German Supreme Court Creates Roadblock to European Central Bank Money-Printing Machine

May 5, 2020 (EIRNS)—In an historic ruling today, the German Constitutional Court in Karlsruhe has put national law above EU law by declaring decisions taken by the European Central Bank (ECB) and the European Court of Justice as ultra vires, i.e., beyond their legal authority. The ruling was a response to a complaint filed by former Christian Social Union Vice-Chairman Peter Gauweiler and a group of economists, including Bernd Lücke and Hans-Olaf Henkel, both former members of the Alternativ für Deutschland (AfD) party.

The ruling of the Bundesverfassungsgericht (BVerfG) is groundbreaking because it criticizes the ECB policy on the merits, charging that its Public Sector Purchase Program (PSPP) was implemented in disregard of its economic and social effects. By not weighing such effects against the stated purpose of the assets purchase program, the ECB has violated the principle of proportionality, the Constitutional Court stated.

As for the European Court of Justice (CJEU), which rejected the same complaint on Dec. 11, 2018, the Karlsruhe decision held that the CJEU ruling “manifestly fails to give consideration to the importance and scope of the principle of proportionality ... 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 program.”

The Karlsruhe Court similarly found regarding the actions of the German government:

“The Court found that the Federal Government and the German Bundestag violated the complainants’ rights under ... the Basic Law by failing to take steps challenging that the ECB, in its decisions on the adoption and implementation of the PSPP, neither assessed nor substantiated that the measures provided for in these decisions satisfy the principle of proportionality.”

Importantly, the Court found that the PSPP is a bank bailout operation. It

“affects the commercial banking sector by transferring large quantities of high-risk government bonds to the balance sheets of the Eurosystem, which significantly improves the economic situation of the relevant banks and increases their credit rating. The economic policy effects of the PSPP furthermore include its economic and social impact on virtually all citizens, who are at least indirectly affected, inter alia as shareholders, tenants, real estate owners, savers or insurance policy holders. For instance, there are considerable losses for private savings. Moreover, as the PSPP lowers general interest rates, it allows economically inviable companies to stay on the market. Finally, the longer the program continues and the more its total volume increases, the greater the risk that the Eurosystem becomes dependent on Member State politics as it can no longer simply terminate and undo the program without jeopardizing of the monetary union.”

In conclusion, the ECB must present a complete and convincing justification of its program within three months, or the Bundesbank will cease to participate to the PSPP program.

“The Federal Government and the Bundestag are required to take steps seeking to ensure that the ECB conducts a proportionality assessment. This applies accordingly with regard to the reinvestments under the PSPP that began on 1 January 2019 and the restart of the program as of 1 November 2019.

“Following a transitional period of no more than three months allowing for the necessary coordination with the Eurosystem, 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 program. 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.”

The Karlsruhe ruling does not directly affect the newest ECB bailout operation, called Pandemic Emergency Longer-Term Refinancing Operation (PELTRO), which offers loans at record negative rates of −1%, but it lays the basis for successful future complaints against it.

The European Commission reacted in defiance to the Karlsruhe ruling. Commission spokesman Eric Mamer stated that “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.”

The Court’s press release on the ruling is available in English.