Almost two months after the German Federal Constitutional Court (Bundesverfassungsgericht, Constitutional Court) handed down its ultra vires verdict concerning the European Central Bank’s (ECB) Public Sector Purchase Program (PSPP) on May 5, 2020 (the May 2020 Judgment), the lower house of the German Parliament, i.e., the Bundestag, passed a resolution on July 2, 2020 confirming its assessment on the proportionality of the PSPP. Consequently, this means that the German Federal Central Bank (the Bundesbank) will be permitted to continue to participate in the ECB’s monetary policy activity and extended asset purchases programs and thus the PSPP. This Client Alert looks at the conditions that the May 2020 Judgment set out to remedy its ultra vires findings and assesses the resolution of the Bundestag in this context.
In overruling parts of the 2018 PSPP verdict of the Court of Justice of the European Union (the CJEU 2018 Judgment), the German Constitutional Court had, for the first time, put into effect its ultra vires doctrine. Ultra vires, which may best be translated as ‘beyond powers’, refers to acts that overshoot the competencies that the German legislature has conferred to the European Union and its institutions, and as such fall outside the constitutional framework that, in German constitutional law, allows acts of the EU to be binding in Germany. Contemplating the reasoning provided in the published ECB’s PSPP Decisions (i.e. the legislative instruments establishing the PSPP) the Constitutional Court found the weighing-up of interests, as illustrated by the recitals of the said Decisions, to fall short of what would have been required by ECB, and in fact the CJEU, in order to satisfy the principle of proportionality. In particular, in the view of the German Constitutional Court, the ECB’s reasoning ought to have provided for a balancing of the legitimate aim of monetary policy and the financing of the Member States’ budgets, which is not a legitimate aim of ECB’s actions.
The Constitutional Court required the German Federal Government and the Bundestag to address the shortcomings vis-à-vis the ECB, as the latter is not subject to its jurisdiction. While the Constitutional Court found that by supplementing its reasoning and passing the proportionality test, the ECB’s Decision would no longer be ultra vires, the format and process of such “supplementary performance” is less clear. In fact, the Constitutional Court merely required the Federal Government and the Bundestag to “work towards a proportionality test by the ECB” and to “make their legal opinion clear to the ECB or otherwise ensure that conformity with the Treaty is restored” (para. 232). While this would suggest that no specific format was required, the May 2020 Judgment also stated that the Bundesbank would be prohibited from “implementing or executing the [Decisions establishing the PSPP (…)], unless the Governing Council of the ECB clearly demonstrates in a new Decision that the monetary policy objectives pursued with the PSPP are not disproportionate to the economic and fiscal policy implications involved.” (para. 235).
While commentators have weighed the pros and cons of the ECB providing supplementary reasoning or indeed if it should, the ECB seems to have opted for a middle-of the road-solution. The ECB has provided the Bundesbank with unpublished documents that contain information it used (internally) to assess the proportionality of the PSPP ahead of its implementation. The Bundesbank, acting as an intermediary for the ECB, forwarded these classified documents to the Bundestag. On Thursday, July 2, 2020, following a discussion on the ECB’s documents in a plenary session, the Bundestag passed a resolution in which it considered the requirements of the May 2020 Judgment to be fulfilled.
Based on this resolution, it is likely that the cooperation between the Bundesbank and the ECB concerning the PSPP will continue as before the May 2020 Judgment. In particular, we do not expect the ECB to issue a further Decision or other legislative or non-legislative instrument supplementing the reasoning provided in the Decisions that set up the PSPP.
Whether the German Constitutional Court accepts this middle-of-the-road solution remains to be seen. In the medium-term, the (pending) complaint against the Corporate Sector Purchase Program (CSPP)1 may provide an opportunity for the Constitutional Court to issue further obiter dictum with regard to the format of the supplementary reasoning.
While, from a practical point of view, the PSPP will likely continue unchanged, one of the key issues in the future will be to prevent and mitigate comparable conflicts at an earlier stage. In this respect, consensus in Germany, but also at the EU level, is that any proposed solution must be in line with the substantive and procedural requirements set by European and national law respectively. While at the EU level, solutions must be assessed in light of a potential amendment of the Treaties of the European Union and the Functioning of the European Union (TFEU), the most important aspects to consider from a German point of view are the limitations set by the German Constitution on the conferral of powers to EU institutions. While no concrete solutions have been proposed from official sides (as of the time of writing), the May 2020 Judgment has already stimulated a multi-layered discussion by legal, economic and political scholars on how such a solution may look at the EU and national (not just German) level.
We hope the above provides some further insight into this landmark decision. If you would like to discuss any of its outcomes, including how they fit into the wider plans of the ECB and Bundesbank and how they may affect your business more generally, please contact our Eurozone Hub. Our lawyers are ready to help you understand relevant risks associated with this new financial and legal landscape and its potential impact on your business.