There are at least two ways to read the decision rendered by the German Constitutional Court – BundesVerfassungsGericht or BVerfG – on May 5, 2020 (BVerfG, Urteil des Zweiten Senats vom 5. Mai 2020), in the case opposing the ECB to a group of complainants, claiming that the Frankfurt-based monetary institution went beyond its legal mandate, when it decided in March 2015 to launch a large scale asset purchase programme (APP) targeting first and foremost government bonds. We can read it through the lenses of Economic Policy or through the lenses of Constitutional Law and EU Politics. From both perspectives, the ruling contains useful insights that clarify some complicated questions and shed light on economic policy options available to the ECB and to EU/Eurozone Member States going forward. The fact that this ruling comes in the midst of an unprecedented global economic crisis, stemming from the measures enacted to combat the coronavirus pandemic, makes it even more critical to understand.
Here are the key takeways from this almost 100 pages ruling. The english version of the ruling can be downloaded here:
- According to the German Court, the ECB must submit its actions to the proportionality principle which commands that its asset purchase programme must be proportionate to its monetary policy goal which is to keep inflation below but close to 2% in the medium to long term. In other words the ECB must not develop an economic policy agenda of its own, beyond its legal mandate.
- This ruling challenges a prior decision rendered by the European Court of Justice in December 2018, which endorsed ECB’s APP/PSPP programme and acknowledged that it was not possible to separate the conduct of monetary policy from broader economic policy objectives and effects.
- The challenge to the power of the ECB stemming from this ruling is more rhetorical than real. The independence of the ECB is enshrined in the Treaties and it has no obligation to respond directly to the claims mades by the German constitutional Court, or for that purpose to any institution or court other than the ECJ.
- However, the ruling clarifies that the European Union is not a Federal State and that the authority conferred by the Treaties to the European Institution is only delegated and can be challenged by the citizens of the Member states on the basis of democracy and popular sovereignty.
- Therefore, this decision could set a legal precedent in other areas and could complicate policy making efforts at the EU level
From an economic policy perspective: ECB policies may be challenged on the account of their proportionality
From a purely economic perspective, the German Constitutional Court does no really bring new elements other than what was already contained in the ruling by the ECJ ECB might do and what it might not do to fulfil its core mandate. The ruling recaps the original arguments of the complainants, the response of the ECJ in its December 11th 2018 ruling (Heinrich Weiss and others vs. ECB) that also stated that most of the complaints were admissible, and finally the BVerfG’s own appreciation of the ECJ response.
According to the ECJ, the ECB’s APP/PSPP programme for the purchase of government bonds on secondary markets does not infringe EU law:
The Court then finds that the PSPP programme does not infringe the prohibition of monetary financing, which prevents the ESCB from granting any type of credit to a Member State. Implementation of that programme is not equivalent to a purchase of bonds on the primary markets and does not reduce the impetus of the Member States to follow a sound budgetary policy.
The Court considers that safeguards are built into the PSPP which ensure that a private operator cannot be certain, when it purchases bonds issued by a Member State, that those bonds will actually be bought by the ESCB in the foreseeable future. The fact that the PSPP procedures make it possible to foresee, at macroeconomic level, that there will be a purchase of a significant volume of bonds issued by public authorities and bodies of the Member States does not afford a given private operator such certainty that he can act, de facto, as an intermediary of the ESCB for the direct purchase of bonds from a Member State.
Furthermore, the PSPP programme does not enable the Member States to determine their budgetary policy without taking account of the fact that, in the medium term, continuity in the implementation of the PSPP is in no way guaranteed and that they will thus be led, in the event of a deficit, to seek financing on the markets without being able to take advantage of the easing of financing conditions that implementation of the PSPP may entail.
Moreover, the effects of the PSPP programme on the impetus to conduct a sound budgetary policy are limited by (i) the restriction of the total monthly volume of public sector asset purchases, (ii) the subsidiary nature of the PSPP programme, (iii) the distribution of purchases between the national central banks in accordance with the key for subscription of the ECB’s capital, (iv) purchase limits per issue and issuer (which means that only a minority of the bonds issued by a Member State can be purchased by the ESCB under the PSPP) and (v) stringent eligibility criteria (based on a credit quality assessment).
The Court also states that the prohibition of monetary financing does not preclude either the holding of bonds until maturity or the purchase of bonds at a negative yield to maturity.http://curia.europa.eu/juris/document/document.jsf?text=&docid=208741&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=759524
As per the ECJ judgment, the Decisions taken by the ECB do not exceed its competences. The European Court acknowledges that the asset purchases programme had foreseeably expected effects on long term interest rates and on banks financing conditions, therefore translating into economic policy effects. However, it argues that forbidding the ECB from purchasing assets because of their impact on interest rates would prevent the monetary institution from fullfilling its core mandate which is to maintain inflation below but close to 2 percent in the medium term. In doing so, the ECJ follows the argument put forward by the ECB that by injecting liquidity through its purchases of financial securities it counteracted emerging deflationary trends within the euro area and achieving its main objective as inflation progressively grew to a level close to 2% by mid-2018. The Karlsruhe Court recognises the permissibility of the APP programme:
The objective of the PSPP to increase inflation rates to levels below, but close to, 2% is in principle permissible as a specific manifestation of the ECB’s task to maintain price stability;
However, as per the BVerfG,
it is not ascertainable that the ECB Governing Council did in fact consider and balance the effects that are inherent in and direct consequences of the PSPP, as these effects invariably result from the programme’s volume of more than EUR 2 trillion and its duration of now over three years. As the PSPP’s negative effects in- crease the more it grows in volume and the longer it is continued, a longer pro- gramme duration gives rise to stricter requirements as to the necessary balancing of interests.
For the BVerfG, the asset programme had other goals as it was destined to ease the financing of the Eurozone Member states and Banks. Therefore according to this line of reasoning the ECB developed an economic policy agenda which it had no mandate for.
The Karlsruhe court concludes that the ECB “neither assessed nor substantiated that the measures provided for in these decisions – i.e. the APP / PSPP – satisfy the principle of proportionality”. In assessing compliance with the principle of proportionality, the Court examines whether the decisions of the ECB were (1) suitable, (2) necessary, (3) adequate.
Based on its own review, the Second Senate concludes that, due to the lack of sufficient proportionality considerations, Decision (EU) 2015/774 together with Decisions (EU) 2015/2101, (EU) 2015/2464, (EU) 2016/702 and (EU) 2017/100 are neither covered by the monetary policy competence of the ECB (Art. 127(1) first sentence TFEU) nor by its merely supporting competence regarding the Member States’ economic policies (Art. 127(1) second sentence TFEU.BVerfG, Urteil des Zweiten Senats vom 5. Mai 2020 – 2 BvR 859/15, 2 BvR 980/16, 2 BvR 2006/15, 2 BvR 1651/15 – Rn. (1 – 237), http://www.bverfg.de/e/rs20200505_2bvr085915en.html
What to make of that ?
All in all, the German Constitutional Court cannot impose directly any restrictions on the action of the ECB which is submitted to European law and must comply only with ECJ rules. However, the complainants may claim a symbolic victory with this ruling which, going forward, will increase the political pressure on the ECB and may prevent it from taking bolder actions than what is currently contained in its playbook, such as deploying a Pandemic-OMT, which could be needed if the economic situation deteriorates further in the Eurozone, as we have argued in an earlier post.
From a constitutional and political perspective: The primacy of EU law should not prevail over democracy, which is exercised primarily at the Member states level.
From a Constitutional perspective, the ruling clarifies and reasserts that the provisions related to democracy and popular sovereignty in the German Basic Law (GrundGesetz – or GG) prevent German citizens from being submitted to decisions made by supranational institutions over which they have no democratic control, so far as that these decisions are not needed to ensure the proper functioning of the aforementioned institutions, within the existing legal framework – i.e. the TFEU and the associated agreements, regulations and ECJ court rulings. This is all the more the case if these decisions are taken ultra vires, which means that they go beyond the original competences granted to the EU institutions by the Treaties. In this regard, the Court states that Member states have an obligation to conduct ultra vires reviews on the validity of EU acts, as assessed against the existing legal background.
If any Member State could readily invoke the authority to decide, through its own courts, on the validity of EU acts, this could undermine the precedence of application accorded to EU law and jeopardise its uniform application. Yet if the Member States were to completely refrain from conducting any kind of ultra vires review, they would grant EU organs exclusive authority over the Treaties even in cases where the EU adopts a legal interpretation that would essentially amount to a treaty amendment or an expansion of its competences.BVerfG, Urteil des Zweiten Senats vom 5. Mai 2020 – 2 BvR 859/15, 2 BvR 980/16, 2 BvR 2006/15, 2 BvR 1651/15 – Rn. (1 – 237), http://www.bverfg.de/e/rs20200505_2bvr085915en.html
If this is not the case, this means that Treaties should be amended and that the competences of the institutions in question should be extended in a legally meaningful manner.
Constitutional organs are afforded wide political latitude in this context. They may retroactively legitimate an exceeding of competences by initiating – within limits set by Art. 79.3 (GG) – an amendment of EU primary laws, and (..) formally transfer the formal powers that were exercised ultra vires.BVerfG, Urteil des Zweiten Senats vom 5. Mai 2020 – 2 BvR 859/15, 2 BvR 980/16, 2 BvR 2006/15, 2 BvR 1651/15 – Rn. (1 – 237), http://www.bverfg.de/e/rs20200505_2bvr085915en.html
Hence, the clarification brought by this ruling concerns the right of the citizens of EU states to challenge decisions taken by the highest EU jurisdiction, the ECJ. The BVerfG supports the idea that on the ground of sovereignty and democracy, citizens of the EU are entitled, through their national courts, to challenge decisions made by the ECJ.
This is potentially a massive blow not so much to the ECB – which is not directly targeted nor obliged to respond to the BVerfG – as to the “Federalist movement” which views the European Union in its current shape as a mere draft for a more ambitious Federal State, akin to the United States of Europe. French President Emmanuel Macron has been one of the most vocal supporters of this orientation. He has been pushing relentlessly – though unsuccessfully – since his election in May 2017 for the formation of a government of the Eurozone, with a proper budget which could serve as a jump board for a Federal European State. In this regard, the ruling of the German Constitutional Court reasserts in a rather stark manner that the European Union – in its current form at least – is not a Federal state, and that the legitimacy of EU institutions is only delegated to them by the citizens of the Member States, through their national governments and elected representatives.
As per the Court:
even under the Lisbon Treaty, the Member States remain the ‘Masters of the Treaties’ and the EU has not evolved into a federal stateBVerfG, Urteil des Zweiten Senats vom 5. Mai 2020 – 2 BvR 859/15, 2 BvR 980/16, 2 BvR 2006/15, 2 BvR 1651/15 – Rn. (1 – 237), http://www.bverfg.de/e/rs20200505_2bvr085915en.html
This is perhaps the most significant message from this ruling. The idea of debt mutualisation at the European level might face similar legal challenges in the future as it will be akin to a risk-sharing regime which is perceived as illegal by the BVergG. But the political challenge is at the time far bigger than any legal challenges to this move. In a way, the Court puts the choice back in the hands of the Member states: they have all the latitude to change the Treaties if they wished and could. But this is yet another debate.