The PSPP judgment of the German Constitutional Court: An Abrupt Pause to an Intricate Judicial Tango
Revising syllabi is not the favourite part of an academic’s job. Still, this is exactly what the German Federal Constitutional Court (FCC) is now forcing us to do. Its 5th of May judgment on the legality of the ECB’s decisions on the Public Sector Purchase Programme (PSPP) – and on the corresponding soundness of the Weiss European Court of Justice (ECJ) ruling providing it legal validity – will echo for years to come. Before exploring the economic, legal and political ramifications of this ruling, we need to briefly examine the history of the judicial “dance” between the FCC and the ECJ. In this post it will be argued that, although this dance has for now been paused, it shall continue, but the tune and the steps will not be the same. The European melody might be forced to take more “notes” from national “composers” and the ECJ’s steps might need to more carefully avoid treading on the FCC’s toes.
A bit of history
German courts have always had a difficult relationship with the principle of EU law supremacy, especially with its absolute and unconditional version, as enunciated in the famous Costa v ENEL ruling and further elaborated in (inter alia) Internationale Handelsgesellschaft, Simmenthal, INCOGE and Melloni. Never accepting absolute and unconditional EU law supremacy, the FCC has retained the right to review EU laws on the grounds of fundamental right protection, ultra vires review and identity locks. However, by a series of clamorous threats and tactical retreats, an intricate judicial dance has been unfolding in the past few decades, and there has never thus been open conflict between the ECJ and the FCC. Not until the 5th of May 2020.
With the FCC’s PSPP ruling we have now witnessed a faux pas in this dance and the music has been paused. The Karlsruhe court has bitten. For the first time ever, it has declared an ECJ judgment as being ultra vires in Germany, de facto refused to comply with its content and taken matters into its own hands. Still, it seems that this particular case, being mostly about procedural matters and the provision of further justifications by the ECB, will not lead to outright judicial war. But the mechanism for a potential showdown is apparently now in motion. An examination of the nub of the FCC’s reasoning is necessary in order to explain why this is indeed the case and why this judgment will have important ramifications in relation to the EU’s economy, politics and legal order.
The crux of the FCC’s reasoning
Briefly, by way of background, yesterday’s FCC judgment was the culmination of a long-running case. Following a complaint before German courts by a group of about 1,750 people in 2015, the question of the legality of the QE programme was put before the ECJ in December 2018 (in the aforementioned Weiss ruling), which found it to be lawful. The case came back to the FCC; the outcome of its deliberations took the form of yesterday’s headline-making judgment.
When one reads the entire judgment (which is quite long), it becomes evident that the FCC was very methodical in its attack against the ECB. First, it realised it had to strip the ECB’s actions of their legal “protection” under EU law, namely their stamp of approval by the ECJ in the Weiss judgment. To do this, the FCC had to somehow discredit said ECJ ruling. It did so by challenging its standard of proportionality review. The FCC accused the ECJ of an essentially subpar review, i.e. a review that ‘does not satisfy the requirements of a comprehensible review as to whether the ESCB and the ECB observe the limits of their monetary policy mandate’ (para 123). What were the reasons behind this conclusion? The ECJ had failed ‘to give consideration to the importance and scope of the principle of proportionality’ and was ‘no longer tenable from a methodological perspective given that it completely disregards the actual effects of the PSPP’ (para 119). What are these effects? Well, they are the economic policy effects that the FCC is habitually concerned with, described by the Financial Times as a well-known ‘one-sided litany’, which includes ‘the risk of creating real estate and stock market bubbles as well as the economic and social impact on virtually all citizens, who are at least indirectly affected inter alia as shareholders, tenants, real estate owners, savers or insurance policy holders’ (para 173).
What is the result of this supposedly unsatisfactory proportionality review by the ECJ in its Weiss ruling? Suffice to say that it is serious. The FCC asserted that the ECJ’s findings ‘manifestly exceed the judicial mandate conferred upon the CJEU in Art. 19(1)’ thus leading to ‘a structurally significant shift in the order of competences to the detriment of the Member States’ (para 154). For this reason, the FCC concluded that the ‘CJEU thus acted ultra vires, which is why, in that respect, its Judgment has no binding force in Germany’ (para 163). With that sentence, history was made. Paragraph 163 of this ruling will probably be one of the most cited paragraphs in EU law discourse in the coming years.
A point of order has to be made before we proceed to the second step of the FCC’s reasoning. This is necessary so that the significance of yesterday’s ruling is not overly exaggerated. This is not the first time a national court has found an ECJ judgment to be ultra vires, or at least concluded that it has no legal basis in domestic law. For instance, the Dansk Industri case of the Danish Supreme Court (see here for a comment) and the Landtová case of the Czech Constitutional court (see here for a comment) had reached similarly controversial conclusions. Still, this is the first time ever that a German court has found an ECJ judgment to be ultra vires, not to mention this court being the Federal Constitutional Court of Germany.
The second step the FCC had to take in order to deliver the coup de grâce, in Germany, to the PSPP was to attack the (now defenseless) decisions of the ECB. Since it could not rely on the ECJ’s Weiss ruling, given the latter’s (admittedly quite recently acquired) lack of binding force, the FCC had to conduct its own review to determine whether the ECB had exceeded its competence (para 164). The FCC found that by pursuing the objective of monetary policy ‘unconditionally while ignoring the economic policy effects resulting from the programme, the ECB manifestly disregards the principle of proportionality’ (para 165). Unfortunately for the ECB, the ‘violation of the principle of proportionality is structurally significant so that the actions of the ECB constitute an ultra vires act’ (para 165). The allegedly improper balancing of the countervailing objectives by the ECB, coupled with an absence of stating the reasons informing such balancing, led the FCC to the conclusion that the ECB had violated proportionality and exceeded its monetary policy mandate (paras 166-177). Therefore, the considerations set out above in relation to the ECJ’s Weiss judgment applied accordingly. Consequently, the ECB’s actions amounted to an ultra vires act (para 178). The FCC then proceeded to spell out in detail the consequences of this finding for the German Federal Government and the Bundesbank, as well as German constitutional organs, administrative authorities and courts (paras 229-235).
Ramifications: the economy, the law and the underlying politics
Having dissected the FCC’s main line of reasoning, three types of ramifications of its ruling now need to be succinctly presented, namely the economic, legal and political ramifications.
First, as regards its economic effects, they are obvious: it is undermining the ECB’s QE programme, arguably the most important ECB initiative of the last decade, through which the ECB has bought more than €2.2tn of public sector debt. The basic idea behind QE has been to prop up the euro zone economy by lowering borrowing costs for weaker Member States. This is now, at least from a procedural standpoint, being called into question.
Moreover, the ruling already casts shadow on the legality of the recently adopted 750bn pandemic emergency purchase programme (PEPP). Although, as a matter of substance, the FCC said about the PSPP (not the PEPP) that it “did not find a violation of the prohibition of monetary financing of member state budgets” and clarified that its judgment “does not concern any financial assistance measures taken by the European Union or the ECB in the context of the current coronavirus crisis”, even contemplating that the PEPP will not be affected is wishful thinking. The reason is that the PSPP programme was only found to be palatable because of the long list of limits and conditions attached to it, which are missing from the PEPP. By way of example, under the rules of the latter, even bonds that do not have investment-grade rating are eligible. Finally, the short-term market effects of the FCC’s ruling have already been felt, with the euro immediately dropping by 0.7% against the dollar after the decision was published.
Second, the legal ramifications of the FCC’s ruling are equally palpable. The German Court has delivered a powerful blow to the principle of EU law supremacy, one of the two fundamental pillars, together with direct effect, of the EU legal order. And this blow has come from from one of the Union’s “Founding Six” States, let alone its biggest and most prosperous Member State. Now other States that object to certain more fundamental aspects of the EU’s legal order, like the rule of law, may feel emboldened to disregard the ECJ’s rulings. It is no wonder that Eric Mamer, a spokesman for the European Commission, was quick to issue the following statement: “Notwithstanding the analysis of the detail of the German constitutional court’s decision today, we reaffirm the primacy of EU law and the fact that the rulings of the European Court of Justice are binding on all national courts.” Still, it’s too late. The damage, in terms of principle, has already been done.
Third, discussing the ruling’s political ramifications is perhaps not unwise. There is a clear risk that EU initiatives which could prove necessary to protect the EU or the euro zone, like the 2012 Mario Draghi “bazooka”, will now not be as forthcoming as before. EU institutions, being wearier of forceful reactions from national courts or government, will hesitate to take action and thus arrest the EU’s momentum. The ossification of the EU’s political structure is now, more than ever, a real risk.
This judgment is one for the EU law syllabi, textbooks and (obviously, since you are reading this) blogs. It might bring forth a new era in the relationship between the German FCC and the ECJ, and thus between EU law supremacy and Member State sovereignty. But EU law is full of surprises, and this judgment might in a few years come to be remembered as a “one-off”, an outlier, an oddity in the universe of EU law. To quote T. S. Eliot, it could very well end with a whimper.
To conclude on a less serious note, the FCC’s judgment was delivered on Tuesday, Wednesday being the last day of the ten-year tenure of its President Andreas Voßkuhle. As far as careers in the judiciary go, it would not be an exaggeration to say, referring back to Eliot, that the phrase “going out with a bang” has now acquired a whole new meaning.