If a dispute between an E.U.
state and the European Central Bank (ECB) on one of its programmes could come
to challenge the European Court of Justice (ECJ) itself and the very sustainability
of the E.U.’s federal system, then that system itself could be said to be
severely impaired, and thus facing a high risk of being destroyed. Yet in the Judgment of the Second Senate of
May 5, 2020, the constitutional court of Germany did exactly that in throwing
out an earlier ruling of the E.U.’s supreme court (ECJ) on the legality under E.U. law of an ECB programme.[1]
The primary objective of the European System of Central Banks, which
includes the European Central Bank and those of the States using the euro
currency, to be the maintenance of price stability. In 2015, the ESCB “adopted
a programme for the purchase of government bonds on secondary markets . . . ,
with the aim of returning inflation rates to levels below, but close to, 2%.”[2]
According to the European Court of Justice, the E.U.’s supreme court within the
federal judiciary (CJEU), the ECB’s rationale was that the large-scale purchase
of government bonds—90% of which by the state banks—would facilitate “access to
the financing that is conducive to boosting economic activity, by promoting a
reduction in real interest rates and encouraging commercial banks to provide
more credit.”[3] With
the supply of goods and services fixed in the short-term, the increased lending
by banks due to the lower interest rates would mean more euros relative to the
E.U. goods and services, and thus an increase in inflation. However, the ECB’s
stated purpose for the program was primarily to boost economic activity by means of lowering interest rates. Yet
price stability was the ECB’s objective, hence not to be a byproduct of the
pursuit of another objective.
(Source: Trading Economics)
To be sure, the central bank’s
mission was an inflation rate to levels below, but close to 2 percent, and the
inflation rate in the “euro area” was .24% in 2015, with a period of deflation.[4]
By 2019, the inflation rate stood at 1.76 percent, which was within the ECB’s objective.
The programme had worked. Whether it should of worked—whether money supply
should be increased to increase inflation—is debatable, for deflation and
inflation should arguably be determined by relationship of GDP to the money
supply. Otherwise, a pro-inflation mandate would mean that prices would
continue to increase rather than reflect the market relationship of money and
GDP. After a sustained period of inflation, balance would dictate a corrective
period of deflation.
Answering questions submitted by
the state of Germany’s top court, the European Court of Justice issued a press
release in 2018 stating that the “purpose of the PSPP programme is to encourage
a return of inflation rates to levels below, but close to, 2% over the medium
term.”[5]
Yet, as stated above, the ECB’s own stated reason for its programme was to
boost economic activity (by decreasing interest rates). The ECJ states that “a
monetary policy [i.e., decreasing interest rates to increase inflation] cannot
be treated as equivalent to an economic [i.e., fiscal] policy [e.g. for
boosting economic activity] for the sole reason that it may have indirect
effects that can also be sought in the context of economic policy.”[6]
In plain English, increasing or decreasing money supply is not an equivalent
option to fiscal policy in boosting economic activity just because this is an
indirect effect of the monetary policy. Therefore, even if boosting economic
activity were an indirect effect, or byproduct, of the ECB’s primary intent to
increase inflation, the ECB could not justify its programme on the basis of its
indirect fiscal effect. Yet the ECB’s stated objective of the programme was to
boost economic activity! The E.U. should have used a fiscal rather than a
monetary policy if the primary aim, as the ECB stated, was to boost economic
activity. The groups in Germany that had instigated the German court’s
questions to the ECJ had a good argument that the ECB had been acting beyond
its mandate in this narrow sense. However, that the ECB had achieved its
inflation target by means of the programme suggests that the central bank could
be viewed as having acted within its mandate. The question is perhaps whether the
ECB pursued its program even after the inflation target had been achieved. That
the rate in 2018 was still below 2% suggests that this was not the case. The
problem, therefore, was that the ECB stated boosting economic activity as its
primary objective, with lower interest rates serving only as a means.
Unfortunately, the constitutional
court of the state of Germany took its objection too far. Even though groups that
had brought constitutional objections to the Bundesverfassungsgericht (the
German constitutional court) had claimed that because the PSPP programme
exceeded the ECB’s mandate, the E.U. failed “to observe the division of
competencies” between the E.U. and its states, the German court violated the
supremacy of the ECJ, the federal supreme court of the E.U., over the state
courts by directing the state’s central bank not to comply with the ECB’s
programme by buying back German bonds. Such a long sentence, by the way, is in
keeping with German, though my words do not reach such a length.
The Nullification Crisis in U.S.
history can provide us with a context. In November, 1832, the South Carolina Government
passed a law declaring the U.S. tariffs laws of 1828 and 1832 null and void in
South Carolina. The underlying problem was “the constitutional theory that
upheld the right of states to nullify federal acts within their boundaries.”[7]
Had the member states still been sovereign, as they had been from 1776 to 1789
(including under the Articles of Confederation), the doctrine would have had a
solid basis (i.e., the full sovereignty of the new republics within the U.S.).
However, once the U.S. itself (i.e., the federal level) had been delegated some
governmental sovereignty, the doctrine would have eviscerated that sovereignty.
States would have been able to pick which federal law to recognize, hence any federal
law could easily have been vitiated or compromised. The states would have been
able to trample on the federal sovereignty with impunity and the federal system
itself would have lost coherence, and thus the ability to function viably.
On May 5, 2020, the
constitutional court of the state of Germany ruled against the legality of the
ECB’s programme within the state, much as South Carolina’s legislature had
voted against the legality of the tariff laws. It was a direct challenge to the
E.U.’s central bank and supreme court (ECJ). Were the ECJ to let the state
court’s ruling stand, other states would surely follow in opting out of
whatever federal laws they do not like. The Government of Germany had been
against the bond buy-backs in the euro area because of the shared losses. In
short, the powerful northern state didn’t want to pay for the losses of poorer
southern states through the programme. Likewise, the matter of shared state
debt had been a hot topic during the Washington administration in the 1790s in
the United States. There too, the state governments who had incurred less debt
in fighting the Revolutionary War did not want the higher debts of other states
to be pooled through the federal government.
The resistance in Germany since
the European debt crisis during and after the financial crisis of 2008 to
covering the massive debts of Greece, Spain, and Italy found a footing in the
German court even though the ruling meant the possible vitiation (i.e. end) of
the E.U’s competencies (i.e., governmental sovereignty), and thus of the
federal system itself. “Given the
influence Germany wields as the largest [State in the euro area of the E.U.],
the [ECB] can’t afford to ignore the [German] court’s decision, in part because
it would be all but impossible for” the programme to continue without the
participation of Germany’s central bank.[8]
Moreover, other state governments (and courts), such as in Poland and the Czech
Republic, would likely follow in challenging the E.U. unilaterally.
The German chancellorin (prime
minister), Angela Merkel, had been urging a stronger E.U. after the secession of
euro-skeptic (anti-federalist) Britain, yet her state’s interest in staving off
shared debt through the ECB resulted in her state’s high court throwing an
arrow directly at the core of the E.U.’s federal system (of dual or divided
sovereignty). “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 German court’s ruling added fuel to the argument that the E.U.
itself was being compromised by the power of its largest state in pursuing its
own interests at the expense of the common good, or general welfare, in the
Union as a whole.[9]
Abstractly stated, no part should have sufficient power over the whole that the
latter’s power is eviscerated because it is a mere reflection of the interests of the part operating at the
expense of the whole.
(Source: Politico)
As for the ruling of the
Bundesverfassungsgericht (the German constitutional court), Justice Andreas
Vosskuhle said that the ECJ had approved the programme that “was obviously not
covered” by the ECB’s mandate.”[10]
The ruling did not apply to the corona bonds during the pandemic in 2020. Nor
was the ECB’s purchasing of state debt (i.e. quantitative easing) during the
financial crisis. Even though the court did not find enough evidence to rule
that the programme amounted to monetary financing (i.e., the ECB funding state
budgets), the court did decide that the ECB had overstepped its
inflation-objective mission.[11]
The German government had been against pooling money through the ECB to fund
the government budgets by pooling the debt of the more indebted states going
back to the financial crisis of 2008. Regarding the programme at issue here,
the German court’s claim that the ECB had overstepped its mandate does not
succeed because the programme did not push inflation above 2% in trying to
boost economic activity. In other words, the ECB had not over-shot its
inflation target, even if the bank erroneously was primarily oriented to increase
GNP. Inflation was so low in 2015 that an inflation rationale was justified.
The impact of the Bundesverfassungsgericht’s
ruling went beyond the ECB itself. The viability of the ECJ and the federal
system itself was suddenly under threat. Dismissing a 2018 ECJ decision to
allow bond buy-backs, the state 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 [the state’s central bank] would no longer be permitted
to participate in the program.”[12]
The ECB was at the time “an independent EU institution [that] does not have to
take orders from the German court, and the government in Berlin.”[13]
In reply, the ECB told the German court that the ECJ had already determined the
legality of [the programme]. In dismissing the ECJ’s earlier conclusions, the
German court, by a 7-1 majority, declared the reasoning by the ECJ to be “not
comprehensible” and “objectively arbitrary” and the decision itself to be untra vires (i.e., beyond the court’s
authority).[14]
Yet the German court presumed itself to have the authority to overrule the
federal supreme court!
Even were the ECJ to deliver a bad ruling, or
one injurious to a particular state’s policy, the ECJ would be protected by the
precedent of its superiority over state supreme courts. The ECJ had ruled in Costa
v ENEL (1964) that the states had transferred sovereign rights to the
ECJ on E.U. law and furthermore that such law could not be overridden by state
law. The ECB being a federal institution, the matter of whether the programme
breached the central bank’s mandate was within the purview of the federal
supreme court, the ECJ, rather than any state court. In stating that the gravity
of the question at hand merited going up against the ECJ ruling and the ECJ
itself, the German court had, I contend, lost perspective. Buying back bonds
through a federal program, unlike something infringing on basic human rights,
for example, does not have sufficient weight to justify imperiling the federal
system itself. It is ironic that just months after the state of Britain seceded
in part out of dislike for the extant governmental sovereignty of the E.U. in
relation to that of the state governments, the German state court threw a bomb
from within.
