That is the message the country's Constitutional Court sent to the European Union on Tuesday as it delivered a landmark ruling on the legality of the European Central Bank’s bond-buying programs, a decision many observers say challenges both the independence of the ECB and the authority of the Court of Justice of the European Union (CJEU).
At a time of growing tension in the EU over German reluctance to embrace ambitious plans to resuscitate southern European economies hit hardest by the coronavirus by issuing mutualized debt, known colloquially as corona bonds, the court's decision risks inflaming anti-German sentiment. For those in the bloc who fear its biggest member is already too powerful, Tuesday's ruling will add fuel to the fire.
In announcing the ruling, German Chief Justice Andreas Voßkuhle said the CJEU had approved a practice that “was obviously not covered” by the ECB’s mandate. Voßkuhle spent months crafting the 77-page decision, announcing the ruling just a day before his official retirement on Wednesday.
Dismissing a 2018 CJEU decision to allow the bond purchases, the German court ordered the ECB to provide Germany with adequate justification for the program within the next three months. Should it fail to do so, the Bundesbank, Germany’s central bank, would no longer be permitted to participate in the program.
The decision sets the stage for a showdown between the ECB, which as an independent EU institution does not have to take orders from the German court, and the government in Berlin. The ECB said in a statement it took note of the German ruling and "remains fully committed to its mandate," adding that the CJEU had already determined the legality of its course.
Given the influence Germany wields as the largest ECB member, the bank can't afford to ignore the court's decision, in part because it would be all but impossible for it to continue the bond-buying without German support.
The German court said that in permitting the practice, the ECJ had given short shrift to the EU’s principle of proportionality, a fundamental tenet of the bloc’s treaties, which holds that its institutions are only permitted to pursue actions they can show are justified and necessary.
“As these decisions lack sufficient proportionality considerations, they amount to an exceeding of the ECB’s competences,” the German court said in its ruling.
What surprised many observers about the ruling was the ease with which the German court, which reached its decision by a 7-1 margin, decided to throw out the CJEU’s earlier conclusions, declaring the Luxembourg-based court’s reasoning “not comprehensible” and “objectively arbitrary.” To add insult to injury, the Germans characterized the European court's decision as “ultra vires,” or beyond its authority.
Critics of the German court’s move worry that by refusing to accept the CJEU’s position, it effectively undermined the court's legitimacy, opening the door for other countries to ignore rulings when they disagree with them.
At a time when the EU is in a clinch with both Hungary and Poland over the steps governments in those countries have taken to roll back the rule of law and democracy, the question is far from academic.
“We’re in a delicate time frame, especially in Poland, where politicians are challenging the CJEU,” said Jan Wouters, who holds the Jean Monnet chair in law at Belgium’s KU Leuven. “They will seize this example and say ‘we’re not the only ones.’”
Around Europe, politicians across the political spectrum warned that the German court had overstepped its bounds.
"This doctrine according to which the German Constitutional Court dictates the policy of the ECB and places itself above the CJEU is the same doctrine followed by the Hungarian and Polish authorities in denying European rule of law," Spanish MEP Esteban González Pons, who is vice chairman of the European People’s Party, wrote on Twitter.
Though the German court signaled it wasn’t deaf to such concerns, it suggested that the gravity of the question at hand merited its forceful contradiction of the CJEU ruling.
“If the member states were to completely refrain from conducting any kind of ultra vires review, they would grant EU organs exclusive authority over the treaties, even in cases where the EU adopts a legal interpretation that would essentially amount to a treaty amendment or an expansion of its competences,” the court wrote, adding that “certain tensions are thus inherent in the design of the EU.”
A price worth paying?
In the view of many economists, the German court’s reasoning was also deeply flawed.
Central to the court’s argument is a contention that in pursuing the bond-buying program, the ECB failed to take the wider economic impact of the policy into account, focusing instead on its mandate to keep inflation in check. One of the effects of the ECB's bond-buying has been to depress interest rates across the eurozone, which has delivered a blow to savers and institutions that rely on regular interest income to fund themselves, such as life insurers and charitable foundations.
Economists who support the ECB's policies were puzzled that the court assumed the central bank had failed to weigh the broader economic impact of its policies.
In the ECB’s view, the negative effect of lower interest rates was the price to pay for keeping the euro intact. In an effort to stabilize the eurozone economy during the debt crisis, the ECB, following the lead of other global central banks, began purchasing eurozone debt, a policy known as quantitative easing. Since 2015, it has acquired nearly €3 trillion of debt on the open market issued by all eurozone countries, pledging to hold on to the bonds until they mature.
A group of conservative German economists and lawyers issued a legal challenge against the practice, arguing that it amounted to monetary financing (central bank funding of national budgets), which is illegal under the EU treaties. The ECB maintains the practice isn't monetary financing because it acquires the bonds after they are placed on the market, purchasing them from banks and not directly from member countries.
The justices also said the decision only applied to the ECB’s Public Sector Purchase Program | Pool photo by Sebastian Gollnow/AFP via Getty Images
The justices also said the decision only applied to the ECB’s Public Sector Purchase Program (PSPP), which began in 2015, and not to the ECB’s recent corona-related emergency measures, such as the €750 billion asset-buying program it announced in March.
Yet the ruling also stipulates criteria the ECB needs to follow in order to avoid monetary financing, such as limiting the scope of the purchases. Such constraints would also affect the newer programs and raise doubts about their efficacy, analysts warned.
Financial market reaction to the ruling was mixed. While investors appeared relieved that the court didn’t overturn the program outright, the euro fell as they digested the long-term ramifications of the move for the ECB’s independence.
Some worry that the ruling effectively neuters the ECB, blunting the famous declaration made by then-president Mario Draghi in 2012 to do “whatever it takes” to save the euro. That's because the decision makes clear that the central bank doesn’t have carte blanche to follow through on Draghi's pledge.
Many economists believe the only way to resolve the tensions around the ECB’s mandate is to amend the EU treaties to both broaden the bank’s purview and to give the eurozone fiscal powers, which would make the currency area less dependent on the ECB in times of crisis.
“It is clear that the eurozone cannot continue to muddle through with creative interpretation of EU law by the ECB,” said Stanislas Jourdan, executive director of Positive Money Europe, a Brussels-based group campaigning for eurozone reform. “More than ever, eurozone institutions, starting with the ECB, are in need of a treaty overhaul.”
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