European Central Bank’s public sector purchase programme (PSPP)
German Federal Constitutional Court reinforces legal certainty and legitimation of EU decisions
Germany’s Federal Constitutional Court has declared the PSPP public sector purchase programme by the European Central Bank (ECB) partially unconstitutional (judgment of 5 May 2020, case no. 2 BvR 859/15 (in German) and others). The court found that by implementing the PSPP, the ECB took account only of its monetary policy objective, but not of its economic policy implications, which the court views as a breach of the principle of proportionality and an obvious and structurally significant overreach of the ECB’s powers. The court thereby opposes the assessment of the PSPP by the Court of Justice of the European Union (CJEU), which came to a different conclusion.
The judgment is a historic one. However, the opposition that the judgment initially generated nationally and internationally does not seem justified. The Federal Constitutional Court has clarified that the public sector purchase programme can be continued with German participation if there is appropriate justification. It also rejected the argument that the PSPP breached the prohibition on monetary government financing. Instead, the judgment appears capable of ensuring legal certainty for future ECB programmes, too, and may offer greater predictability and transparency for citizens, investors and economic operators.
Subject of the decision
The subject of the decision is the ECB’s government bond purchase programme, known as the public sector purchase programme (PSPP), originally introduced in 2015 and later amended. Within the PSPP, the ECB and central banks of the euro area Member States buy government bonds and similar euro-denominated marketable debt instruments issued primarily by the central governments of euro area Member States, subject to specific conditions. The PSPP aims to ease monetary and financial conditions in the euro area, including financing conditions for the economy and private households, thereby stimulating consumption and investment and raising the inflation rate in the euro zone to just under 2%. The decision does not cover EU and ECB financial assistance measures in connection with the coronavirus crisis.
Background: Distinction between the competences of the EU and Member States
The decision focuses on the boundaries of the EU’s competences and on the distinction between monetary policy, assigned to the ECB, and economic policy, generally assigned to the Member States. Under the principle of conferral, the EU and its institutions shall act only within the limits of the competences conferred upon them by the Member States (Article 5(2) TEU).
From the perspective of German constitutional law, adherence to the principle of conferral ensures that the constitutional limits on Germany’s integration into the EU are observed. This applies in particular to the maintenance of democratic legitimacy of sovereign power exercised in Germany. German constitutional law considers this maintenance of democratic legitimacy part of its inviolable constitutional identity and prohibits surrendering it in the course of transferring sovereign rights to the EU (integrationsfeste Verfassungsidentität).
Therefore, from the point of view of German constitutional law, the EU and its institutions can only act within the boundaries of the competences conferred upon them and, in particular, cannot independently create new competences and powers (so-called competence-competence). German authorities, primarily the federal government and the Bundestag, have a permanent responsibility to ensure that the EU and its institutions respect these boundaries.
With this in mind, the Federal Constitutional Court claims the right to review EU measures for obvious and structurally significant transgressions of competences (ultra-vires). However, the ultra-vires control must be carried out with restraint and in a Europe-friendly manner.
Breach of the principle of proportionality in the delimitation of competences, but no breach of the prohibition on monetary government financing
Against this backdrop, the Federal Constitutional Court has held that the PSPP constitutes an obvious and structurally significant transgression of competence – for the first time in its judicial history.
The court considers it essential to assess the consequences of a government bond purchase programme in order to define the delimitation of competences between monetary and economic policies. In its view, the PSPP's proportionality requires that the programme’s monetary policy objectives as well as the programme’s economic policy implications be identified, weighted and weighed up against each other. The PSPP improves Member States’ refinancing conditions, increases the risk of real estate and stock market bubbles and brings about far-reaching economic and social implications. However, these considerations cannot be found in the ECB decision relevant to the PSPP. Pursuing the objective of monetary policy in a way that fails to take account of the economic and fiscal implications of the programme is, in the view of the Court, manifestly contrary to the principle of proportionality and is unduly shifting the exercise of competences to the detriment of the Member States.
The Federal Constitutional Court thus opposes the judgment of the CJEU. Upon request from the Federal Constitutional Court, the CJEU in a preliminary ruling held the PSPP to be compatible with the principle of conferral (judgment of 11 December 2018, Weiss and others, case C-493/17). However, the Federal Constitutional Court does not consider the CJEU’s handling of the delimitation of competences to be acceptable in this case.
Yet the Federal Constitutional Court did not assume that the PSPP breached the prohibition on monetary government financing (Article 123(1) TFEU). The PSPP risk-sharing between national central banks is also in line with constitutional limits, the court said. The distribution of risk does not allow for the redistribution of sovereign debts between the euro area Member States and does not lead to an assumption of liability for third-party decisions prohibited by the Basic Law.
Public sector purchase programme can be compatible with constitutional law
In spite of this, the Federal Constitutional Court points out that a constitutionally compatible design of the PSPP is possible if the Governing Council of the ECB makes it clear in a new decision that the monetary policy objectives pursued by the PSPP are not disproportionate to the programme’s economic and fiscal implications.
Impact of the judgment
Among the German and particularly the European public, the judgment has drawn fierce opposition and criticism. It is considered to be gravely problematic since it is the first time that a Member State court has challenged the jurisdiction of the CJEU over EU law, thereby calling into question the EU’s community of law.
It is understandable that the decision is initially a source of confusion for the EU and other Member States. However, the Federal Constitutional Court did not take the easy way out with this decision, for which it provided detailed justifications, and dealt intensively with the case law of the CJEU. The court emphasises that if each Member State claimed competence of its own courts to rule upon the validity of EU law, the primacy and uniform application of EU law would be jeopardised. If, on the other hand, Member States were to completely renounce ultra-vires control, compliance with the delimitation of competences would be within the sole discretion of the EU institutions.
The Federal Constitutional Court has thus handed down an exceptional decision which also takes the practical consequences of the judgment into account. It opposes a gradual shift in the competences of the EU institutions, which would require a change in the EU’s treaty basis, involving the parliaments of the Member States. In this respect, the ruling strengthens the democratic legitimacy of EU decisions. The judgment is based on a long series of constitutional court decisions by which the Federal Constitutional Court has benevolently supported the European integration process, while demanding respect for constitutional boundaries.
Even after this decision, the ruling leaves little doubt that the ECB’s public sector purchase programme and other financing programmes will not necessarily fail at the hurdle of the Federal Constitutional Court. Rather, the Court’s request for a clear justification for complex measures with wide-ranging implications may lead to greater transparency in the ECB’s decisions. This is essentially a good sign for citizens, economic operators and investors. It increases the predictability of the ECB’s decisions and allows for a clearer view of the consequences.
Any questions? Please contact: Dr Holger Schmitz, Dr Thomas Schulz or Dr Carl-Wendelin Neubert
Practice groups: Regulatory, Private Equity