A new ruling by Germany’s constitutional court, which is intended to protect the German people from a mistaken policy implemented at the European level, has placed Germany’s government and its parliament in an impossible situation.

The German constitutional court passed judgement on the legality of the European Central Bank’s (ECB) public-sector asset-purchase programme on 5 May 2020. In its judgement, the German court ruled that the European Court of Justice had manifestly exceeded its authority in its 2018 ruling that the public-sector purchase programme – through which the European Central Bank purchases government bonds to stimulate the European economy – falls within the mandate of the ECB. The German court also ruled that the ECB may have exceeded its authority in designing the programme in the first place.

Now all eyes are on the European Court and the European Central Bank to see how they will respond. But they are looking in the wrong place. The German constitutional court’s real challenge is to the German federal government and the German federal parliament, or Bundestag. The court has placed those other German ‘constitutional organs’ in an impossible situation. A German constitutional struggle may not be far behind.

 

Don’t forget that the German constitutional court is … German

The German constitutional court has no choice but to direct its findings at the federal government and the Bundestag. Although the rulings of the German court have clear implications both for the supremacy of European law and for the conduct of the ECB, the German court does not have the power to compel European institutions to act. Indeed, the only power that the German court has to evaluate the actions of European institutions relates to how German constitutional organs – meaning the court itself, the federal government and the Bundestag – should respond. Hence, when the German court insists that the European Court of Justice has manifestly exceeded its own mandate, the implication is that the German court does not have to follow the guidance that the European Court has to offer. Indeed, the German court insists that it is the failure of the European Court to deliver a well-reasoned judgement that compels it to make an evaluation of the ECB’s policy of its own.

The reason the German court has to evaluate the ECB’s policies is to determine whether the federal government and the Bundestag have failed in their obligation to protect the German people from a mistaken policy implemented at the European level. Specifically, the federal government and the Bundestag have an obligation to protect the democratic rights of German citizens and, by extension, the policy competence of German public authorities. Indeed, the court is not even interested in what the German central bank (or Bundesbank) does as part of the European System of Central Banks or as a German institution except insofar as the federal government and the Bundestag are involved. Although the substance of the ruling is about monetary policymaking and the vague boundaries between monetary policy, fiscal policy and economic policy more generally, the legal force focuses narrowly on the constitutional responsibilities of the federal government and the Bundestag to the German people.

The judgement ends by ‘[requiring] the Federal Government and the Bundestag to take steps to ensure that the ECB conducts a proportionality assessment in relation to the [public-sector purchase programme]’ (para. 232). The German court asserts that such steps do not violate the political independence of the ECB, citing one of its own prior rulings. Hence, the court goes on to insist that: ‘The Federal Government and the Bundestag must clearly communicate their legal view to the ECB or take other steps to ensure that conformity with the Treaties is restored’ (para. 232). This ruling implicates the Bundesbank insofar as it is a German administrative organ and given that ‘it is called upon to advise the Federal Government in monetary policy matters’ (para. 234). By implication, the Bundesbank should cease to participate in the public-sector purchase programme if the ECB fails to comply with the demands of the federal government and the Bundestag to issue ‘a new decision [on the public-sector purchase programme] that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the ECB are not disproportionate to the economic and fiscal policy effects resulting from the programme’ (para. 235).

 

German government in a bind

This judgement puts the German federal government in a triple bind. To begin with, the federal government has to instruct the ECB in the conduct of monetary policy. The German court has given the federal government permission to do this despite the constraint implied by Article 130 in the Treaty on the Functioning of the European Union that enjoins national governments from seeking ‘to influence the members of the decision-making bodies of the European Central Bank or of the national central banks in the performance of their tasks’. But the German court cannot absolve the ECB from the responsibility not ‘to seek or take instructions from … any government of a Member State’.

Of course the ECB could change its procedures to accommodate this new requirement to show consideration of proportionality, but it would not want to do so in a way that would expose itself to other forms of interference – and presumably the European Court of Justice would not want to water down the political independence of the ECB either. For now, the ECB has simply taken note of the German court’s ruling while at the same insisting that its asset purchase programme falls within its mandate according to the 2018 European Court ruling. If the ECB continues to hold out, the federal government will either have to insist at the European level or it will have to push back against the German court’s requirement for action. Importantly, the German court has given the federal government only three months to get satisfaction.

A second bind for the federal government comes from the fact that the German court has made it clear that – as things stand at the moment – the federal government and the Bundestag have already ‘violated the rights of the complainants’ who brought the case initially ‘by failing to take suitable steps challenging that the ECB … neither assessed nor substantiated that the measures provided for in these decisions [related to the public-sector purchase programme] satisfy the principle of proportionality’ (para. 116). As a result, ‘the Federal Government and Bundestag are obliged … to monitor the further execution of the [public-sector purchase programme] to ensure timely action countering any risks’ that, essentially, the programme might hold for the economic rights of German citizens and the fiscal competence of German authorities (para. 116).

In this sense, while the judgement of the court looks backward at the decisions made by the ECB prior to the coronavirus pandemic, the responsibilities of the federal government and the Bundestag look forward to the impact of ECB policy on German economic and fiscal priorities. In an odd sort of way, this obliges the federal government and the Bundestag to ferret out a series of problems that may have been hidden by the ECB through its decision-making processes and that would reflect – in the words of the ruling – ‘cases where the purported monetary objective is possibly only invoked to disguise what essentially constitutes an economic and fiscal policy agenda’ and where ‘certain Member States benefited more than others from the programme’ (para. 137). Hence, even without an explicit legal challenge, the German court is demanding that the federal government and the Bundestag exert some oversight over monetary policymaking at the ECB, which runs against the European treaty obligations for both institutions.

 

Sometimes the remedy is worse than the problem

The third bind comes in the form of the remedy. The federal government and the Bundestag would have to instruct the Bundesbank to withdraw unilaterally from the policies agreed by the ECB’s Governing Council. Specifically, the Bundesbank would have to stop participating in the public-sector purchase programme and, as the judgement makes clear, it ‘must ensure that the bonds already purchased under the [public-sector purchase programme] and held in its portfolio are sold based on a – possibly long-term – strategy coordinated with the [European System of Central Banks]’ (para. 235). This is a bind insofar as it would require the federal government and the Bundestag to tell the Bundesbank how to conduct monetary policy – something they are enjoined from doing by European Treaty obligations, as well as national law.

More importantly, though, having a national government instruct its central bank to act against the wishes of the ECB’s Governing Council would run against the idea that the euro area has a common monetary policy. We have seen this problem before. When Ireland got into trouble with its banks in 2008 and 2009, the ECB’s Governing Council came along repeatedly to insist that the Bank of Ireland restrict the flow of emergency liquidity assistance to stricken institutions. The Governing Council did the same again to the Bank of Cyprus in 2013 and to the Bank of Greece in 2015. These are all cases where it might have useful for the Governing Council to make an explicit assessment of the ‘proportionality’ of its actions, weighing the threat posed by excessive monetary creation in the three small economies against the devastating impact that withdrawing emergency liquidity assistance from the banking sector would have on the government finances and economic performance of Ireland, Cyprus, and Greece.  Instead, the Governing Council operated on the principle that the central banks should not bail out insolvent institutions – leaving the Irish, Cypriots, and Greeks to suffer the consequences.

It is easy to imagine a constitutional court making a challenge against the shutdown of emergency liquidity assistance to its banking system along the same lines that the German constitutional court is presenting in its 5 May judgement.  No doubt the advocates of monetary orthodoxy could come up with good arguments about the threat of moral hazard or the requirements for sound central banking practice, but that kind of technocratic rationality does not always find fertile ground in the reasoning of high court officials.  By implication, both the German federal government and the Bundestag must be aware of the precedent they would be setting by forcing a showdown between the Bundesbank and the Governing Council of the ECB. In the Irish, Cypriot and Greek cases, the issue came close to fracturing the euro as a single currency. As similar refusal by the Bundesbank to follow the requirements of the ECB’s Governing Council could have lasting implications for the viability of Europe’s economic and monetary union.

The problem for the German federal government and for the Bundestag is that they are now the protagonists of the crisis, and not simply powerful interested observers. The ECB can retreat into the arms of the European Court of Justice where the German constitutional court cannot reach. Moreover, the German court has made it clear that its judgement is binding on the other German ‘constitutional organs’. It is up to the German federal government and the Bundestag – not the European Central Bank or the European Court of Justice – to respond.  The German constitutional court ruling is a German problem, albeit with important European implications. The federal government and the Bundestag can challenge the constitutional basis for German democracy, or they can challenge the institutional framework for European integration.  Either way, something is going to have to give.  And, in case you were wondering, this is another example of what disintegration looks like.

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This piece was originally published on the Survival editors’ blog at the IISS. For the edited version, go here.