Policy Spotlight
Working Paper: In the Name of the People? – The German Constitutional Court’s Judgment on the European Central Bank’s Public Sector Purchase Programme

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Author: Isabel Feichtner

On Tuesday, 5 May 2020, the Federal Constitutional Court of Germany (FCC) issued its judgment in the proceedings on the European Central Bank’s (ECB) Public Sector Purchase Programme. The pronouncement of the judgment at the courthouse in Karlsruhe was originally scheduled for 24 March 2020 and had been moved “in order to prevent the spread of COVID-19.” When it did take place on Tuesday, only 5 of 8 judges of the FCC’s Second Senate were present and seated at safe distance from each other. Before pronouncing the judgment, the court’s president and presiding justice of the Second Senate Andreas Vosskuhle advised the claimants, government representatives and other attendees to keep their distance also after the pronouncement when they would gather in conversation.

He must have anticipated the tumult that this last judgment under his presidency would cause. For the first time, the court in this judgment rules that EU institutions (the Court of Justice of the European Union and the ECB) exceeded their powers and that the resulting ultra vires acts were not binding in Germany. A journalist later humorously remarked the judgment was “something about viruses.” The judgment not only sounds of virus. It might seriously affect how Europe will emerge from the COVID-19 pandemic.

The judgment only addresses the ECB’s Public Sector Purchase Programme, a quantitative easing programme under which the ECB and national central banks purchase government bonds to bring up inflation rates in the euro area. The FCC finds this programme to be illegal, yet holds that illegality may be remedied if the ECB conducts a proportionality review and substantiates that the bond purchases do not have disproportionate economic effects. The judgment does not rule on the Pandemic Emergency Purchase Programme that the ECB announced on 18 March 2020 to address the effects of the COVID-19 pandemic. Yet, it calls into question also the legality of this programme. More disturbingly, the judgment may undermine efforts to strengthen transnational solidarity and democratize the European Union. It comes at a time when inequality in Europe makes itself most acutely felt, when solidarity albeit constantly invoked, is hardly practiced. For the FCC at this moment to tell the highest court of the European Union that its reasoning is incomprehensible and to order the German government to work on the ECB so that it will duly take into account its policies’ effects on German savings accounts, to many (including myself) appears not only puzzling, but dangerous. Dangerous as it cloaks German hegemony in the mantle of democracy.

The Judgment in Brief

The FCC ruled on a number of constitutional complaints brought by individuals who claim that their individual rights under the German constitution (the Basic Law/Grundgesetz) are violated (for an English translation of part of the judgment, see here). Their complaints were primarily directed against the ECB’s Public Sector Purchase Programme (PSPP). Complainants argue that with the PSPP the ECB overstepped its competence to conduct monetary policy. They hold the view that the PSPP is primarily an economic policy measure that – in violation of the prohibition of monetary financing – assists EU Member States who run budget deficits in refinancing their debts and at the same time negatively affects private savings in Germany.

The PSPP forms part of the ECB’s Asset Purchase Programme (APP). The Governing Council of the ECB adopted a decision establishing the PSPP in March 2015 (Decision (EU) 2015/774) and has amended the programme several times since. Under the PPSP central banks of the EU Member States whose currency is the euro and the ECB (the Eurosystem central banks) may purchase euro-denominated marketable debt securities issued by central, regional or local governments of a Member State as well as bonds issued by international organisations and multilateral development banks located in the euro area (Art. 3(1) Decision (EU) 2015/774). These purchases complement the purchase of private assets under the APP. According to the ECB the PSPP, thus, aims to “further ease monetary and financial conditions, including those relevant to the borrowing conditions of euro area non-financial corporations and households, thereby supporting aggregate consumption and investment spending in the euro area and ultimately contributing to a return of inflation rates to levels below but close to 2 % over the medium term.” (Decision (EU) 2015/774, preambular para. 4). The volume of the APP was initially set at €60 billion per month, was scaled up to €80 billion in 2016 and reduced again in 2017 and 2018. The APP was discontinued between January and October 2019 and was restarted on 1 November 2019 with a monthly purchase volume of €20 billion. By 8 November 2019 the purchases under the PSPP had amounted to EUR 2,088,100 million, i.e. 81.63% of the APP’s total volume at that time.

In its judgment on the constitutional complaints, the FCC agrees with the complainants that the ECB by establishing the PSPP exceeded its powers to conduct monetary policy. Yet, it does not make a categorical finding that the PSPP cannot be qualified as a monetary policy measure. Rather, it finds the decisions to establish and implement the PSPP to be procedurally deficient because the ECB “neither assessed nor substantiated that the measures provided for in the decisions on PSPP satisfy the principle of proportionality” (para. 116). The ECB, thus, can remedy illegality by conducting a proportionality review.

Before rendering its final judgment, the FCC had referred the question whether the ECB had complied with EU law to the Court of Justice of the European Union (CJEU) who had answered in the affirmative. As a matter of EU law, the FCC is bound by the CJEU’s interpretations of EU law. The FCC justifies its departure from the CJEU’s ruling on the question whether the ECB acted within its power to conduct monetary policy by holding that the CJEU’s opinion on this question was “simply not comprehensible and thus objectively arbitrary” (para. 116). In the view of the FCC, the CJEU with its incomprehensible reasoning exceeded its power to interpret and apply EU law. Consequently, the part of the CJEU’s judgment that finds that the ECB when establishing the PSPP legally exercised its power to conduct monetary policy was not binding in Germany (para 119).

The FCC orders parliament (Bundestag) and federal government (Bundesregierung) to take steps in order to ensure that the ECB conducts and documents the legally required proportionality assessment, i.e. a proportionality assessment that takes into account “the actual effects of the PSPP” and includes an “an overall assessment and appraisal in this regard” (para. 123). In case the ECB fails to do so within three months, the Bundesbank may no longer participate in the PSPP by purchasing bonds or contributing in increasing the purchase volume and must sell the bonds it purchased under the PSPP.

Reception of the Judgment

Since the judgment was issued, there has been a constant flow of – rather more than less outraged – commentary by legal scholars and economists. On the widely read constitutional law blog Verfassungsblog alone, eleven posts and one podcast seeking to explain and critically assessing the judgment have been published by the time I am writing this. Most commentators are baffled – by the legal reasoning, the court’s (mis-)understanding of monetary policy and EU law, the tone, the ignorance or conscious acceptance of the political fallout this judgment may fuel within the European Union, the potential consequences for the “rule of law” and judicial cooperation, and the list could be continued. EU law scholar Federico Fabbrini and political scientist R. Daniel Kelemen write in the Washington Post of 7 May 2020 that “the German court’s decision didn’t just open Pandora’s box, it ripped the lid off and smashed it to bits” encouraging courts in Poland and Hungary to likewise disrespect EU law.

By contrast, some voices in Germany present the judgment as an act of resistance against the ECB’s “pumping of billions of euros into ailing government budgets.” Such language is familiar from the eurocrisis – the effects of which the PSPP was established to address. At the time, German media commentary repeatedly called out Southern European states, and especially Greece, for “not doing their homework” or “spending beyond their means”. Such sentiment was also behind the constitutional complaints. One of the claimants was Bernd Lucke, who in 2013 co-founded the “Alternative for Deutschland” as an anti-Euro party (today at the far right of the political spectrum and represented in the Bundestag and a number of state parliaments).

I add to the flood of commentary with this “case note” to flag the impact that this decision may have at a critical moment not only on the ECB’s Pandemic Emergency Purchase Programme. The judgment implicates far-reaching questions as to the relationship between monetary policy and economic politics as well as the potential for democratizing money and the economy. These questions reveal themselves with great acuity during the pandemic and guide my reading of this judgment. Like many of my colleagues in Germany and internationally, I am puzzled and concerned by the judgment. Like them, I ask myself what may have ridden the seven justices supporting the opinion (one voted against it, but did not write a separate opinion). Some have suggested that hubris was at play, that the court that had barked so much in the past felt it had to show it could bite to maintain its position as “guardian of the treaties”. Without seeking to rebut these explanations, in this comment I try to read the judgment as giving an impetus to the democratization of the European Union – even though it probably has harmed this cause.

In the following, I render a relatively detailed account of the court’s reasoning in order to shed some light on the relationship between monetary and fiscal/economic policy in the European Monetary Union and the various explicit and implicit conceptions of democracy at play in the judgment. I then briefly address the judgment’s potential implications for the PPEP. Finally, I attempt to make my case that we might read this judgment as promoting democratization.

The Court’s Reasoning Explained

The cause of action: constitutional complaint based on the “right to democracy”

German constitutional law allows individuals to bring constitutional complaints to the FCC who substantiate that their individual rights under the Basic Law are violated by acts of state power. In a series of earlier judgments on European integration (starting with its judgment on the Maastricht treaty), the FCC has interpreted the Basic Law to contain an individual right to democracy that goes beyond the right to participate in elections. According to the FCC this right is violated either when too much power is transferred to the European Union – thus hollowing out the powers of the German parliament (Bundestag) – or when EU institutions manifestly exceed their competences (act ultra vires).

The FCC’s reasoning is as follows: The Basic Law with the right to vote in elections of parliament also protects “the basic democratic contents of the right to vote.” By demanding that all state power derives from the people (Art. 20(2) GG), the Basic Law requires that “any act of public authority exercised in Germany can be traced back to its citizens” (para. 99). At the same time, the Basic Law allows for European integration through a transfer of sovereign powers to the European Union and the FCC consistently stresses the Europe-friendliness of the German constitution. To ensure that such transfer of powers can be traced back to German citizens, it requires an “act of approval” (Art. 23(1) GG) – the law ratifying the EU treaties. If EU institutions act outside the powers transferred to them (ultra vires) this link between the will of the citizens as expressed in the “act of approval” and the exercise of power by the EU is interrupted – the individual right to democracy is affected. The FCC has specified that determination that EU institutions act ultra vires requires a “manifest and structurally significant” exceeding of powers.

Transfer of powers to the EU, moreover, faces limits: “Indispensable elements of the constitutional principle of democracy” (para. 104) must be retained at the national level as required by the Basic Law’s so-called eternity clause (Art. 79(3) GG). In order to protect a core of democracy in Germany, the EU may only be granted specific competences, not however a general competence to determine its own competences (no Kompetenz-Kompetenz). Moreover, the FCC has found that the budgetary responsibility of the Bundestag belongs to the core democratic powers that may not be hollowed out by a transfer of powers to the EU. If a transfer of powers to the EU or the exercise of powers by EU organs detracts from this core and thus affects the “constitutional identity,” the FCC also holds the “right to democracy” to be violated.

The PSPP proceedings centered on the ultra vires doctrine (even though constitutional identity also played a role) – the question whether the ECB manifestly and in a structurally significant way exceeded its competences. As explained above an ultra vires act, according to the FCC, affects the right to democracy. Yet, the finding of an ultra vires act alone would be insufficient for a constitutional complaint to be successful. European institutions are not bound by the German Basic Law and constitutional complaints only provide redress for a violation of individual rights by public authority, i.e. German public authority. The FCC takes this hurdle by reasoning that the constitutional organs, in particular parliament and the federal government have an obligation to “continuously monitor the execution of the European integration agenda” (Integrationsprogramm) for violations by EU institutions (para. 108). If they fail to do so and if they do not take action when EU institutions act ultra vires, their inaction may result in a violation of the individual right to democracy.

Thus, the Court has in its many judgments on European integration incrementally created for itself a way to control – in the name of popular sovereignty of the German people – the bounds of European integration upon the complaints of individual German citizens, i.e. also in situations when the German parliament itself agrees with the transfer of powers or action by EU institutions in question. This is explosive stuff: Not only because the FCC understands democracy as an individual right that it can – in the realm of European integration – enforce against the will of the democratically elected government. But also because the FCC makes acceptance of the primacy of EU law (over national law), that shall ensure EU law’s uniform application and effectiveness throughout the EU, conditional upon compliance by EU institutions with the “agenda of integration” as agreed to with the “act of approval.”

In recent judgments the FCC– in the name of European cooperation – has shown itself slightly more conciliatory. It conceded that before ruling that EU institutions manifestly exceeded their competences and therefore acted ultra vires, it would make use of the preliminary reference procedure (Art. 267 Treaty on the Functioning of the European Union (TFEU)) and ask the CJEU for its interpretation of EU law. It did so in previous proceedings directed against the OMT (Outright Monetary Transactions) Programme (resulting in the CJEU’s Gauweiler judgment) and has done so again in the PSPP proceedings (resulting in the CJEU’s Weiss judgment). As indicated above, the CJEU is mandated with the interpretation of EU law (Art. 19(2) TEU). Its interpretations are binding for the EU Member States. Yet, the FCC finds that the CJEU with part of its reasoning in Weiss itself has acted ultra vires, i.e. in excess of the powers conferred to it. According to the FCC the CJEU’s ruling therefore lacks the democratic legitimation of the “act of approval” and is not binding on the FCC.

Conformity of the PSPP with EU Law – Diverging Views of the FCC and CJEU

With order of 18 July 2017 the FCC had stayed the PSPP proceedings and referred several questions of EU Law to the CJEU for a preliminary ruling (Art. 267 TFEU) – not without expressing its serious doubts as to the compatibility of the PSPP with EU law. The CJEU consequently ruled inter alia on the questions whether the ECB acted within its powers to conduct monetary policy when adopting the decisions on the PSPP (Decision (EU) 2015/774 and subsequent decisions modifying the PSPP) (1) and whether the PSPP is compatible with the prohibition of monetary financing (Art. 123(1) TFEU) (2). It answered both in the affirmative, yet the FCC only followed its interpretation in part.

  1. Did the ESCB exceed its competence to conduct monetary policy?

The EU institutions may only exercise the powers conferred to them – not only as a matter of German constitutional law as laid out above, but also as a matter of EU law, namely Art. 5(1) of the Treaty on European Union (TEU): “The limits of Union competences are governed by the principle of conferral.” EU primary law (i.e. the treaties, including Protocol 4 on the statute of the European System of Central Banks and the European Central Bank) confers to the European System of Central Banks (ESCB) – consisting of the ECB and the central banks of the Member States whose currency is the euro – the power to conduct monetary policy. This power is exclusive, meaning that the Member States whose currency is the euro no longer may conduct a monetary policy of their own (Art. 3(1)(c), 127(2) TFEU). In conducting monetary policy, the ESCB must pursue price stability as its primary objective. Without prejudice to this aim, the ESCB must also “support the general economic policies in the Union with a view to contributing to the achievement of the objectives of the Union” (Art. 127(1) TFEU). EU primary law does not define price stability. The ECSB specified this aim as an inflation rate below, but close to 2% in the medium term.

In determining whether the ESCB with adoption and implementation of the PSPP remains within its competence to conduct monetary policy, the CJEU looks to the programme’s objective (does it pursue price stability?) as well as to the instruments employed (are they included in the arsenal of monetary policy instruments set out in the ESCB and ECB’s statute?), an approach the CJEU developed in earlier judgments (Pringle and Gauweiler). The CJEU finds that the ESCB with the PSPP pursues price stability (bringing the inflation rate up) and with the purchase of government bonds and bonds of international organisations uses the instrument of open market transactions explicitly provided for in Art. 18.1 ESCB/ECB Statute.

The CJEU clarifies, in a way that will alarm the FCC, that the mere fact that the programme has foreseeable effects on commercial banks and the costs for Member States in financing their deficits does not turn the PSPP into an economic policy measures not covered by the ESCB’s competence. Economic and monetary policy are not absolutely separate, according to the CJEU. In order to achieve the desired inflationary effects the ESCB has to adopt measures that “may entail an impact on the interest rates of government bonds, because, inter alia, those interest rates play a decisive role in the setting of the interest rates applicable to the various economic actors” (Weiss, para. 66).

While the effects on Member States’ refinancing costs, according to the CJEU, do not negate the monetary policy character of the PSPP, the CJEU recognizes proportionality as a limit to the ESCB’s exercise of monetary policy. Art. 5(1) TEU postulates proportionality as a principle governing the use of Union competences and Art. 5(4) TEU clarifies that “[u]nder the principle of proportionality, the content and form of Union action shall not exceed what is necessary to achieve the objectives of the Treaties.” Art. 282(4) TFEU specifically addresses the European Central Bank who “shall adopt such measures as are necessary to carry out its tasks”.

The CJEU consequently asks whether the measures in question are proportionate to the objectives pursued; whether they are (1) suitable and (2) do not go beyond what is necessary. Regarding the standard of review, the CJEU notes the ESCB must be allowed broad discretion regarding the choice of suitable and necessary action. The CJEU does not find any manifest error on the side of the ESCB in adopting the PSPP in order to promote investment activities and thus inflation in the euro area. It refers inter alia to the fact that before the PSPP was adopted inflation was at -0,2%. The CJEU further finds that the PSPP does not go beyond what is manifestly necessary to attain the ESCB’s inflation target. Relevant here is the fact that before adopting the PSPP the ESCB had already implemented a programme of private sector asset purchases that had not shown the desired effect in raising inflation. The CJEU agrees with the ECB that there was “no more limited action available to the ESCB” in order to attain its price stability objective. The CJEU then – still as part of its necessity review – looks at the PSPP’s design and finds that it includes safeguards to limit its effects and circumscribe the risk of losses to the ESCB. These safeguards include eligibility requirements (from which exceptions can be granted and have been granted for Greece) to ensure that no high risk bonds are purchased as well as purchase limits – compliance with both being monitored by the ECB.

This, in abbreviated form, is the reasoning that the FCC declares to be “simply not comprehensible,” “objectively arbitrary,” “not tenable from a methodological perspective.” The FCC states that the CJEU “manifestly fails to give consideration to the importance and scope of the principle of proportionality” (para. 119). What rather seems to have triggered this harsh critique by the FCC is that the CJEU does not review proportionality “German-style.” That it does not focus on what for the FCC is the third stage of proportionality review – appropriateness or proportionality in the strict sense. According to the FCC proportionality review of the PSPP requires that the CJEU “give consideration to the economic and social policy effects of the PSPP”; that it ascertains that the ESCB takes into account “the effects that a programme for the purchase of government bonds has on, for example, public debt, personal savings, pension and retirement schemes, real estate prices and the keeping afloat of economically unviable companies, and – in an overall assessment and appraisal – weigh[s] these effects against the monetary policy objective that the programme aims to achieve and is capable of achieving” (para. 139).

The CJEU in its proportionality review had focused instead on the question of suitability and necessity. It did not weigh the benefits for price stability against general effects on the economy as the FCC would have wanted. Rather, when the CJEU agrees with the Advocate General that “the ESCB weighed up the various interests involved so as effectively to prevent disadvantages which are manifestly disproportionate to the PSPP’s objective” it appears that it was concerned with a weighing of the effects on price stability against the risk of loss for the ESCB (and consequently fiscal loss for the Member States).

A finding that this kind of proportionality review is incomprehensible is difficult to grasp (see also Toni Marzal’s critique). Especially since it remains unclear how the ESCB could possibly carry out the kind of review the FFC is demanding.

What makes the FCC’s proportionality review of the ESCB’s competence to conduct monetary policy so problematic becomes clear by comparison with the realm of fundamental freedoms and individual rights, where proportionality review by CJEU and FCC is routine: A measure that restricts fundamental freedoms/individual rights must pursue a legitimate regulatory objective and the measure must be such that it can contribute to the attainment of this objective (suitability); no measure may be reasonably available that is as effective in attaining the objective, but less restrictive on the right/freedom in question (necessity); the restrictions on the right/freedom may not outweigh the benefits pursued by the measure (balancing test/proportionality in the FCC’s “strict sense”). In this constellation, we see clearly what is to be put into proportion to/weighed against what – the pursuit of the public policy objective against infringement of a freedom/right.

The constellation in the PSPP proceedings is different. Here proportionality is to be employed to delimit the scope (FCC)/exercise (CJEU) of a competence. When applying proportionality to the exercise of a competence it is less clear how a least restrictive measure test is to be applied and how balancing shall proceed, i.e. what is to be weighed against the pursuit of price stability. The CJEU appears to have opted for “risk of loss to the ECB and national central banks” or – as the FCC interprets the CJEU’s necessity test – “the budgetary autonomy of Member States” (para. 133).

The FCC, by contrast, wants the monetary policy objective (price stability) to be balanced against the effects of the measure on the competences of Member States to conduct economic policy. It then appears to equate effects on Member State competences with effects on the economy – including real estate prices, interest on savings accounts, viability of corporations. It thus implies that damaging impact to a Member State’s economy would itself detract from the competence of the Member State to conduct economic policy. It is true that monetary policy has economic effects and that these economic effects may affect the scope of possible economic policy measures available to Member States – in international economic law we might say they affect the “right to regulate”. Yet, different from the constellations in international economic law when the “right to regulate” is invoked, the FCC does not point to particular (types of) measures that Member States no longer can adopt due to the ESCB’s implementation of the PSPP. It is therefore difficult to comprehend – to say the least – how a proportionality test that shall take into account potential impacts of monetary policy on unspecified policy options might be operationalized. Applying this kind of proportionality test is further complicated/made impossible as the effects of the ESCB’s monetary policy on “the economy” vary widely across the euro area.

This question is no further illuminated when the FCC – having concluded that it is not bound by the CJEU’s ultra vires finding of proportionality – goes ahead with its own assessment of proportionality. As indicated, the FCC demands that an asset purchase programme’s monetary policy objectives be weighed and balanced against its economic policy effects. Here, another curiosity appears in the court’s reasoning: While proportionality review, generally, is understood to be a matter of judicial review (with higher or lower levels of scrutiny), the FCC suggests that the ESCB itself needs to conduct and document a proportionality review. It thus imposes a procedural requirement on the ESCB’s conduct of monetary policy.

Holding proportionality review to constitute an obligation of the ESCB, allows the court to leave unanswered the question whether the PSPP is or is not proportional. And since for the FCC proportionality is a question of competence, it consequently does not make a final judgment whether the PSPP is a monetary policy measure or not. What the court does instead, is to list economic effects that the ESCB should take into account when conducting the required proportionality review. The FCC’s list (paras. 170-175) includes: improvement of Member States refinancing conditions, improving the economic situation of banks, risk of real estate and stock market bubbles, risks of losses for private savings and reduced income on pension schemes, increased real estate prices, allowing unviable economic companies to stay on the market and finally “risk that the ESCB becomes dependent on Member State politics as it can no longer simply terminate and undo the programme without jeopardizing the stability of the monetary union” (para. 175).

The court does not engage in a weighing and balancing exercise itself – this is the ESCB’s tasks – but simply makes “the point […] that such effects, which are created or at least amplified by the PSPP, must not be completely ignored.” (para. 173). Many commentators have pointed out that the ECB is far from ignoring these effects – as demonstrated by the manifold publications available via the ECB’s website. The FCC, however, holds a different view: “It is not ascertainable that any such balancing [of these effects against the expected positive contributions to achieving the ECB’s monetary policy objective] was conducted, neither when the programme was first launched nor at any point during its implementation;[…] Neither the ECB’s press releases nor other public statements by ECB officials hint at any such balancing having taken place” (para. 176).

And thus it remains unclear how such a balancing should be conducted. As explained above, proportionality, according to the FCC, is to protect Member States’ competence to conduct economic policy. Yet, it remains obscure how, for example, improved refinancing conditions for Italy – a major worry for the FCC – detract from Germany’s power to make economic policy and how such encroachment should be weighed exactly. Moreover, what may appear as a reduction of economic policy space for one Member State, may expand another Member States’ policy options.

The reasoning of the FCC reveals that what is at stake here for the FCC is less economic policy space of Member States, but rather a particular design of European Monetary Union. According to this design, a common monetary policy is complemented with strict fiscal discipline for the Member States. While it may be correct that, as the FCC insists, Member States have “conferred” few economic policy competences to the EU, EU law imposes many restrictions on Member States economic policy space. It does so in order to ensure sound government budgets and avoid “excessive deficits”. Among these are preventive measures of budget control and economic coordination (Art. 121 TFEU and secondary law) as well as reactive measures such as the excessive deficit procedure (Art. 126 TFEU and secondary law). Further pillars in this architecture of common monetary policy and fiscal discipline are debt brakes (Fiscal Compact) and the prohibitions of government bailouts (Art. 125 TFEU) and monetary financing (Art. 123 TFEU).

When the FCC singles out the improving of refinancing conditions for certain Member States and the consequent “risk … that necessary consolidation and reform measures will either not be implemented or discontinued” (para. 170) as effects that need to be included in the balancing exercise, its focus seems motivated by the concern that this architecture is under threat. This threat follows rather from an expansion of fiscal policy space (for Italy who can refinance her deficit at lesser cost) than a restriction of economic policy competences (for Germany).

This concern of the FCC for fiscal discipline of Member States takes us to the other question referred to the CJEU for a preliminary ruling.

2. Is the PSPP compatible with the prohibition of monetary financing?

The PSPP’s potential impact on Member States’ fiscal discipline was squarely addressed by the FCC’s questioning whether the PSPP was compatible with the prohibition on monetary financing in Art. 123(1) TFEU. Art. 123(1) TFEU prohibits ECB and Member State central banks from providing governments with overdraft facilities or any other type of credit facility and from purchasing debt instruments directly from governments. The CJEU already in its judgment in Gauweiler had addressed the question whether and under which circumstances a government bond purchase programme could violate the prohibition of monetary financing. At issue in the proceedings in Gauweiler was the ESCB’s Outright Monetary Transactions (OMT) programme, which provided for the selective purchase on the secondary market of sovereign bonds from Member States who received financial assistance. The programme’s stated objective was to neutralize interest peaks on the bonds of crisis-ridden Member States and ensure the transmission of monetary policy throughout the euro area. In Gauweiler the CJEU found that the programme did not violate Art. 123(1) TFEU as long as safeguards were in place to ensure, inter alia, that purchases on the secondary market did not amount to direct purchases from governments and thus circumvent the prohibition of monetary financing. From the ruling in Gauweiler it was predictable, that the CJEU in Weiss would not find the PSPP to constitute monetary financing in violation of Art. 123(1) TFEU either.

The CJEU in Weiss first points out that under the PSPP the central banks of the Eurosystem purchase bonds only on the secondary market and not directly from governments. The CJEU recognizes, however, that also purchases on the secondary market may constitute a violation, namely when they have an effect equivalent to direct purchases. The ESCB is thus obliged to make sure, through programme design and monitoring, that no such effects arise. It must further ensure that the programme does not “reduce the impetus which that provision [Art. 123 TFEU] is intended to give the Member States to follow a sound budgetary policy” (Weiss, para. 127).

The CJEU sees sufficient safeguards in place to ensure that the secondary market purchases are not equivalent in effect to direct purchases. In this respect, it is of particular importance to the CJEU that purchasers of government bonds do not act as de facto intermediaries of the ESCB. This would be the case if they can be certain that the ESCB will purchase the government bonds they hold. The CJEU agrees with the ECB that several programme features protect against such de facto intermediation. Among them are the so-called blackout periods, which prohibit the central banks to purchase bonds immediately after their issuance, the ESCB’s option to reduce monthly purchase volumes, limits on purchase volume, the variety of bonds eligible under the programme (including regional and local government bonds), and the restriction of purchases to 33% of a particular bond issuance and issuer.

The CJEU further finds that the PSPP does not reduce the impetus on Member States to conduct sound budgetary policy. On this issue, the CJEU points to the programme’s limitation in time, the possibility to re-sell the purchased bonds, the restrictions on volume, the distribution of purchases among the national central banks according to the key for ECB capital subscriptions, the purchase limits per issue and issuer as well as the programme’s eligibility criteria based on a credit quality assessment of the bond issuer. The CJEU adds that even when the central banks hold the purchased bonds to maturity they do not therewith waive their right to debt payment. As all national central banks only buy bonds from their Member State’s governments and no provision has been made for the sharing of losses incurred by national central banks, a central bank does not bear the risk of losses on bonds purchased by another national central bank. The only losses subject to loss sharing are those incurred on the purchases by the ECB of international bonds, which are limited to 10% of the book value of all purchases under the PSPP.

The FCC accepts the CJEU’s conclusion that PSPP does not violate the prohibition of monetary financing in Art. 123(1) TFEU. Yet, while it agrees with the CJEU’s criteria to determine whether a violation of Art. 123 (1) TFEU occurs, it criticizes their application by the CJEU. It takes particular issue with the CJEU’s treatment of blackout periods. According to the FCC, the CJEU failed to review whether they were suitable (not only to avoid certainty on behalf of governments that their bonds would be purchased, but also to protect the formation of market prices) and indeed observed. The FCC further critiques the CJEU’s treatment of the practice of holding bonds to maturity, which according to the FCC needs to remain the exception to the rule to ensure that the Eurosystem does not become a “permanent source of finance” (para. 197) for the Member States. Moreover, in view of the FCC, the CJEU fails to determine whether the ESCB with adoption of a programme like the PSPP must also adopt a binding exit strategy.

Despite this criticism, the FCC concludes that after the required overall assessment, it cannot ascertain that the adoption and implementation of the PSPP amounts to a qualified violation of the prohibition of monetary financing in Art. 123 (1) TFEU. Thus, even though the FCC does not agree in all points with the CJEU and even though the FCC holds that the CJEU did not fully discharge its duty to effectively review monetary policy, it does not find that on the issue of monetary financing the CJEU acted ultra vires. The FCC consequently accepts as binding the CJEU’s ruling on this count. The FCC underlines as of particular importance the safeguards against selectivity, among them the limitations of purchases to 33% per issuance/issuer and the distribution of purchases according to the ECB’s capital subscription key. The latter was an “objective criterion that is independent of the economic and budgetary situation of the respective Member States” and it could therefore “be ruled out that this criterion could be used to purposely direct bond purchases to support struggling Member States” (para. 203).

The FCC’s Ruling: Violation of the Individual Right to Democracy and Its Remedy

As laid out above, the FCC finds that the CJEU exceeded its judicial mandate under EU law (Art 19 (1) TEU) with its ruling that the PSPP is a monetary policy measure and thus falls within the ESCB’s competence. As an ultra vires act, the ruling did not bind the FCC. Moreover, according to the FCC, due to the exceeding of judicial competence the decision also “lacks the minimum of democratic legitimation necessary under [the Basic Law]” (para. 113).

Not bound by the CJEU’s ruling on competence, the FCC conducts its own assessment. It concludes that the ESCB did not engage in the required balancing exercise to determine proportionality (and consequently competence). As the violation of the principle of proportionality (Art. 5(1), (4) TEU) by the ESCB was “structurally significant” the ECB (like the CJEU) had acted ultra vires.

As outlined above, an ultra vires act, according to the FCC, lacks binding effects in Germany and triggers the integration responsibility of parliament and federal government, i.e. the responsibility to make sure that the EU institutions remain on the path of integration, legitimated by the “act of approval.” A violation of this responsibility results in a violation of the individual right to democracy of German citizens (voters). Since the FCC finds a lack of balancing by the ESCB, but does not itself resolve the issue of proportionality, it concludes that no violation of the integration responsibility can be determined, yet:

At present, it cannot yet be determined whether the Federal Government and the Bundestag did actually violate their responsibility with regard to European integration (Integrationsverantwortung) by failing to actively advocate for the termination of the PSPP. This determination is contingent upon a proportionality assessment by the Governing Council of the ECB, which must be substantiated with comprehensible reasons. In the absence of such an assessment, it is not possible to reach a conclusive decision as to whether the PSPP in its specific form is compatible with Art. 127(1) TFEU” (para. 129).

While the FCC does not find that integration responsibility was violated, it does find that the federal government and parliament must “take steps seeking to ensure that the European Central Bank conducts a proportionality assessment in relation to the PSPP.” In order to do so they “must clearly communicate their legal view to the ECB or take other steps to ensure that conformity with the Treaties is restored.” (para. 232) They shall further “continue monitoring the decisions of the Eurosystem on the purchases of government bonds under the PSPP and use the means at their disposal to ensure that the ESCB stays within its mandate” (para. 233). Contrary to many commentators, the FCC does not see any conflict with central bank independence. Rather it argues that independence must go hand in hand with a strict monitoring of the boundaries of monetary policy.

Finally, if within three months the ECB Governing Council has not adopted “a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the ECB are not disproportionate to the economic and fiscal policy effects resulting from the programme” (para. 235) then the Bundesbank may no longer participate in the PSPP and must sell the bonds it purchased under the PSPP and still holds (para. 235).

Already in the OMT proceedings, Justice Gertrude Lübbe-Wolff ‘s had expressed dismay in her separate opinion at the court’s ultra-vires-and-integration-responsibility-constructions: “In an effort to secure the rule of law, a court may happen to exceed judicial competence. In my view, this has occurred here” (para. 1). A sentiment that is shared by many after the PSPP judgment. In the meantime the EU Commission considers treaty violation proceedings against Germany for not accepting as binding the CJEU’s interpretation of EU law. The ECB issued a press release in which it takes note of the judgment, states its commitment to its mandate and refers to the CJEU’s ruling “that the ECB is acting within its price stability mandate.”

Implications for the PEPP

At the judgment’s pronouncement, FCC president Vosskuhle made sure to stress that it did not apply to the ECB’s Pandemic Emergency Purchase Programme. Yet, a number of the court’s findings are relevant to the PEPP, which the ECB announced on 18 March 2020 and was adopted by the Governing Council on 24 March 2020 with Decision (EU) 2020/440 to address the effects of the COVID-19 pandemic.

With the PEPP the ESCB seeks to address the devastating economic effects of the COVID-19 pandemic. Under the PEPP, which is is to complement the ESCB’s Asset Purchase Programme that includes the PSPP, Eurosystem central banks purchase private and public sector securities. The PEPP has an initial volume of €750 billion. The ECB announced that the Governing Council may increase this volume “by as much as necessary and for as long as needed”. The PEPP is to run until the Governing Council assesses that “the coronavirus crisis phase is over” and at least until the end of 2020. As concerns government debt securities, allocation of purchases shall be guided by the ECB’s capital subscription key (Art. 5(1) Decision (EU) 2020/440). Yet, the PEPP also provides for flexibility in this respect: “Purchases under the PEPP shall be conducted in a flexible manner allowing for fluctuations in the distribution of purchase flows over time, across asset classes and among jurisdictions” (Art. 5(2) Decision (EU) 2020/440).

The policy objective of the PEPP is set out in Decision (EU) 2020/440. The decision stresses the economic shock caused by the pandemic. It states in its preamble that “economic activity across the euro area is declining and will inevitably suffer a considerable contraction” and points to “acute strains on the cash-flows of businesses and worker” that “put the survival of businesses and jobs at risk.” Only thereafter does it make a connection to the monetary policy objective of price stability. According to the decision the current situation hampered “the transmission of the monetary policy impulses and add[ed] severe downside risks to the relevant inflation outlook”. In this context, the PEPP was a “proportionate” measure “to counter the serious risks to price stability, the monetary policy transmission mechanism and the economic outlook in the euro area, which are posed by the outbreak and escalating diffusion of COVID-19.”

ECB president Christine Lagarde specifies in her statement after the PEPP’s announcement: “Monetary policy has to keep the financial sector liquid and ensure supportive financing conditions for all sectors in the economy. This applies equally to individuals, families, firms, banks and governments.” In its announcement of the programme, the ECB furthermore formulates a “whatever it takes approach”: “To the extent that some self-imposed limits might hamper action that the ECB is required to take in order to fulfil its mandate, the Governing Council will consider revising them to the extent necessary to make its action proportionate to the risks that we face. The ECB will not tolerate any risks to the smooth transmission of its monetary policy in all jurisdictions of the euro area.”

In light of these characteristics, it is doubtful whether the PEPP would pass judicial review as envisaged by the FCC. If the ECB failed to properly substantiate proportionality with respect to the PSPP, it also failed to do so here. The question (for the FCC) would be whether it can substantiate that the programme is proportionate and thus falls within the ambit of monetary policy. The decision as well as the ECB’s announcement refer to proportionality between the action taken and “the risks that we face” due to the COVID-19 pandemic. To maintain this kind of proportionality the ECB makes clear that it is determined to revise any limitations in order to enhance the programme’s effectiveness. This account of proportionality differs significantly from the FCC’s account. If the FCC were to review proportionality with respect to the PEPP, it most likely would take issue with the following two characteristics: (1) the wide and rather vague description of the policy objectives – stressing inter alia the need to support financing conditions including those of governments; (2) the “whatever it takes approach” that is guided merely by effectiveness in achieving the programme’s objectives and does not take into account the potential effects on Member States’ ability to autonomously decide on their economic policies.

Furthermore, the FCC’s pronouncements on the prohibition of monetary financing have increased the likeliness that the PEPP will become the target of constitutional complaints. While the PEPP by reference to Decision (EU) 2020/188 on PSPP provides for a blackout period and the 33% limit on purchases per issue/issuer, it also provides for flexibility in the allocation of bond purchases (Art. 5(2) Decision (EU) 2020/440). This characteristic, which may lead to selectivity in government bond purchases, opens the programme to challenge given the OMT and now also PSPP precedents.

As indicated above, selectivity had been an issue specifically in the OMT proceedings because the ESCB’s OMT programme had envisaged selective bond purchases from crisis-ridden Member States. To ensure that selectivity would not lower the impetus for fiscal discipline, FCC and CJEU both found it to be crucial that Member States whose bonds were eligible for purchase under the OMT programme were recipients of financial assistance inter alia by the European Stability Mechanism (ESM) and as such subjected to strict conditionality (securing fiscal discipline and consolidation).

By contrast, financial assistance to deal with the effects of the COVID-19 pandemic will not be extended within the framework of the ESM – inter alia due to the strong resistance by Italy and Spain. It will not be subject to conditionality. The lack of conditionality may expose the PEPP to the challenge that it functions – in the words of the FCC – “to support struggling Member States.” Possibly, Art. 122(2) TFEU, that constitutes and exception to the bail-out prohibition in Art. 125 TFEU during crises caused by natural disaster, might come to the rescue here. It does not allow for financial assistance by the ESCB. Yet, an argument may be made that in a situation when the treaties allow the bail-out of governments and EU rules on budget discipline are suspended, the prohibition of monetary financing should be interpreted more narrowly.

A Case of German Rule of Law Fetish or Impetus for Democratization?

“In the name of the people” the court issued a judgment identifying explicitly and implicitly various dangers to democracy. In this last part of my comment, I wish to raise the question whether the judgment may indeed provide an impetus for democratization or whether it is yet another manifestation of an antidemocratic German obsession with the rule of law (Rechtsstaat).

German constitutional lawyer Helmut Ridder was a harsh critic of this obsession. Frequently, he pointed out how German legal scholarship and courts interpreted the written constitution in light of a higher rule of law and thus undermined efforts at democratization. Democratization for him was to extend not only to the institutions of the state, but to society as a whole, including the economy. One of his examples on how democracy is being obstructed in the name of the “the rule of law” fits particularly well the context of the PSPP judgment. In his monograph “Die soziale Ordnung des Grundgesetzes” (1975) he describes how in 1924 justices in the Weimar Republic announced that they would not comply with a legislative act that prohibited the judicial revaluation of mortgages to compensate for losses from inflation. They justified their disobedience on the basis of a higher moral law. This higher law that in view of the justices mandated revaluation, obviously benefited creditors. Whereas the legislative act prohibiting revaluation would have had the effect that debtors only owed the face value of their obligations, now lightened by depreciation of the currency. On the basis of such judicial practice (and supporting legal scholarship) Helmut Ridder formulated his critique that jurisprudence and scholarship in the name of a rule of law above the legal order continuously consolidated power structures and undermined the progressive, democratizing potential of the written constitution.

The PSPP ruling might be an instance of such constitutional law jurisprudence despite its framing as a defense of democracy. The individual right to democracy, as interpreted by the FCC, allows the court to sidestep parliament in order to control European integration. Moreover, the FCC construes a proportionality test by reading a balancing requirement into the treaties that is nowhere to be found in the written text. The proportionality test advocated by the FCC would not only restrict monetary policy for the benefit of Member State competence, but would also obstruct monetary policy supporting poorer Member States’ budgets. To the FCC, the CJEU is an unreliable guardian of this “rule of law.” It therefore reserves for itself the power to disregard the CJEU’s interpretation of EU law.

The construction of democracy by the FCC, moreover, seems to locate democracy only in state institutions that derive their power from the people (even if indirectly) by way of elections. It does not envisage that also an institution like a central bank that acts independently from such institutions might be a place of democratic politics. The FCC not only holds democracy at the supranational level to be deficient (it made this very explicit in its Lisbon judgment). It also turns the German parliament and the federal government into watchdogs over EU institutions in the name of the individual right to democracy (yet the suspicion arises that the FCC here is less concerned with democracy than with national sovereignty). Might the judgment nonetheless be read to further democratization?

First Reading: Democratization of Monetary Policy from Within?

I would like to suggest for a moment that we (re)interpret the PSPP judgment as envisaging a democratization of monetary policy. A democratization of monetary policy-making by the central banks itself, not through greater control from the outside by the political organs of the EU or Member States.

The FCC asks that the ESCB consider, weigh and balance a wide range of economic and social effects when adopting and implementing monetary policy and that it document this process in a way that is accessible to the public. Admittedly, the effects that the FCC primarily wants to see taken into consideration reflect a preoccupation with fiscal discipline. Yet, taking the FCC at its word could just as well support the claim that the ESCB should also take into account the monetary policy effects on – say – (gender) inequality and climate change mitigation. Such a claim is in in line with calls for a diversification of perspectives, which consequently would also require a diversification of the central banks’ staff, in the making of monetary policy. These calls are receiving growing attention since the financial and euro-crisis, even within the ECB. In 2010, then ECB president Claude Trichet called for “input from various theoretical perspectives and from a range of empirical approaches” and formulated the view that an “open debate and a diversity of views must be cultivated—admittedly not always an easy task in an institution such as the ECB.” Better communication between central bank policy-makers and the public could play a part in forging what Annelise Riles calls financial citizenship – a dedication on the part of central bankers and the public to dialogue and mutual understanding – that consequently leads to more legitimate monetary policy.

To be sure, such a conception of democratic central bank politics is at odds with a conception that holds the ECB to have a narrow mandate and to stand beyond politics, a conception that also figures prominently in the judgment. Even when read through this lens, however, the judgment may act as an impetus for democratization.

Second Reading: Democratization through European Economic Politics

In several parts of its judgment, the FCC refers back to its treatment of central bank independence in the 1993 Maastricht judgment. In Maastricht, the court held that central bank independence constituted a deviation from the principle of democracy, albeit one that was justified since only an institution independent from parliamentary politics could be trusted to maintain the value of the currency. Because central bank independence is an exception to the democracy principle, monetary policy, thus the FCC, must be understood narrowly. The FCC recognizes that a narrow construction of monetary policy cannot be achieved by way of a definition or strict rules. This explains its rather hapless attempt in PSPP to reign in monetary policy through the proportionality principle and judicial review.

Also already in Maastricht the FCC had taken note of what many consider a fundamental design flaw in the European Monetary Union – namely that the single currency is not complemented with a common fiscal and economic politics. A politics that could, for example, address structural imbalances across the euro area and prevent one Member State through its labour politics to gain a competitive advantage over other Member States (as economists argue Germany has done, see e.g. here). At the time it pronounced its Maastricht judgment, the FCC pointed out that it was not up to the court, but to politics to provide a fix to monetary union without political union. A treaty amendment providing for an EU economic and fiscal policy competence could be a remedy. As the discussion on Corona bonds shows, there are (limited) options to allow for some common fiscal politics even without a treaty amendment. So far, however, attempts to institute a common economic and fiscal politics within the EU have been obstructed, inter alia by Germany. In this impasse the ESCB’s rather wide interpretation of its monetary policy mandate could do some work in addressing inequalities caused by the European Monetary Union. With its PSPP judgment the FCC now seeks to reign in and police the ESCB.

The COVID-19 pandemic might make us see the consequences of a combination of narrow monetary policy, fiscal discipline and lack of common democratic economic and fiscal politics even more clearly than we would without the virus: Member States who benefit least from European Monetary Union and who have been hit hard by the eurocrisis and once more by the COVID-19 pandemic will only receive financial assistance either as an act of charity (even if called solidarity) or in combination with conditionality and a commitment to austerity. This will further increase inequality in Europe and undermine even the last bit of transeuropean solidarity.

If this is not an impetus to work towards a transnational European democratic politics – what is?

A Sense of an Ending

This is where I would have left it. Had not my friend said: Your text needs an ending. If a reader followed you for that long you cannot leave her in the cold like this. Her admonishment kept me awake during a lonely full moon COVID-19 night. What should I say to a reader who would like to stay for a coffee and chat about my take on the judgment or the potential for democracy in Europe? I would probably say: Forget my lies. I wrote this comment because I am upset – not only with the judgment, but also idealizations of the EU and German democracy, inequality and lack of solidarity. Possibly, I also want to prove that I can talk the talk, add my voice to the conversation among (male) colleagues. Yet, while I used the words, applied the rules, I realized that joining this conversation might leave me even more dissatisfied. That I long for a different language, a game that is a little fun to play. That I miss promise in the democracy, poetry in the justice that lie at the horizon of my reading of the judgment. Eventually, I remembered a little poetry to offer as a parting gift. It is from Gertrude Lübbe-Wolff’s dissent in OMT: “If they want to take you on a long desert walk that will not lead to a spring – resist.”

Frankfurt, 13 May 2020.