EU starts infringement procedure against Germany over 2020 Court decision

On May 5, 2020, the German Federal Constitutional Court issued a ruling in regard to the European Central Bank’s Public Sector Asset Purchase Programme (PSPP) that sent shock waves through the EU. In addition to raising fundamental constitutional questions about the relationship between national law and EU law and between national courts and the EU institutions, the ruling  placed a large question mark not only over the PSPP but also over the new Pandemic Emergency Purchase Programme (PEPP) announced two months earlier by European Central Bank President Christine Lagarde under which the ECB would purchase up to €750 billion—subsequently increased to €1.35 trillion—of private and public debt through at least the first half of 2021.

In the PSPP, created in March 2015, the central banks of the members of the euro area purchased government bonds or other marketable debt issued by the central, regional, and local authorities within their jurisdictions as well as securities issued by international organizations and multilateral development banks. The purchases were distributed in accordance with the subscription key of the ECB’s capital, with the central banks holding 90 percent of the book value of the purchases and the ECB 10 percent. Intended to run through September 2016, the PSPP was extended several times and by 2020 the purchases amounted to €2.2 trillion.

More than 1,700 German citizens filed complaints before the German court alleging the PSPP violated several provisions in the EU’s treaties—most notably, those prohibiting the monetary financing of EU deficits and defining the ECB’s mandate in regard to monetary policy—and alleging, also, that the German government and parliament had failed to act with respect to Bundesbank participation in the program. In 2017, the German court referred several questions to the European Court of Justice for a preliminary ruling and in 2018 the ECJ ruled the PSPP neither exceeded the ECB’s mandate nor violated the prohibition of monetary financing. Following that ruling, the German court conducted a hearing in 2019 on the complaints.

In its ruling last May, the German court found in favor of the complainants, ruling the government and Bundestag had violated their rights under Germany’s Basic Law by failing to take steps to challenge the fact that the ECB, in its decisions on the adoption and implementation of the PSPP, neither assessed nor substantiated that the measures provided for in those decisions satisfied the principle of proportionality. And it said the ECJ’s review as to whether those decisions satisfied that principle “is not comprehensible; to this extent, the judgment was rendered ultra vires” [i.e., it exceeded the ECJ’s legal authority]. It said the ECJ’s ruling that the ECB Governing Council’s decision in regard to the PSPP was within the ambit of its competences “manifestly fails to give consideration to the importance and scope of the principle of proportionality [in Article 5(4) of the Treaty on European Union]—which applies to the division of competences between the European Union and the Member States—and is simply untenable from a methodological perspective given that it completely disregards the actual economic policy effects of the programme.” It said the ECJ’s “approach to disregard the actual effects of the PSPP in its assessment of the programme’s proportionality, and to refrain from conducting an overall assessment and appraisal in this regard, does not satisfy the requirements of a comprehensive review as to whether the European System of Central Banks (ESCB) and the ECB observe the limits of their monetary policy mandate.”

For that reason, the German court concluded it was not bound by the ECJ’s ruling and “must conduct its own review to determine whether the Eurosystem’s decisions on the adoption and implementation of the PSPP remain within the competences conferred upon it under EU primary law. As these decisions lack sufficient proportionality considerations, they amount to an exceeding of the ECB’s competences. A programme for the purchase of government bonds, such as the PSPP, that has significant economic policy effects requires that the programme’s monetary policy objective and economic policy effects be identified, weighed and balanced against one another. By unconditionally pursuing the PSPP’s monetary policy objective—to achieve inflation rates below, but close to, 2%—while ignoring its economic policy effects, the ECB manifestly disregards the principle of proportionality…. Therefore, the decisions at issue…exceed the monetary policy mandate of the ECB.”

The court ruled that “the Federal government and the Bundestag are required to take steps seeking to ensure that the ECB conducts a proportionality assessment …with regard to the reinvestments under the PSPP that began on 1 January 2019 and the restart of the programme as of 1 November 2019.” It said they “also have a duty to continue monitoring the decisions of the Eurosystem on the purchases of government bonds under the PSPP and use the means at their disposal to ensure that the ESCB stays within its mandate.” And because German institutions may not participate in either the development, implementation, or execution of ultra vires acts, the court ruled that, following a transitional period of no more than three months, “the Bundesbank may thus no longer participate in the implementation and execution of the ECB decisions at issue, unless the ECB Governing Council adopts a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme. On the same condition, the Bundesbank must ensure that the bonds already purchased and held in its portfolio are sold based on a—possibly long-term—strategy coordinated with the Eurosystem.”

Three days after the decision, the ECJ issued a statement in which, after noting that it never comments on a judgment of a national court, it said it “has consistently held that a judgment in which the Court gives a preliminary ruling is binding on the national court for the purposes of the decision to be given in the main proceedings. In order to ensure that EU law is applied uniformly, the Court of Justice alone – which was created for that purpose by the Member States—has jurisdiction to rule that an act of an EU institution is contrary to EU law….Like other authorities of the Member States, national courts are required to ensure that EU law takes full effect. That is the only way of ensuring the equality of Member States in the Union they created.” The same day, Lagarde, appearing before the European Parliament’s Economic and Monetary Affairs Committee, noted that, contrary to what the German court claimed, the ECB continually monitors the proportionality of its instruments and said the official account of the Governing Council’s meeting on June 4, the day before the German court issued its ruling, would demonstrate that it had conducted a substantial discussion of the proportionality issue, including negative as well as positive aspects of the PSPP.

Two days later, Commission President Ursula von der Leyen issued a statement in which she said, “We take good note of the clear statement of the European Court of Justice of 8 May. In the same vein, the European Commission upholds three basic principles: that the Union’s monetary policy is a matter of exclusive competence; that EU law has primacy over national law and that rulings of the European Court of Justice are binding on all national courts. The final word on EU law is always spoken in Luxembourg [location of the ECJ]. Nowhere else.” Concluding, she said, “We are now analysing the ruling of the German Constitutional Court in detail. And we will look into possible next steps, which may include the option of infringement proceedings. The European Union is a community of values and of law, which must be upheld and defended at all times. This is what keeps us together. This is what we stand for.”

Speaking the next day, German Chancellor Angela Merkel suggested the issue was “solvable” and that a clash with Brussels could be avoided if the ECB illustrated why the bond-buying program was needed. Several days later, after speaking with Lagarde, Jens Weidmann, who as president of the Bundesbank sits on the ECB’s Governing Council, told members of the Bundestag’s European Union committee the issue could be resolved in a way that would maintain the independence of the ECB and the Bundesbank. He suggested he could convey ECB documents demonstrating that it had addressed the proportionality issue to the Bundestag and government. He also said he would update the committee quarterly on the issue. The ECB, for its part, agreed to give a number of unpublished documents pertaining to the PSPP program, many of which had been given to the ECJ when it considered the program, to Weidmann to pass along to the government and Bundestag. And as Lagarde had suggested, the 18-page, single-spaced official account of the Governing Council’s June meeting contained an extensive and detailed summary of the economic, fiscal and monetary consequences of the PSPP.

With those measures, the government and the Bundestag satisfied the court’s ruling that they “take steps seeking to ensure that the ECB conducts a proportionality assessment…with regard to the reinvestments under the PSPP…and continue monitoring the decisions of the Eurosystem on the purchases of government bonds under the PSPP and use the means at their disposal to ensure that the ESCB stays within its mandate.” But while those measures satisfied the court’s ruling, they didn’t address the more fundamental question of whether the German court had, in its PSPP ruling, violated EU law. On July 20, 2020, a half-dozen members of the European Parliament put forward a priority question to the Commission, prompted by von der Leyen’s statement soon after the ruling that “we will look into possible next steps, which may include the option of infringement proceedings.” The question, which required a written response, was “1. Does the Commission intend to open an infringement procedure? 2. If so, when?” On November 18, 2020, von der Leyen answered the question on behalf of the Commission, saying in part, “Article 17 of the Treaty on European Union grants to the Commission, as the guardian of the Treaties, the power to ensure the application and implementation of EC law in all Member States. In that context, the Commission may open infringement procedures if it considers that a Member State has failed to fulfil an obligation under the Treaties. The Court of Justice of the European Union (CJEU) has recognised that the Commission enjoys wide discretion whether to initiate infringement proceedings. At this stage, the Commission has not decided whether to open infringement procedures.”

On April 1, six MEPs, prompted by the German court’s decision in late March to temporarily stop Germany’s ratification of the EU’s Own Resources Decision (ORD) after the Bundestag and Bundesrat had approved it, the uncertainty that decision created in regard to the implementation of the EU’s recovery plan, and the continuing uncertainty about whether the Commission was planning to open an infringement procedure in regard to the PSPP decision, submitted another priority question to the Commission: “1. Why has the Commission failed to this day to open an infringement procedure against Germany regarding the behavior of the GCC [German Constitutional Court]? 2. Is it now ready to open such a procedure?” On Tuesday, those MEPs received an answer to the second question: Yes.

Each month, the Commission announces a series of infringement decisions involving legal action against Member States for failing to comply with their obligations under EU law. Among the key decisions announced on Tuesday was a “letter of formal notice to Germany for breach of fundamental principles of EU law, in particular the principles of autonomy, primacy, effectiveness and uniform application of Union law, as well as the respect of the jurisdiction of the European Court of Justice” by the German court in its decision in the PSPP case. Specifically, the Commission faulted the court for declaring the ECB “to be ‘ultra vires’, going beyond its competence” and declaring the ECJ’s 2018 ruling in the case “to be ‘ultra vires’ – without referring the matter back to the Court of Justice. As a consequence, the German Court deprived a judgment of the European Court of Justice of its legal effect in Germany, breaching the principle of the primacy of EU law. This is the reason now for starting this infringement procedure….The Commission considers that the judgment of the German Constitutional Court constitutes a serious precedent, both for the future practice of the German Constitutional Court itself, and for the supreme and constitutional courts and tribunals of other Member States” The Commission gave Germany two months to reply to its concerns.

The Commission’s concern about the court’s decision creating a “serious precedent” for its future practice is not just a purely hypothetical concern. Indeed, the court is now preparing to consider an issue that could call into question not only the EU’s ability to fund its €1.074 trillion 2021-27 budget but its ability to raise and service €750 billion of debt to fund its Covid recovery effort. In December, the Council approved an Own Resources Decision to fund the seven-year budget and service the recovery-related debt. An ORD must be approved by all of the member states in order to take effect. In late March, after the Bundestag and Bundesrat approved the ORD and just as the ratification legislation was about to be signed into law by President Frank-Walter Steinmeier, the German court intervened and blocked completion of the ratification while it considered an application filed by a number of citizens for a preliminary injunction preventing ratification. After considering the application, the court rejected it in late April, allowing Steinmeier to sign the legislation completing Germany’s ratification. But while it rejected the application, the Court expressed doubt about the constitutionality of the ORD, saying the complaint “is not clearly unfounded” and that it would conduct a thorough examination of the issues raised by the applicants. The EU announced last week that all 27 member states had approved the ORD. If nothing else, the Commission’s formal notice of infringement was a well-timed shot across the bow, advising the German court and government to leave well enough alone.

It is of course much too soon to hazard a guess as to how Germany will respond to the Commission’s formal notice or, indeed, whether it will respond at all. But assuming it does respond, the EU may, depending on the response, issue a “reasoned opinion” requesting remedial action within a specified period of time, after which, depending on the response (if any), it could take Germany—and, in effect, the German Constitutional Court—to the ECJ and request that it direct the German court to adhere to and observe the fundamental principles of EU law.

David R. Cameron is a professor of political science and director of the European Union Studies Program.