German Constitutional Court rules ECB exceeded competences

On 5 May 2020 the German Federal Constitutional Court declared that the European Central Bank (ECB) may have overstepped its authority granted by the EU Treaties with its decisions regarding the Public Sector Purchase Programme (PSPP) from 2015 in the wake of the Euro-crisis. The immediate impact of the verdict will be limited, as the Constitutional Court limited its judgment to requiring the German Federal Parliament to insist that the ECB provides sufficiently balanced reasoning for its decisions. However, it signals potential conflict in the relationship between the EU and its Member States, as the European Court of Justice (ECJ) ruled in a 2018 preliminary ruling (at the request of the same German Court) that the underlying decisions of the ECB were in line with the EU Law. Moreover, the verdict creates some uncertainty in regard to the ECB’s State debt buy-up practices and could potentially put a strain on COVID-19 related measures by the ECB.

In the underlying proceedings, the appellants asked the Constitutional Court to find that the PSPP violated their rights and interests as German citizens since the immense spending it entailed was to a large part funded by German tax payers, but lacked a sufficient legal basis. They claimed that the PSPP had effectively violated the prohibition of monetary financing of Member State budgets in breach of Article 123 of the Treaty on the Functioning of the European Union (TFEU). The Court concurred that the appellants had legal standing for a constitutional complaint based on the fact that the contested ECB decisions could effectively also violate the sovereign’s (ie the people’s) rights if it turned out that the ECB had overstepped its authority and acted beyond the powers conferred to it by the Member States (ultra vires).

As the issue concerned the interpretation of the EU Treaties, the Constitutional Court had initially submitted the issues to the ECJ. In a 2018 preliminary ruling, the ECJ held that the ECB decisions were in line with the EU Treaties and that the ECB had in any event a wide discretion regarding such measures. In its 5 May judgement, the German Court expressed its dissatisfaction with the ECJ’s findings. The German Court found that the ECB had provided very little justification for its decision and only superficially addressed the risks for Member States’ real economies associated with the PSPP, and the ECJ did not feel that an in-depth analysis of chances and risks was warranted. As a result, the German Court held that the PSPP by the ECB, whose responsibility is limited to the monetary policy of the Euro countries and has no say in the economic and fiscal policy of the individual Member States, could in its present form violate guarantees established by the German Constitution. The Court added that the previous review by the ECJ had not satisfied the standards inherent in Article 19 (1) of the Treaty of the European Union. Still, the Constitutional Court stressed that it was not in the position to go so far as to rule that the bond-purchase program had been illegal, as further alleged by the appellants.

The decision by the judges in Karlsruhe is a double-edged sword. Although the Constitutional Court has no direct jurisdiction over the ECB, its decision will affect cooperation by the German Government and authorities (especially the German Federal Bank) regarding the PSPP, which could be detrimental to the PSPP. Its repercussions will largely also depend on how the EU institutions and other Member States receive the Court’s decision. It is the first time that the German Court purported to overrule a decision by the ECJ and questioned its authority, which potentially could lead to a “constitutional crisis” in the EU. However, the decision was not entirely unexpected taking into account previous rulings by the Constitutional Court setting boundaries for sovereignty transfer unless a referendum is held in Germany about a structural change of the EU.

Moreover, the Court has also presented the EU institutions with an olive branch. There are no immediate implications for the PSPP since the Karlsruhe decision merely requires the ECB to provide adequate reasoning for its measures within the next three months. The decision may therefore either be read as a last warning shot by the German Court or even a friendly reminder that the ECJ will need to take its role for judicial review more seriously, even when the circumstances and political necessities may seem to dictate certain steps to protect the interests of the Union as a whole.

Still, some legal scholars have already cautioned that the decision could serve as a blueprint for other national courts to disregard decisions by the ECJ in the future. Ultimately, the decision could also put the ECJ’s legal standing in jeopardy as a decision maker in other contexts. It had, for instance, been proposed that even post-Brexit, the UK would have to take the verdicts of the ECJ into consideration or even subject itself to the ECJ’s decisions when it came to matters regarding the interpretation of the EU Treaties and the secondary law. The decision by the German Constitutional Court might serve as a stepping stone to question the ECJ, whenever a party feels that the deliberations for the reasoning of its decisions are insufficient.

Additionally, although the decision does not necessarily diminish the discretion of the ECB in relation to monetary measures, it may feel that the need for justification will inhibit the scope of its actions. The ECB therefore immediately scheduled an extraordinary meeting of its top management to review the implications of the decision. It should, however, be noted that the ruling from Karlsruhe should not necessarily hinder the ECB from continuing its debt purchase programmes - it rather requires the ECB to substantiate its decisions more carefully and to take more macro- and microeconomic factors into consideration that could be impacted by its decisions. So long as the ECB can deliver proper justification for its actions (and given the ECB’s brain power, it is likely that it will be able to) its bond purchase programmes are likely to continue. It remains to be seen whether the ECB will take the opportunity to reconsider the basis of the PSPP.