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Artillery Row

Germany’s judges have spoken. Should the EU be worried?

Germany’s Constitutional Court challenges whether the ECJ can decide the extent of its own power

On 5 May the German federal constitutional court, the Bundesverfassungsgericht (BVerfG or FCC), delivered its long-awaited judgment on the legality of the European Central Bank’s (ECB) Public Sector Purchase Programme (PSPP or simply QE programme). The FCC held that the ECB’s policies were in breach of EU and German constitutional law. In reaching that conclusion, the FCC disregarded an earlier judgment of the European Court of Justice (ECJ) which had validated the ECB decisions, but which, in the FCC’s view, manifestly went beyond the acceptable standards of legal interpretation. The FCC’s decision has been met with dismay, incomprehension and indignation throughout the EU, notably so in my own native Germany where practically the entire political establishment remains firmly committed to “ever closer union.”

Much of the furore, even hysteria, whipped up about the FCC’s judgment is misplaced. The decision came as a surprise even for lawyers like me who deserve some credit for initiating the action years ago and then continued to act as advocates for the complainants throughout the five-year period of the proceedings. The judgment does not signify the imminent collapse of the euro, nor (yet) mark a timely reversal in the relentless march towards further EU integration. I say that with a degree of confidence as the topic of the relationship between EU and national constitutional law has been with me for some fifteen years for most of my career as an EU legal academic and barrister. The judgment is unprecedented in that the FCC never ruled against the ECJ before and it is bold in tone and some of its conclusions, whilst it remains deferential in others. Crucially, the judgement is far from clear about what will happen if, with the acquiescence of the German government, is fudged in some way or the ECB simply ignores the German judges, while pressing ahead or even extending its massive stimulus programme.

The case was originally brought in 2015 by four groups of complainants – some  1,750 people led by German economists and legal academics. They argued that the ECB was pursuing an independent economic policy – which the EU Treaties reserve for the member states – and was straying into monetary financing of governments, which is unlawful under the EU Treaties. The FCC gave a preliminary assessment in 2017, which was highly critical of the ECB, and referred the matter to the ECJ which gave a preliminary ruling in favour of the ECB in 2018. The case then went back to the FCC for a final ruling, in which the German judges departed from an ECJ ruling for the first time, calling it “untenable from a methodological perspective”.

There are two issues at the heart of the long drawn litigation. First, the question of whether the ECB’s QE programme is ultra vires, i.e. not covered by the ECB’s treaty-based mandate which is confined to monetary policy. Second, the issue of supremacy and of which court – the ECJ or national constitutional courts – has the final say over the limits of the EU’s powers.

On the first question, the FCC had to consider two points. The first point is whether the ECB acted in breach of Art. 123 AEUV which prohibits monetary financing of government budgets by means of direct or open market purchases (Article 123 TFEU together with Council Regulation 3603/93) of government bonds? The second point concerns whether the QE programme, either in law or its actual effects, exceeds the bank’s monetary policy mandate by reaching over into the general economic policy prerogative of member states?

On the first point, the FCC concluded that there was ample and clear evidence that the QE programme had resulted in substantial distortions in the bond markets which virtually eliminated risk premiums, effectively eliminated investor risk and pushed down the cost of public borrowing. The ECB thus eased refinancing conditions for embattled governments whilst undermining market sanctions which act as disincentives against further public borrowing.

At the same time the judges recognised that the ECB programme remained subject to certain minimal conditions such as a 33 percent limit on the acquisition of the total bond issue of any one member state as well as a requirement that each national central bank within the euro system would primarily buy bonds issued by its own government. For as long as those conditions were adhered to, the judges noted, it could not be excluded that they would impose at least certain constraints on public debt spiralling out of control.

There was not yet therefore conclusive clarity that the QE programme could be classified as a circumvention of the prohibition on state monetary financing. For this reason, it could not (yet) in the absence of further evidence be concluded that it represented a manifest and “structurally significant” shift of competences from the member states to the EU. Although with evident reluctance, the FCC therefore concurred with the ECJ’s validation of the ECB’s policies on this point. The court’s tortuous language at this point is an indication of the extreme political pressure weighing on the judges and the deference the court has always imposed on itself in order to avoid an open confrontation with the ECJ. The judges expounded at great length on the multiple ways in which the ECB facilitated monetary state financing, only to conclude that not all the elements in the puzzle had been assembled to justify a conclusion beyond all possible doubt. The appropriate standard of proof, however, should have been closer to the balance of probabilities.

The FCC then considered the second point of whether the ECB exceeded its treaty-based monetary policy mandate which is confined to securing price stability, pursuing instead an independent economic policy. Here the judges were bolder. The EU Treaty reserves the conduct of general economic policy including all fiscal, financial sector support and growth policies to the member states. According to settled ECJ case law, the issue falls to be decided by reference to a proportionality test which balances the fiscal, economic and social impact of the QE programme against its suitability and effectiveness in achieving its stated monetary policy objectives. The FCC concluded that the ECB had failed to provide the required proportionality analysis when assessing the likely impact of its policies on both monetary and broader economic outcomes.  The FCC also subjected the ECJ to severe criticism for failing to hold the ECB to account in this regard. The ECJ effectively afforded the ECB an unlimited margin of policy discretion, which freed the ECB from any effective judicial oversight (whilst the ECB is independent from democratic control it is not exempt from judicial oversight). This, according to the FCC, meant that the ECJ itself had acted ultra vires, i.e. in breach of its duties under the EU Treaties.

This leads on to the second question, namely, which court is competent to rule that an EU institution has acted unlawfully, i.e. overstepped its powers under the EU Treaties. According to the EU establishment the only court competent to decide such an issue is the ECJ and that the FCC, in common with all other national supreme courts, is bound to accept the ECJ’s decision. This is also the position of the ECJ which it developed in a series of cases going back to the 1960s and is known as the doctrine of the supremacy of EU law as interpreted by the ECJ.

The judge-made principle of supremacy, however, is limited by Article 5 of the EU Treaty which provides that the EU may only act within the powers conferred upon it in the Treaties by the member states. Indeed, the EU Treaties still describe the member states as the “masters of the Treaty.” Starting from the Treaties themselves, the FCC has a very clear view of its own jurisdiction. The EU is not a sovereign state but a treaty-based international organisation. By participating in the EU, Germany never surrendered to those institutions the power to determine whether the EU institutions are complying with their obligations under the EU Treaties or respecting the integrity of the German Basic Law which, within Germany, remains the ultimate Grundnorm to validate all laws and public authority.

The ECJ … is not competent to determine its own jurisdiction or the limits of the EU’s powers.

The ECJ, viewed in that manner, is not a supreme court but a treaty tribunal competent to decide disputes which fall within the matters covered by the Treaties, but not competent to determine its own jurisdiction or the limits of the EU’s powers. That power to define the extent of one’s own powers is known amongst German lawyers as Kompetenz-Kompetenz. If the ECJ had the Kompetenz-Kompetenz to determine the limits of its judicial and the EU’s law-making and executive powers, the EU would in effect be a sovereign federal state with the autonomy to define its own powers through judicial competence creep.

For this reason, the FCC has always maintained that, within Germany, it retains a jurisdiction of the last resort, that is, the final say over whether the EU is acting within or outwith its powers conferred by the German government in accordance with the Basic Law. The FCC here issued a poignant reminder to everyone of the ECJ’s role as a treaty court and of the EU’s status as a powerful but not sovereign international organisation.

The FCC also sharply criticised the German government and parliament for their failure “to take the available legal and political steps” against the ECB’s power grab. It ordered both the Federal government and the Bundestag to ensure the ECB carried out the required proportionality assessment and to take a new governing council decision to ensure that  the “economic and fiscal policy effects” were proportionate to the stated policy objectives. Unless the ECB did so within three months, the Bundesbank could no longer lawfully participate in the ECB’s bond buying programmes.

What will happen now?

Unfortunately, the judgment does not spell out what precisely will happen if the ECB fails to satisfy the FCC. It is widely accepted that the ECB would find it difficult to establish that the fiscal and economic impact of QE does not go beyond the collateral damage necessary to achieving the ECB’s price stability mandate. Furthermore, the ECB has indicated that it does not consider itself bound by the FCC’s ruling and that it only accepts the ECJ’s jurisdiction. Notwithstanding these apparent complications, there is little doubt that some formula will be concocted to suggest that the ECB complied with the FCC’s ruling to provide the required proportionality assessment within the three-month grace period while maintaining it did not compromise its independence. The ECB could, for example, ask the Bundesbank to provide such a review or the ECB could publish the assessment as part of some wider strategic review of its policies. The German government would then publicly endorse the assessment. In these circumstances, the FCC judges are highly unlikely to reopen the issue and subject the ECB’s review to further review. This would allow the Bundesbank to continue participating in the ECB’s policies.

The FCC is unlikely to take further action for three reasons. First, the FCC, evidently with great reluctance, rejected the complainants’ plea that the ECB was engaged in monetary state financing by reference to various limits the ECB had imposed on itself to assuage German public opinion when it first launched its bonds buying programme. The court heavily relies on these self-imposed limits when it concluded there was insufficient evidence of monetary state financing. In reality, however, former ECB president Mario Draghi never respected these limits. From the start, Draghi bought more Italian and Spanish bonds than the ECB should have under the capital key rule and well above the 33 percent issue limit which the FCC stated was essential to the legality of the programme. It is evident from the judgment that the judges were aware of Draghi’s duplicity, and yet did nothing.

Secondly, the QE ruling was the last judgment handed down by the FCC during the presidency of Andreas Voβkuhle who stepped down on 6 May, one day after the ruling. His successor, Stephan Harbarth, a former international corporate lawyer and close Merkel confidant, was the deputy leader of the CDU parliamentary party in the Bundestag until two years ago. Most unusually amongst recent FCC presidents, Harbarth is not only a professional politician, but was appointed to the FCC without significant judicial or academic research experience. Indeed, to bolster his academic credibility, the University of Heidelberg awarded Harbarth an extraordinary professorship. Heidelberg University previously received donations from Harbarth’s Mannheim-based law firm and, when asked, refused to disclose academic testimonials submitted in support of Harbarth’s appointment. Under Harbath’s leadership the partially reconstituted FCC, few observers doubt, will adopt an even more deferential stance to the national and EU political authorities than under the generally very pro-EU Voβkuhle.

the FCC judgment may in the long-term have greater effect outside, than within, Germany.

Thirdly, Germany, seventy-five years after the end of the war (and paradoxically today even more so than twenty-five or fifty years ago), remains a deeply pathological country with an almost obsessive preoccupation with its catastrophic twelve-year-long experiment with totalitarianism matched, unfortunately, only by a resurgent didactic tendency to lecture other nations about what is best not just for Germany but for them too. Attitudes to European integration reflect both these features of contemporary political life in Germany, and Germany’s political establishment has an almost religious commitment to “ever closer union.”

For this reason, no institution in Germany – judicial or political – is likely to pull the plug on the common currency in the absence of a fundamental shift of public opinion. The euro is being “rescued” at the cost of some hundreds of billions of euros every year. Such a currency is bound to fail, but it will not do so because of Germany whose political class, in accordance with a certain unfortunate inflexibility in our essentially apolitical national character, will defend it like the Eastern front.

Paradoxically, therefore, the FCC judgment may in the long-term have greater effect outside, than within, Germany. Other northern European countries, notably the Dutch but also Finland or Austria, are increasingly questioning the benefits of the common currency. Their opposition may harden if they draw encouragement from the FCC’s surprisingly stark words of warnings about the state of the common currency and rule of law in the eurozone.

The QE judgment marks not the first time that national constitutional courts have challenged the authority of the ECJ – Danish and the Czech constitutional courts have done so before – but it is the first time the FCC has done so and no other court ever did so in such an important case and in such conspicuous and even censorious manner. If this precedent set by the FCC spreads to other national courts and not merely to those whose governments could easily be intimated by the ECJ imposing financial sanctions, ECJ supremacy could be qualified.

Such an outcome would be a victory for national sovereignty and democratic accountability. A more pessimistic outcome would be for the politicisation of the German judiciary to continue through wily political patronage. The self-assertion of the FCC would be undermined from within, and the judiciary in other, less powerful countries, could be induced into continuing submission by a carrot-and-stick combination of EU funds in return for political compliance. This is the more likely scenario, until the EU runs out of German money.

Dr Gunnar Beck is a Member of the European Parliament, elected for the German AfD in 2019. He is a practising barrister at 1 Essex Court, Temple and has taught EU law, legal and political philosophy at SOAS University of London, the LSE and Oxford University.

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