There are at least two ways to read the decision rendered by the German Constitutional Court – BundesVerfassungsGericht or BVerfG – on May 5, 2020 (BVerfG, Urteil des Zweiten Senats vom 5. Mai 2020), in the case opposing the ECB to a group of complainants, claiming that the Frankfurt-based monetary institution went beyond its legal mandate, when it decided in March 2015 to launch a large scale asset purchase programme (APP) targeting first and foremost government bonds. We can read it through the lenses of Economic Policy or through the lenses of Constitutional Law and EU Politics. From both perspectives, the ruling contains useful insights that clarify some complicated questions and shed light on economic policy options available to the ECB and to EU/Eurozone Member States going forward. The fact that this ruling comes in the midst of an unprecedented global economic crisis, stemming from the measures enacted to combat the coronavirus pandemic, makes it even more critical to understand.
Here are the key takeways from this almost 100 pages ruling. The english version of the ruling can be downloaded here:
- According to the German Court, the ECB must submit its actions to the proportionality principle which commands that its asset purchase programme must be proportionate to its monetary policy goal which is to keep inflation below but close to 2% in the medium to long term. In other words the ECB must not develop an economic policy agenda of its own, beyond its legal mandate.
- This ruling challenges a prior decision rendered by the European Court of Justice in December 2018, which endorsed ECB’s APP/PSPP programme and acknowledged that it was not possible to separate the conduct of monetary policy from broader economic policy objectives and effects.
- The challenge to the power of the ECB stemming from this ruling is more rhetorical than real. The independence of the ECB is enshrined in the Treaties and it has no obligation to respond directly to the claims mades by the German constitutional Court, or for that purpose to any institution or court other than the ECJ.
- However, the ruling clarifies that the European Union is not a Federal State and that the authority conferred by the Treaties to the European Institution is only delegated and can be challenged by the citizens of the Member states on the basis of democracy and popular sovereignty.
- Therefore, this decision could set a legal precedent in other areas and could complicate policy making efforts at the EU level
From an economic policy perspective: ECB policies may be challenged on the account of their proportionality
From a purely economic perspective, the German Constitutional Court does no really bring new elements other than what was already contained in the ruling by the ECJ ECB might do and what it might not do to fulfil its core mandate. The ruling recaps the original arguments of the complainants, the response of the ECJ in its December 11th 2018 ruling (Heinrich Weiss and others vs. ECB) that also stated that most of the complaints were admissible, and finally the BVerfG’s own appreciation of the ECJ response.
According to the ECJ, the ECB’s APP/PSPP programme for the purchase of government bonds on secondary markets does not infringe EU law:
The Court then finds that the PSPP programme does not infringe the prohibition of monetary financing, which prevents the ESCB from granting any type of credit to a Member State. Implementation of that programme is not equivalent to a purchase of bonds on the primary markets and does not reduce the impetus of the Member States to follow a sound budgetary policy.
The Court considers that safeguards are built into the PSPP which ensure that a private operator cannot be certain, when it purchases bonds issued by a Member State, that those bonds will actually be bought by the ESCB in the foreseeable future. The fact that the PSPP procedures make it possible to foresee, at macroeconomic level, that there will be a purchase of a significant volume of bonds issued by public authorities and bodies of the Member States does not afford a given private operator such certainty that he can act, de facto, as an intermediary of the ESCB for the direct purchase of bonds from a Member State.
Furthermore, the PSPP programme does not enable the Member States to determine their budgetary policy without taking account of the fact that, in the medium term, continuity in the implementation of the PSPP is in no way guaranteed and that they will thus be led, in the event of a deficit, to seek financing on the markets without being able to take advantage of the easing of financing conditions that implementation of the PSPP may entail.
Moreover, the effects of the PSPP programme on the impetus to conduct a sound budgetary policy are limited by (i) the restriction of the total monthly volume of public sector asset purchases, (ii) the subsidiary nature of the PSPP programme, (iii) the distribution of purchases between the national central banks in accordance with the key for subscription of the ECB’s capital, (iv) purchase limits per issue and issuer (which means that only a minority of the bonds issued by a Member State can be purchased by the ESCB under the PSPP) and (v) stringent eligibility criteria (based on a credit quality assessment).
The Court also states that the prohibition of monetary financing does not preclude either the holding of bonds until maturity or the purchase of bonds at a negative yield to maturity.http://curia.europa.eu/juris/document/document.jsf?text=&docid=208741&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=759524