The PSPP decision’s perspective in one year of hindsight

This July, the Polish Constitutional Tribunal ruled that the Court of Justice of the European Union (hereinafter “CJEU”) acted ultra-vires imposing the obligation on Poland to abolish the Disciplinary Chamber established as part of its controversial judicial reform. The decision has swept over the world as an utmost thrill visualizing even a “Legal Polexit”. Some may argue that this step from the Polish court is one of the possible consequences of last year’s milestone judgment (hereinafter: PSPP decision) of the Federal Constitutional Court of Germany (Bundesverfassungsgericht, hereinafter: BVerfG ).

On 5 May 2020, the stagnant water of multilevel constitutionalism was stirred up by the PSPP as a “nuclear bomb”.[1] The BVerfG stated that the European Central Bank’s (hereinafter “ECB”) bond purchase program (hereinafter “PSPP”) and the decision of the CJEU declaring this program to be lawful is ultra-vires, disproportionate and objectively arbitrary, therefore not applicable in accordance with German law. The issue has swept across the European public law and constitutional discourse, even though we are not talking about a completely unprecedented case.

How does last year’s BVerfG decision depart from previous case law? Did it really open Pandora’s ultra- vires box in front of other EU member states? Which of the constitutional risks or opportunities would prevail? During the following lines, I seek answers to these and similar questions by (i) presenting the background of the case; (ii) summarizing the main arguments for the PSPP decision and, last but not least, (iii) comparing scientific critiques with a little more than one year of hindsight.

1. Context and history

To understand the context, we need to go back to the global financial crisis of 2008. In order to maintain the standard 2% inflation rate, the ECB launched the bond purchase program of public sector assets in secondary markets (PSPP), and bought central and local government bonds in the eurozone.

Subsequently, four groups submitted constitutional complaints to the BVerfG questioning the constitutionality of the PSPP from several aspects. The applicants argued that the German Federal Government and the Federal Parliament failed to act appropriately against the ECB decisions, despite the fact that they are disproportionate under the German Basic Law (Grundgesetz).

The BVerfG referred these questions to the CJEU for a preliminary ruling[2] on the same ground as the complaints and postulated that the ECB had not provided an adequate statement of reasons for the PSPP. The “response” from the Luxembourg court adversely confirmed the legality of the ECB’s decisions. It argued that the ECB should not exceed the monetary powers conferred on it in the Treaties[3] by the PSPP and its decisions do not run counter to the ban on budget financing. The CJEU identified the PSPP as a purely monetary instrument and thus disregarded economic policy objectives, which fall within the exclusive competence of the Member States. Consequently, it also considered proportionality to be justified in order to achieve the ECB’s stability and monetary objectives. In response to this judgment, the PSPP – apostrophized as a milestone of the BVerfG – was born, whose main arguments are to be discussed in the following point.

2. Main findings of the decision

The German court’s decision can be interpreted in its entirety trough the theoretical dogmas of the integration plan enshrined in the founding Treaties (Integrationsprogramm) and the constitutional responsibility for the integration (Integrationsverantwortung). The BVerfG has found the Weiss judgment of the CJEU ultra-vires which, as such, cannot bind the national court. This was supported among others by two prominent arguments: (i) firstly, the CJEU had ignored the economic policy implications of the PSPP program for the Federal Republic of Germany on the basis of an erroneous methodology, and (ii) the decision did not meet the B”comprehensive assessment” requirement, and failure to do so is contrary to the CJEU’s own case law.

It argued that while financial policy falls within the competence of the EU and its bodies, fiscal policy is an immanent competence of the Member States, which in no case can be transferred, not even in part, to the EU without amending the founding Treaties. In the field of proportionality, the BVerfG’s arguments follow from a similar point of origin. On this basis, the PSPP would comply with the principle of proportionality only if it does not lack the definition, consideration and balancing of the monetary policy objective of the program and its economic policy implications. Consequently, the CJEU exceeds the powers set out in the second sentence of Article 19 (1) of the Treaty on European Union (“TEU”) if the interpretation of the Treaties is incoherent and as a result considered to be objectively arbitrary.

By virtually creating a transfer union and extending its competence to the German budget,[4] the PSPP has been declared ultra- vires and conflicting with the German constitutional identity. The latter finding follows from the fact that the purchase of bonds, which involves a financial undertaking in order to recapitalize other countries, poses a threat to the principle of democracy and statehood by restricting the exercise of budgetary rights. In the fundamental rights aspect of the motions, they emphasize that the loss of autonomy over the budget restricts the right of German citizens to vote through effectively rendering the competences of the German Parliament void.

The BVerfG also declared the decisionsof the ECB implementing the PSPP program to be ultra-vires and obliged the German Government to enter into a dialogue with the ECB in order to promote sound consideration. Karlsruhe also banned Germany’s central bank (Bundesbank), to participate in the PSPP program as long as the ECB does not fulfill his obligation to state reasons equally in accordance with the BVerfG’s standards. This created a paradoxical framework concerning the rule of law, in which the Bundesbank could not conceptually take a legitimate decision, since it was bound by the decisions of the BVerfG as well as the CJEU and the ECB. Tensions have been fueled by the EU’s response: in a statement, European Commission (hereinafter: EC) President Ursula Von der Leyen has announced the possibility of infringement proceedings against Germany, but – one year in – there is still no prospect of such action on the horizon.

The particular legal tension was relieved within a short time. The ECB has complied with its obligation to state reasons for authorizing the PSPP Circular Program within the 3-month period specified in the PSPP decision, and the idea of infringement proceedings has been removed from the agenda. Although the long-term aftershocks of this ‘bomb’ (if any) may only crystallize from future court practice in the Member States, the academia has responded to the PSPP decision with rapid criticism, which I summarize in the next section.

3. Criticisms of the PSPP decision and suggestions for solutions

Even if only temporarily, the BVerfG has opened Pandora’s box in terms of ultra-vires review. The ‘dangers’ of this are somewhat mitigated by the multidisciplinary criticism from scientific discourse, objecting to the BVerfG’s position as fully and unanimously as it did in the past in relation to the Maastricht or Honeywell decisions.

In the context of the BVerfG’s examination of proportionality, it should be noted that the judgment also stated that a German court recognizes the proportionality of a decision or other measure only if stricter criteria are met. In its examination, it distinguished between the elements of suitability, necessity and equity and set the same standards before the Weiss decision. However, there is no justification as to why the BVerfG expects the same test from other courts.[5] In addition, it is worth noting the relevant case law of the CJEU, carrying out its proportionality test on the base of reasonableness except in deciding on restrictions of fundamental rights or freedoms.[6] The German court here failed to apply the same differentiated and perspective approach it wanted to read from the CJEU. The BVerfG required the ECB to balance the monetary policy objectives with the diversity of economic, fiscal and political aspects of the program. Here are a number of examples of the latter, from undermining the independence of the ECB and the budgetary discipline of the Member States to the loss of private savings or the creation of real estate. However, in its assessment, the BVerfG considered only certain fiscal costs to be relevant to the bond program, leaving this statement without justification. If any action by the ECB is to be assessed from a balancing point of view, it would not be possible to stop at fiscal costs, but to place fiscal benefits in another pan of the balance scale, and to take into account other considerations, argues Toni Marzal.

The criticism turned the BVerfG’s ultra-vires review against itself. The CJEU has acted in accordance with the rules of Community law and its own case law governing the assessment of the validity of EU acts. If the CJEU had required the ECB, to justify the PSPP separately, it would have deviated from the above practice. On the other hand, the BVerfG based its legal position regarding the bond program largely on its own financial and economic analysis, raising questions of the professional competence of the German constitutional court. Overruling an ECB decision on financial and economic grounds can also be interpreted as an ultra-vires act.[7]

Following the criticisms, of course, the question of “what’s next” also arose in academic discourses. There were voices envisioning Germany’s exit from the EU, while others have evaluated the PSPP as a step towards the common-law system. It is definitely worth mentioning one of the opinions proposing a concrete solution. Oliver Garner, British international law scholar called for the introduction of declarations of incompatibility, which could be submitted to the CJEU by Member States during preliminary rulings, thus indicating that the decision is incompliant with national law. The implementation of the proposal would require an amendment of the founding Treaties, which in itself is a proposition with many difficulties. Garner sees this as an offset by the mechanism’s “integration keystone” function, which would be a predictable barrier to the possible arbitrariness of the CJEU. I would add here that it is not sufficient to exclusively keep the CJEU within this framework of two-way mechanisms. It must also be ensured that such or a similar possibility does not become an instrument of abuse for Member States in the event of a potentially doubted CJEU decision.

4. Closing remarks

For the first time in the history of the EU, the PSPP decision has dared to ban the application of a community act until it meets its own standards. The box may hold valuable treasures for sovereignty-defending Member States in the future, but at the same time less hope for European coexistence based on loyal cooperation. However, the expected ‘mushroom cloud’ is nowhere to be seen so far: the lines of argument set out in the PSPP decision of the German Federal Constitutional Court have now been extended by Finland and Germany regarding the EU’s COVID-19 recovery plan since spring last year apart from the Polish case cited at the beginning of this blogpost.

Regarding the aftermath of Polish decision, on the following day the CJEU reiterated that the Disciplinary Chamber shall be liquidated immediately as it seriously hinders judicial independence contrary to the founding Treaties and values of the EU. In its communication to the EC, Poland accepted the ruling of the CJEU and made a commitment to cease the operation of the Disciplinary Chamber whilst other judicial reforms. After all, we can state that even though the Polish Constitutional Tribunal questioned the competences of the CJEU, the outcome resulted (will result) in the harmonization of national and EU law for the sake of loyal cooperation. As for me, the questioning itself does not equal with the serious undermining of the EU legal order, but the opportunity for an other public discourse on the multilevel constitutionalism.

We have known since the “Taricco-saga” (cases Ivo Taricco and Others and MAS AND MB) that a longer and more in-depth dialogue between courts can soften the edge of conflicts. I am of the opinion that it is important to bear in mind that the EU was not created for overlapping national competences as well as its legal system does not aim at necessarily conflicting with national legal systems and the sovereignty of the Member States. The founders wanted the EU to achieve the reinforcement of the nations via cooperation, not power struggles that would result in the mutual destruction of both the EU and its Member States. However, in addition to the dangers lying ahead, I reckon that there is certainly at least one positive benefit of the PSPP decision: without the ruling, we would not know today the status quo of the contemporary public discourse on the relationship between EU and national law affecting dialogues even this year in several countries.

Lastly, I conclude my analysis with the thoughts of Nóra Chronowski, a acknowledged Hungarian constitutional and EU-law scholar, in my own translation: ” As the first Solange decision set in motion the development of the protection of fundamental rights in the EU, and then the Maastricht decision launched a common thinking to address the EU’s democratic deficit, a scenario could even contribute to a more transparent, solidarity-based monetary and fiscal union Constitutional Court, which strengthens the euro area – it is only difficult to believe the optimistic outcome in the frozen mood after the decision.”[8] I think that we already have more reason to believe – with a little more than a year of perspective – that the PSPP’s ‘nuclear bomb’ brought about the possibility of common thinking rather than the dangers it supposedly posed.

[1] The ‘nuclear’ indicator comes from Lucas Guttenberg, director of the Jacques Delors Center. See further: https://twitter.com/lucasguttenberg/status/1257592204308164609
[2] In its Honeywell decision, the BVerfG made it compulsory to make a reference for a preliminary ruling before declaring a legal instrument ultra-vires. See further: BVerfGE 126, 286.
[3] See further: Article 127 (1) and (2) TFEU and Articles 17 to 24 of the Protocol on the Statute of the European System of Central Banks (ESCB) and of the European Central Bank
[4] The principle for separation of powers is enshrined in Article 119 TFEU.
[5] Attila, V. (2020). A német szövetségi alkotmánybíróság döntése a PSPP-ügyben: az európai integráció jogi és fiskális határainak feszegetése. [The decision of the German Federal Constitutional Court in the PSPP case: pushing the legal and fiscal boundaries of European integration] Jogtudományi Közlöny. 7-8 (2020). 329.
[6] Nóra, C. (2020). Fordulópont az európai bírói párbeszédben: a Német Szövetségi Alkotmánybíróság PSPP-döntése. [A turning point in the European judicial dialogue: the PSPP decision of the German Federal Constitutional Court] Közjogi Szemle. 2 (2020). 77.
[7] Attila, V. (2020) 329.
[8] Nóra, C. (2020). 79.

Kinga Kálmán is a 5th year law student at Eötvös Loránd University Faculty of Law and research assistant at the Institute for Legal Studies at the Hungarian Centre for Social Sciences. She was a member of the Law School of the Mathias Corvinus Collegium. Her interest mainly covers constitutional law and artificial intelligence. This year, Kinga has been granted with Hungarian National Higher Education Scholarship and will start an Erasmus exchange semester at the University Charles III of Madrid.