The ‘Quantative Easing’ saga: the Backlash of the German Federal Constitutional Court

by Stefania Baroncelli

On 5 May, the Federal Constitutional Court of Germany (GCC) issued a landmark judgement capable of having a major impact on the shape of the European Economic and Monetary Union (2 BvR 859/15). The judgment centres on the ‘government bond purchase programme’, known as ‘Quantitative Easing’ (QE), launched by the European Central Bank (ECB) to provide the Member States of the Eurozone with liquidity injection. The GCC qualifies the QE measures as an ultra vires act. At the same time, it rules that QE does not finance the States and therefore complies with the Treaty prohibition against the monetisation of national public debt (art. 123 TFEU).

Since March 2015 and until April 2020, the ECB had given mandate to the central banks of the 18 Member States of the euro area, with the exclusion of Greece, to buy bonds for 2,291,511 million EUR.

The GCC referred several questions to the ECJ on the compatibility of the QE measures with the EU Treaties. The ECJ ruled in December 2018 that the ECB is acting within its mandate, hence allowing the ECB to conduct the QE programme (C-493/17, Weiss). It is precisely the content of this judgment that is now criticised by the GCC.

A first argument concerns the possibility of keeping monetary policy and economic policy absolute separate. The GCC and the ECJ are inspired by two different concepts. According to the ECJ, the Treaties do not allow monetary policy to be absolutely separated from economic policy. The ESCB needs to adopt measures that have effects in the real economy to be effective. The GCC instead maintains that the QE programme is not part of the monetary policy field – for which the ECB is competent – but pertains to the area of economic policy. This complaint is based on the observation that a high volume of securities was purchased and for extended periods, which would make the QE measures de facto an instrument of economic policy.

The ECJ also considers that the ECB should be allowed a broad type of discretion, considering its technical role. The ECB’s decision is not vitiated by a manifest error of assessment, as it is based on a number of studies and reports. It is also proportionate because the ECB has set a number of self-limiting conditions (uniform and temporary application, presence of eligibility criteria, limited risk sharing, etc.). The GCC rejects this view as it disregards the principle of proportionality. It is also “untenable from a methodological perspective” as it “completely disregards the actual economic policy effects of the programme”. The interpretation of the ECJ, argues the GCC, allows the ECB to gradually expand its competences without any judicial review. The ECJ has exceeded the judicial mandate conferred on it by the Treaties, therefore the judgment is ultra vires. It is therefore for the GCC using a different standard of review to determine whether the ECB is competent. Aren’t the Member States still the masters of the Treaties?

Therefore, the German government and the Bundestag must ensure that the ECB conducts a proportionality assessment of the purchases. The Bundesbank will no longer be able to participate in the QE programme unless the ECB Governing Council takes a new decision and demonstrates in a comprehensible and substantiated manner that the measure is proportionate. It should also start by selling the securities it holds. The GCC allows, however, a 3-month transitional period to find a coordination with the Eurosystem.

The conflict between the two courts had been announced by a number of judgments concerning the role of the ECB (OMT, Weiss), but few expected such a severe pronunciation. The GCC leaves enough room for the ESCB to continue its bond purchases. However, this ruling raises fundamental constitutional issues, as it questions the competence of the ECJ in the interpretation and application of EU law: who has the competence to decide the competence? In addition, the GCC suggests a balancing of interests that takes into account economically questionable arguments.

The pronunciation is even more surprising when one considers the context of emergency in which it has been enacted. It is true that the ‘Pandemic Emergency Purchase Programme‘ adopted by the ECB is exempt from the ruling, however, this decision put in danger the position of independence of the ECB at a time when it needs credibility. Indeed, the ECB’s monetary policy instruments aimed at ensuring the stability of the euro area have enabled monetary union to survive in times of economic turbulence. The German judges have highlighted the inadequacy of the EU Treaties to tackle complex situations (but which have now become normal). Maybe this shock treatment will convince decision-makers that it is necessary to put economic and monetary union on a sounder footing.

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