The recent ruling of the German Constitutional Court on the Public Sector Purchase Programme (PSPP) issued on 5 May triggered an institutional earthquake. Here we try to outline the actual content of the ruling, the reasons on which it is based and the possible impact.
Subject of the judgement
The Public Sector Purchase Programme was introduced in 2015 by the European Central Bank under the guidance of Mario Draghi as part of the Expanded Asset Purchase Programme (EAPP), both also known as Quantitative Easing programmes. It is a programme for the purchase of public sector assets in secondary markets. The purpose of the ECB, which buys government bonds from banks on the basis of the EAPP, is to provide them with liquidity and facilitate the granting of credit to businesses, while bringing the inflation rate within the Eurozone back to 2%.
The PSPP forms the main part of the EAPP. As of 8 November 2019 the ECB had purchased securities for a total value of € 2,557,800 million of which € 2,088,100 million under the PSPP.
It should be pointed out that the judgment does not concern the programmes planned to deal with the Covid-19 emergency.
The question addressed to the Court
In several appeals, some German citizens, including Peter Gauweiler, a well-known member of the CSU party (Bavarian branch of the CDU), questioned the constitutional conformity of the PSPP.
The applicants claimed that the ECB had infringed Article 123 of the Treaty on the Functioning of the European Union (TFEU), which prohibits the ECB and the central banks of the Member States from granting credit facilities in any form whatsoever to the administrations of the Member States and of the European Union itself, by adopting decisions on the introduction of the PSPP.
In addition, the applicants plead infringement of Article 5 of the Treaty on European Union (TEU), namely the principle of attribution for the delimitation of the Union competences and the principle of proportionality which must be respected when exercising the Union competences.
According to the applicants, the ECB deliberations constituted ‘ultra vires‘ acts through which there had been a misappropriation of power from the German national institutions to those of the Union.
The decisions relating to the PSPP infringe, moreover, the principle of democracy enshrined in the Grundgesetz (German Constitution) and thus undermine Germany’s constitutional identity.
The question raised before the Court of Justice for a preliminary ruling
In 2017 the Constitutional Court referred the question to the Court of Justice for a preliminary ruling. In particular, it asked whether Article 123(1) TFEU was infringed by the fact that, under the PSPP,
- certain details of purchases are disclosed in such a way as to give the markets the certainty that the Eurosystem will purchase some of the securities to be issued by Member States;
- no details of compliance with minimum time limits between the issue of a debt instrument on the primary market and its purchase on the secondary market are disclosed, even after the event, so that judicial review is not possible in this respect;
- all the securities purchased are not sold again, but are held until final maturity and are therefore excluded from the market;
- the Eurosystem purchases nominal marketable debt securities with a negative rate of return on maturity.
In its December 2018 judgment (Case C-493/17), the Court of Justice found that the ECB decisions in question were sufficiently justified by the need to achieve an increase in inflation rates, which at the time were close to zero following the deep recession that had occurred since 2008.
On the proportionality issue, the Court of Justice concluded that the economic analysis of the ESCB (European System of Central Banks), indicating that the PSPP was appropriate to contribute to the achievement of the purpose of maintaining price stability, was not vitiated by a manifest error of assessment.
The German Court criticism against the Court of Justice
According to the German Constitutional Court, in its proportionality assessments the Court of Justice did not take into account the actual consequences of the PSPP on economic policy. Where fundamental interests of the Member States are involved, as is generally the case in cases of interpretation of the competences conferred on the European Union, judicial review cannot simply accept positions simply supported by the ECB, limiting the review to ‘obvious’ defects. Otherwise, the ECB would be allowed to extend its competences autonomously. This would effectively undermine the principle of conferral of competences laid down in Article 5 of the Treaty on European Union.
The German Court considers that the conclusions of the Court of Justice on this point are methodologically unsustainable.
The conclusions of the German Constitutional Court
Because of its criticism of the Court of Justice, the German Court does not consider itself bound by the decision of the European court. It points out that the exercise of control over possible ultra vires acts by European bodies is part of its tasks, even though this task would fall mainly to the Court of Justice. At the same time, a complete renunciation of such control by the Member States would mean that decisions on the contractual basis of the European Union would be taken only by the bodies of the European Union itself.
The German Court then submits the questions raised by the applicants to an independent assessment and concludes that the ECB decisions exceed the monetary policy mandate conferred on it by invading on economic policy, which is reserved for the exclusive competence of the Member States.
The Federal Government and the German Parliament have an obligation to safeguard compliance with the integration agenda followed by the European Union. According to the Karlsruhe judges, they will therefore have to insist that the ECB submit a comprehensive analysis of the proportionality of the PSPP both for the measures taken in the past and for the reinvestment phase that has been ongoing since 1st January 2019.
As a consequence, all German constitutional bodies, administrative bodies and courts cannot participate in the development, implementation, enforcement or ratification of ultra vires acts. After a transitional period of three months, the Bundesbank is therefore prohibited from participating in the implementation and enforcement of the decisions that are the subject of the judgment, unless the Governing Council of the ECB adopts a new decision that demonstrates in a comprehensible and substantiated manner that the objectives pursued by the PSPP are disproportionate to the economic and fiscal policy effects caused by the PSPP measures themselves.
At the same time, the Bundesbank must ensure that bonds already purchased under the PSPP are sold.
Possible impact
The Commission could already send a letter of formal notice to Germany to initiate infringement proceedings. However, the Commission may prefer to wait until the Bundesbank, as required by the Constitutional Court, no longer cooperates in the implementation of the forthcoming measures to purchase government bonds.
So far, only three infringement proceedings have been opened and closed with convictions for conduct attributable to the Constitutional Court of a Member State. In two other cases, where the judgements concerned matters of ultra vires acts, the infringement proceedings were not completed.
Infringement proceedings would in any case result in the embarrassing situation for the German Government because it has not the power to force the Constitutional Court to change its position.