Wednesday

27th Oct 2021

German court questions bond-buying and EU legal regime

  • The ECB has three months to prove its bond-buying has limits (Photo: Kiefer/Flickr)

The German Constitutional Court on Tuesday (5 May) ruled that the country's central bank should stop buying government bonds under the European Central Bank's (ECB) stimulus program within three months - unless the ECB proves it acted proportionally.

The ruling by the Karlsruhe-based top court puts question marks around the ECB's stimulus scheme ahead of a looming economic crisis.

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It also questions the independence of EU institutions, and creates a risky precedent by dismissing an earlier ruling by the EU's top court.

It could also embolden populists, and nationalist governments in Poland and Hungary, which have railed against EU legal supremacy.

On the economic front, the German ruling deals a blow to the so-called Public Sector Purchase Programme (PSPP), that has kept the eurozone's economy afloat during subsequent crises.

The court said the German government and parliament acted unconstitutionally when they did not challenge the ECB's decision on PSPP, and did not investigate if the scheme is proportional to the goals it aimed to achieve.

The ECB will now have to provide evidence within three months that the scheme is proportionate.

The ECB collected almost €3 trillion in bonds since 2015, with German bonds bought under the PSPP worth €533.9bn by the end of April, according to Reuters.

But - it is important to note - the Karlsruhe judges did not apply their ruling to the ECB's latest programme, a €750bn scheme to help the coronavirus-stricken eurozone economy.

The seven-to-one ruling , however, puts into question the ECB's "whatever it takes" approach in the next economic crisis, as it could open the door for new cases in Germany.

Some German economists and academics, who brought forward the original 2015 case, have argued that the ECB programme constitutes direct financing of governments - which goes against the EU Treaty.

The ruling itself highlights the ongoing tension between the ECB and eurozone governments, with capitals being reluctant to pull resources together and share costs, while the central bank is expected to offset economic shocks.

The court decision adds a legal complication to the political one, which has dominated EU discussions over the past months as financing the coronavirus's economic affect took centre stage.

Previous ruling

The Karlsruhe ruling also creates tension between the EU's top court and constitutional courts around Europe, shaking the bloc's legal order.

In 2017, the German judges asked the European Court of Justice (ECJ) for an interim ruling if the ECB's margin of manoeuvre should be limited.

The EU court in 2018 cleared the bond-buying scheme, arguing it is not illegal financing and is proportionate, citing the ECB's self-imposed limits on purchases.

In Tuesday's decision the German judges said the ECJ's ruling is "not comprehensible" and deemed it "ultra vires", meaning beyond its powers.

"Declaration of war by [the German constitutional court] on CJEU [EU top court]," the Brussels-based Bruegel think tank economist and director Guntram Wolff reacted on Twitter.

"It [ruling] is basically addressed to the ECJ, this is judicial egos clashing, […] who is the ultimate umpire, the final arbiter, who has the final world, here, with the German constitutional court saying, basically it is us," Franz Mayer, EU law professor with the Bielefeld University said in a webinar at Bruegel.

"The treaties don't provide for this kind of overruling of the ECJ," Mayer said, adding that it could open a "pandora's box" and that the ECJ must react.

The ruling raised concerns that other national constitutional courts, some of which are suspected to be under pressure from governments, could dismiss EU law.

Poland and Hungary has been locked in a conflict with EU institutions over the rule of law and judiciary independence.

Mayer said in Poland, authorities could use the ruling to justify their own dismissal of EU law, saying "look, even the Germans do it, we don't have to obey European legal claims of primacy of EU law."

MEP Esteban Gonzalez Pons from the centre-right European People's Party said the move by the German court dictating the policy of the ECB and putting itself above the ECJ "is the same one followed by the Hungarian and Polish authorities denying the European rule of law".

The EU commission defended the bloc's top court.

"Notwithstanding the analysis of the detail of the German constitutional court's decision today, we reaffirm the primacy of EU law and the fact that the rulings of the European Court of Justice are binding on all national courts," Eric Mamer, commission spokesperson said.

The Karlsruhe decision was welcomed by at least some populists.

The co-chair of far-right German party, Alternative for Germany (AfD), Tino Chrupalla tweeted that the with the ruling the German constitutional court "is putting the EU institutions in their place".

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