A Tale of Two Courts - ECJ v GCC
by Ruzzelyn Maurie Caniel, Analyst at KPMG Ireland, law and business graduate from Maynooth University in Dublin, currently preparing for FE1 exams
On 5th May 2020, the German Federal Constitutional Court sent shock waves across the EU legal landscape, adding to the mounting dilemma facing the European Union. The epicentre of such a dilemma was the Constitutional Court’s declaration on the European Court of Justice’s preliminary reference ruling on the validity of European Central Bank’s bond-buying scheme. The declaration? That the bond-buying scheme was an ultra vires act by the Central Bank, essentially dismissing the European Court of Justice’s ruling.
The Case against the European Central Bank (Proceedings Brought by Weiss C-493/17)
The European Central Bank (ECB) introduced its flagship scheme, the Public Sector Asset Purchase Programme (PSPP or the programme) in 2015. The PSPP was a monetary policy tool that allowed the purchase of government or public sector bonds (debt, essentially). The programme’s aim was to address the European sovereign debt crisis, but more specifically to maintain price stability by keeping inflation at a level below, but close to 2%.
A group of German economists and law professors brought a case against the PSPP before the German Federal Constitutional Court (GFCC) who argued the following:
The nature of the PSPP was such that it strayed into the monetary financing of Member States. It also exceeds the mandate of the ECB, whose primary objective is to maintain price stability. This violates Article 123 and 127 TFEU.
The extent of the ECB’s powers is limited to monetary policy. The PSPP appeared to be a measure on economic policy, due to the resulting economic and fiscal effects when implemented. This area is, in principle, under Member State competence and therefore infringes on the principle of conferral and proportionality under Article 5 Treaty of the European Union (TEU).
The PSPP undermined the principles of democracy and constitutional identity set out in German Basic Law as it encroaches on the German peoples’ reserve right to govern on economic and fiscal policy.
The GFCC then referred the issue to the European Court of Justice (CJEU) by way of preliminary ruling. In December 2018, the CJEU upheld the validity of the PSPP and that the institution acted within its competences. The CJEU used a proportionality test, finding that there was no manifest error in the programme. It also concluded that the ECB, whose expertise lies in monetary policy, must be given wide discretion in creating such policy measures.
Following this, the GFCC in May 2020, declared that the CJEU’s proportionality review was insufficient by limiting the standard to ‘manifest errors’. In its view, the CJEU gave the ECB too much discretion “to pursue its own economic policy agenda”. The GFCC found the programme to be ultra vires (acting beyond powers) and concluded that the CJEU’s judgment “has no binding force in Germany”.
The German court set a period of three months for the Bundestag and the Bundesbank to ensure that the ECB comes up with a justifiable proportionality assessment. The assessment must adequately show that economic effects did not outweigh the monetary objectives pursued by the PSPP. Failure to deliver the requirement will result in prohibiting the Bundesbank from participating in the PSPP and it must divest from the bonds it already purchased.
This raises many questions. Aren’t CJEU judgments final and binding on Member States? Doesn’t the CJEU have sole jurisdiction in ruling on the validity of measures adopted by EU institutions? What about the principle of primacy whereby EU law takes precedence over national law? Those questions will be discussed in the following sections.
Primacy, Proportionality, Conferral
To understand the GFCC’s reasoning, it is important to look at the principles governing which areas the EU and its institutions can act on. The EU has come a long way since its humble beginnings to assert its legal authority across its twenty-seven-strong Member States. It did so by developing legal mechanisms in piecemeal fashion by the CJEU. First, let us look at the principle of primacy.
The logic for primacy is straightforward. EU law takes precedence over national law and national courts must hold against conflicting legislation. The rationale is to enable even and unified application of EU law. If primacy is not observed, Member States would be free to turn back on its obligations set by the EU Treaties. This would then lead to far-reaching disparity in applying EU law across its Member States. The argument is not as compelling when it comes to the Member States' highest courts. In their view, national constitutions are the basis for the primacy of EU law and therefore the EU is limited by what those constitutions grant it competence.
What then governs the areas in which the EU can and cannot legislate? The principle of conferral sets out that the EU is limited to act within the competences given to it by Member States to achieve Treaty objectives. The principle of proportionality sets out that EU measures are proportionate only if it is suitable in achieving Treaty objectives and does not go beyond what is necessary to achieve it. Both are outlined in Article 5 TEU.
To break down the GFCC’s rationale, the PSPP operates in excess of the ECB’s competence. Competence is granted by Member States conferring some of its sovereign rights to the EU. Those sovereign rights are in turn guaranteed by Member State constitutions. The GFCC will generally follow CJEU rulings and treat it as binding. However, it also has a duty to protect the German Constitution. The GFCC assumes that it reserves a right to rule an EU measure ultra vires if it exceeds its competence and in turn is incompatible with the German constitution. The CJEU issued a press release following the German court’s ruling, emphasising that:
“…a judgment in which the Court gives a preliminary ruling
is binding on the national court…”
It seems that the courts have come at a legal impasse. Where does that leave them?
Courts in Conflict or a Constructive Judicial Dialogue?
It must be understood that the two courts have come to their respective decisions from different perspectives. The CJEU views the matter as giving the ECB independence in creating policies within its expertise. The ECB’s remit after all is an area of a technical nature which the two courts lack the ability to adjudicate upon. Meanwhile, the GFCC sees it as overstepping into an area which the Member State reserves the right to govern.
The CJEU’s main concern is to uphold the Treaties, while the GFCC’s duty is to the German constitution. The GFCC envisioned a more restrictive approach on the proportionality assessment compared to the broad approach used by the CJEU to ensure the ECB retains its independence.
At face value, the GFCC’s stance may be viewed as an attack towards the authority of the CJEU and indeed the ultimate primacy of EU law. According to Clemens Fuest, head of the ifo Institute in Munich, the German court’s dismissal of the CJEU ruling “reads like a declaration of war”.
However, this matter may also be read as the GFCC raising concerns on the conflict between EU law and the German constitution. In fact, it is argued that although the GFCC’s tone was rather confrontational, it is necessary to voice its constitutional concerns to the CJEU. Those concerns may even indicate the potential for similar concerns that exist in other Member States and perhaps should be addressed at the wider EU level. This concept is called a constitutional dialogue. Such dialogues can hardly be described as cordial; however, it gives Member States the opportunity to bring its concerns to sharp relief and resolve gaps in keeping the uniformity of EU law.
Path to Resolution
While infringement proceedings to be brought by the European Commission against Germany was suggested to resolve the matter, it would not appear to be a favourable option. Even if the CJEU were to rule in the Commission’s favour, the German government cannot compel the GFCC, an independent court, to act on the ruling.
As regards to the GFCC requirement to submit a convincing proportionality assessment, the ECB decided to settle the legal deadlock by releasing unpublished minutes of its meetings. It contained discussions by the governing council on whether the PSPP was proportionate in achieving its monetary policy objective, before it was implemented. These documents were given to the Bundesbank and the Bundestag for review.
On 2nd July 2020, the latter passed a resolution stating that the GFCC’s requirement was met. This was well received by policy makers, as it lessens the risk of the GFCC’s judgment impacting Germany’s participation in the ECB’s other bond buying programmes. The most relevant currently, of course, is the 2020 Pandemic Emergency Purchase Programme.
It is unclear whether the documents provided by the ECB would be sufficient for the GFCC. A take-away from this is that some Member States may not readily assume the validity of an EU measure. Perhaps more consideration should be taken on constitutional limits placed on EU competence. One thing is certain, Germany’s constitutional court has a firm stance on potential encroachment of the German constitution, and will not falter in the face of the EU’s highest court.
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