On 5 May, German’s Constitutional Court (BVerfG) ruled in a long-awaited and controversial decision that the ECB’s ongoing government bond buying programme (PSPP) exceeded EU competencies, raising fundamental questions for the ECB and Europe’s legal order.
In its ruling, the BVerfG’s argues that parts of the European Central Bank’s 2015 government bond-buying programme may be illegal under the Germany constitution. Through its ruling, which disregards and directly contradicts a previous European Court of Justice (ECJ) ruling, the BVerfG not just challenged the ECB’s fundamental independence from policymakers, but, crucially, questions the supremacy of EU law and the ECJ.
Under the EU’s governing treaties, EU law supersedes national legislation, with ruling by the Luxembourg-based ECJ, as the bloc’s highest court, superseding decisions by the national courts.
In its ruling, the BVerfG argues that the ECB’s programme does not satisfy the principles of proportionality and oversteps the Bank’s mandate for monetary policy by ensuring that inflation remained below, but close to 2%. The Court also took specific aim at the scope and longevity of the programme.
In this context, it said, the ECB’s recent COVID-19 emergency asset programme worth €750 billion was not affected.
The German Court controversially argued in favour of the plaintiffs, a group of German academics and politicians, that the PSPP’s €2 trillion sovereign bond purchasing programme constitutes an act of fiscal policy, thus effectively helping to finance governments. While the German Government and Bundesbank must not immediately step back from the programme or its decision-making process, it ordered any German agencies to step back from the programme after a 3-month transition period, “unless the ECB Governing Council adopts a new decision that demonstrates, in a comprehensible and substantiated manner, that the monetary policy objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme.”
In their responses to the ruling, both the European Commission and the European Central Bank took note of the decision but strongly reiterated the supremacy of EU law and the independence of the EU treaties, to which Germany is a signatory. The ruling was also strongly criticised by French Finance Minister Bruno le Maire who accused the German court of overstepping its competences, arguing that the ECB was the “only one able to judge what is necessary when it comes to monetary policy in the eurozone,” adding that “the European treaties guarantee the independence of the European Central Bank.”
Mr. le Maire added that the ECB “takes its decisions in total independence and decides on the conditions for the exercise of its mandate under the exclusive supervision of the Court of Justice of the European Union, which is the guardian of the treaties.”
Meanwhile, the ruling also highlights the deficiencies of the eurozone’s governance structure to support fiscally weak national governments in creating economic growth. In the absence of a coordinated EU-level fiscal policy and lagging growth across the eurozone, former President of the ECB vowed to do “whatever it takes” to foster economic growth through the PSPP. This week’s ruling, however, appears to show the limits as to how far central bank action alone can support economic growth in the absence of political action.
Notwithstanding this specific ruling, the BVerfG’s decision to rule contrary to the European Union’s highest Court may have significant knock-on effects for future rulings on issues ranging from further integrating economic, fiscal and monetary policy to enforcing the rule of law.
Compliments of Vulcan Consulting – a member of the EACCNY.