tasks is concerned, this power is exercised in accordance with Union law (see paragraph 2.2). 3.8 Extent to which the performance of tasks harbours substantial financial risks 3.8.1 The Regulations provide that the members of an ECPA’s personnel are not to be held liable for any damage caused by any action or omission during the exercise of their duties, provided that such damage was reasonably necessary for the exercise of their duties, except in the event of negligence or fault. Furthermore, this task would seem to primarily require planning and coordination within the CBC and with the competent national authorities. Hence, the ECB is not aware of significant financial liabilities for the CBC arising out of this task. At the same time, the ECB invites the consulting authority to consider introducing a provision on the liability of the CBC in relation to the tasks it undertakes in carrying out its role as an ECPA to bring it in line with other existing laws which attribute tasks to the CBC . 3.9 Extent to which the performance of the new tasks expose members of the decision-making bodies of the CBC to disproportionate political risks and impact on their personal independence 3.9.1 The ECB does not consider that the new tasks would either expose the members of the decisionmaking bodies of the CBC to disproportionate political risks or impact on their personal independence. Moreover, national defence preparations and planning are primarily the tasks of other authorities and the additional involvement of the CBC in national defence preparations is not likely to be substantial. In such circumstances any impact on the members of the CBC’s decisionmaking bodies should be limited . 3.10 Conclusion regarding the conferral of new tasks on the CBC 3.10.1 Although the new tasks, including the national defence preparedness task of the CBC, could be considered to be tasks which are not atypical of NCBs’ tasks in the ESCB, these tasks would be clearly discharged on behalf of and in the exclusive interest of the Cypriot government, in order to ultimately strengthen the defence capacity of the Republic of Cyprus in the face of any hostile

actions against it. Given that these tasks go beyond the internal contingency planning tasks of a central bank, they are government, rather than central banking tasks. Therefore, similar to the arrangements existing in a number of Member States which have conferred comparable tasks on their NCBs, a mechanism for reimbursing the CBC for any costs incurred in the performance of this government task should be introduced in the relevant legislation.

This opinion will be published on EUR-Lex.

Done at Frankfurt am Main, 22 November 2021.

[signed]

The President of the ECB

Christine LAGARDE