The Bundesverfassungsgericht's PSPP decision of 5 May 2020 and its struggle for judicial dominance

The recent decision of the German Constitutional Court (‘GCC’) could hardly have come at worse times. With European solidarity thinned out over disputes regarding common European bonds, the GCC’s de-facto declaration of the ECB’s conduct as an illegal encroachment on state sovereignty adds fuel to the fires of anti-European sentiments.

The judiciary may claim the right not to consider collateral political consequences while acting as the custodian of the law. Yet, the key issues of the GCC’s decision do not lie within the legal findings, but instead in insinuations and attempts to use tendentious readings for individual political purposes.

In order to distinguish between legal facts and (superficial) political utilization, it is helpful to understand what the court did and did not rule, and whether its reasoning is conclusive. The GCC’s tremendous contempt for the Court of Justice of the European Union (‘CJEU’) can only be understood within the context of the struggle for judicial dominance between the two courts.

Even though the GCC essentially accuses the CJEU of perversion of justice and indirectly voices demands of national sovereignty, the judgment might also benefit the Union, which is speculated upon at the end of this article.

The history of struggle for judicial dominance between the CJEU and the GCC

Who shall have the ultimate authority to determine whether an organ of the Union exceeds its mandate under the treaties? This fundamental division between the GCC and the CJEU dates back to as early as 1974. The CJEU, referring to art. 19(3) Treaty of the European Union (‘TEU’), claims exclusive competence to determine the legality of Union acts under Union law. For German state organs, on the other hand, it would be unconstitutional to adhere to illegal acts performed by Union organs. Thus, the GCC only reluctantly accepted the CJEU’s proposition, reserving an ultimate review should the CJEU itself act outside of its mandate. On 5 May 2020, the GCC eventually dropped this nuke, arguing the European System of Central Banks (‘ESCB’) had exceeded its mandate and that the CJEU had perverted the law to make up for it.

The GCC’s decision of 5 May 2020

In its decision of 5 May, the GCC declared unconstitutional the failure of the German government and parliament to “take suitable steps challenging that […] the European Central Bank neither assessed nor substantiated that the measures provided for in [the Public Sector Purchasing Programme decisions] satisfy the principle of proportionality” (Judgment, para. 3).

"The CJEU's interpretation of the treaties is not comprehensible and thus objectively arbitrary. The judgment was issued ultra vires and needs not to be considered."

Significantly, the GCC merely reprimanded that the ECB had not sufficiently substantiated the proportionality of its measures under the PSPP (Public Sector Purchasing Programme: European central banks buy governmental bonds on the secondary market from non-governmental investors). Neither did it qualify the PSPP itself disproportionate nor economic instead of monetary policy, in case of which it would fall outside the ECB’s (primary) mandate under art. 127 Treaty of the Functioning of the European Union (‘TFEU’). Finally, the GCC dismissed a claim that the PSPP circumvented the prohibition of direct state funding under art. 123 TFEU.

The court’s legal argument works as follows: Every act or omission of domestic state organs requires sufficient democratic legitimization, inter alia by laws enacted or international treaty ratified by elected representatives (e.g. the TEU). Where powers are conferred upon the Union, Union organs must act within the boundaries defined by the treaties. If an organ of the Union acts outside of its mandate, domestic organs must not participate and instead take suitable steps to intervene. Ultimately, the question therefore was not constitutional, but whether the ECB had acted within the mandate prescribed by the European treaties. This genuine European legal question falls within the exclusive mandate of the CJEU under art. 19 TEU.

The GCC initially played by the rules and referred the question to the CJEU by decision of 18 July 2017. The court asked whether either (1) the strong factual economic policy consequences of the PSPP or (2) a lack of proportionality, given potential negative consequences of the program, qualify as a violation of the ECB’s mandate (Judgment, para. 80). Art. 127 TFEU defines the ESCB’s primary objective as to maintain price stability and general support of the economic policies of the Union as secondary.

The CJEU responded by decision of 11 December 2018. Regarding the PSPP’s qualification as monetary policy, the European court found the PSPP’s declared goal was monetary and that it utilized mechanisms the ECB is expressly empowered to by the treaties (Judgment, para. 81).. The TFEU neither defines monetary policy (instead it mentions price stability) nor strictly distinguishes between monetary and economic policy. Hence, potential economic policy consequences of the PSPP cannot overturn its qualification as monetary. Regarding proportionality, the CJEU noted there were no other means reasonably available to provide for price stability and the PSPP accounted for a minimization of losses (Judgment, para. 81). The CJEU did not consider the potential negative effects of the PSPP under proportionality. Finally, the CJEU held that the ECB’s explanations were scarce, but nevertheless sufficient (Judgment, para. 81).

This response outraged the GCC. It found the CJEU’s interpretation of the treaties was not comprehensible and thus objectively arbitrary (“schlechterdings nicht mehr nachvollziehbare und daher objektiv willkürliche Auslegung der Verträge”, judgment, para. 118). In other words, the GCC accused the CJEU of blatant perversion of justice.

The GCC’s criticism is directed against two points. First, in assessing whether a measure is monetary or economic, the CJEU primarily focused on the formal qualification by the ECB and thus granted enormous executive discretion. According to the GCC, this effectively allows for an autonomous determination of the bank’s mandate (Judgment, para. 134). Secondly, the CJEU did not consider detrimental economic policy questions when assessing the proportionality of the PSPP, a “grave methodological flaw” according to the GCC (Judgment, para. 150). Arguing that the CJEU’s has no binding force, the GCC concluded that it must assess the legality of the PSPP itself.

Onwards, the GCC noted that the ECB’s decisions leading to the PSPP were not covered by its competences under art. 127 TFEU due to a lack of evidence of consideration of proportionality (Judgment, para. 164). Consequently, it ordered German state organs to refrain from participating in the program, should the ECB not provide supplementary evidence of sufficient considerations of proportionality (Judgment, para. 235).

The GCC’s legal criticism is justified – its own assessment not necessarily convincing

The GCC’s raised several valid legal arguments. The CJEU’s assessment of the proportionality of the PSPP’s implementation is indeed rather shallow. The PSPP is assumed to have significant economic side-effects. It might indirectly lower interest rates on government bonds, discouraging fiscal discipline. It allows commercial investors to sell high-risk assets to public banks, potentially boosting their credit scores and profits at the expense of increased risk for the public. Lowered interest rates might allow economically unviable competitors to remain in the market. Private savings and pension funds are being skimmed. Any assessment of proportionality must include weighing relevant benefits and downsides. Not considering these obvious aspects is truly poor legal methodology. Alarmingly, this is unlikely to have been an oversight as the CJEU is composed of very competent lawyers.

Furthermore, the PSPP has been criticized as an extension of the ECB’s mandate, undermining the principle of limited conferral under art. 4 and 5 TEU. Even if legally defensible, one may rightfully ask whether ECB’s actions are not in fact indirect government funding and/or economic policy. European citizens might observe the ECB circumvents its mandate at the expense of state competences. Alleged attempts of the CJEU to cover its fellow organization would erode the Union’s legitimacy even further.

On the other hand, openly accusing Union organs of perversion of justice is extreme. Such a step should only be taken when a court can provide compelling evidence and legal argument in support of its allegations. Here is where the GCC’s decision is not necessarily convincing. The GCC neither demonstrated that the ECB’s PSPP is economic instead of monetary (would violate art. 127 TFEU, art. 5 TEU) nor that its advantages are (gravely) outweighed by its disadvantages and thus disproportionate (would violate art. 5 TEU). Instead, it argued the PSPP is not covered by the ECB’s competences because of a lack of evidence of consideration of proportionality (Judgment, para. 164).

Under European law, shortcomings in the obligation to state of reasons for legal acts (art. 296 TFEU) are generally deemed infringements of essential procedural requirements (art. 263 TFEU), justifying judicial annulment of an act.

The ECB’s statements are meager. In 2015/774, it argued the PSPP is necessary for price stability as other means have proven insufficient. It pledged that “the PSPP is a proportionate measure” and that “the related financial risks have been duly taken into account”. Comparable statements can be found over the extensions of the program. In addition, the ECB issued several explanatory documents and gave press conferences in which potential economic disadvantages and risks were considered (CJEU, 11 December 2018, paras. 30-38).

However, it is very difficult to distinguish between a lack of documentation of reasons (justifying annulment) and materially incorrect or unreasonable statements of reasons (not justifying annulment, but subject to material review). This difficulty increases in highly technical areas of policy. It may well be argued that the ECB’s statements of reasons comprise all necessary aspects but are materially unconvincing. In that case, the GCC’s would have had to demonstrate a material lack of proportionality of the ECB’s decision – which it was hesitant to do. The GCC itself determined that overruling the CJEU and claiming ultimate authority of review requires an evident and structurally significant excess of powers.

Given the political avalanche the GCC’s decision is projected to trigger, one may well ask whether a mere formal error, especially one that is subject to legitimate legal debate, sufficiently establishes an evident and structurally significant excess of powers. Material disproportionality would well be – which not even the GCC was willing to find.

A (naïve) speculation on the benefits of the judgment

Read superficially, the judgment is a desperate cry for state sovereignty against an all-encroaching, statehood-subverting Union centralism. Particular politicians all over Europe rejoice, deeming Germany as an influential member of the Union finally on their side.

On the other hand, the decision might add momentum to the political debate on the PSPP. Its potential detrimental effects must not be overlooked, particularly because they affect the realities of many European citizens.

Secondly, the judgment is a sharp reminder to the CJEU that it does not reside in judicial absolutism. The CJEU’s mandate is conditional on legally sound and legitimate administration of justice. Should it circumvent its legal obligations in order to cover up institutional irregularities within the Union, the people and the states will lose faith in the European system.

Finally, the judgment might incentivize honesty in handling the competences of the Union. Citizens and states have long raised concerns over a silent extension of the Union’s powers. Even if governments have seemed to approve the PSPP politically, a constitutional Union must respect the rules it is founded upon. If a measure is not fully available under the competences established by law, an extensive political debate is the only mechanism to ensure a sustainable institutional foundation. Debatable unilateral reading of treaties is not. With more pressure applied by domestic institutions, this dogma might become increasingly inevitable.

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Lukas Reichl, Frankfurt am Main

Credit: European Central Bank, picture taken by Kiefer, CC-BY 2.0.