Karlsruhe shows the ECB the limits that the CJEU did not want to show

The German Federal Constitutional Court (GFCC) does not accept the ruling of the European Court of Justice (CJEU) on the PSPP bond purchase programme. According to the GFCC, both the CJEU and the European Central Bank (ECB) have manifestly exceeded their respective mandates. The CJEU's judgement of December 2018 is methodologically unjustifiable and turns the principle of limited conferral of powers meaningless.

Bert Van Roosebeke of cep explains: "For the first time in the history of European integration Karlsruhe is taking this step. The Federal Constitutional Court is particularly tough on the Court of Justice. It is dissatisfied with the CJEU's attitude of not wanting to go into the technical details of the limits of the ECB mandate and being reluctant in having those limits verified by the Court. Karlsruhe considers the CJEU's confidence in the lawful conduct of the ECB to be naive. It is now trying to set standards for the judicial review of the ECB's actions by the CJEU. This is quite remarkable and an embarrassment for the CJEU, as the ECB is not subject to the jurisdiction of the Federal Constitutional Court.”

The Federal Constitutional Court is building a bridge. Karlsruhe sees the crucial problem in the fact that 1) the ECB did not examine whether the PSPP bond purchases were really necessary to achieve its monetary policy objectives or whether milder means were available and that 2) the CJEU let the ECB get away with this. The GFCC now demands the ECB to carry out such a proportionality test as a precondition for the Bundesbank to continue to participate in the PSPP purchase programme.

"The ECB will overcome these somewhat constructed obstacles and the PSPP programme will continue to be implemented. More importantly, however, the Federal Constitutional Court is using this condition to push the ECB to face the question of the limits of its monetary policy mandate. The Federal Constitutional Court stops short of judging that the ECB is exceeding its monetary mandate with the PSPP programme. Indeed, this would have likely applied to the much larger Corona Bond Purchase Programme (PEPP) as well and would have led to serious distortions on the capital markets. Nevertheless, the Federal Constitutional Court's fundamental doubts are obvious. The fact that the ECB has to weigh up the consequences of its - in its opinion - monetary policy motivated action at all will not please it. Legal disputes are inevitable in the coming years as to whether this weighing has been carried out correctly and whether the right conclusions have been drawn from it. The bottom line is that the ruling expresses the Federal Constitutional Court's mistrust of the ECB. Karlsruhe demands the ECB to justify more precisely than before where it sees the limits of its mandate," Van Roosebeke continued.

The Federal Constitutional Court follows the CJEU. Karlsruhe follows the CJEU in its assessment that the ECB's PSPP bond purchase programme does not constitute a breach of the prohibited monetary financing. The GFCC stresses the importance of  a number of criteria for the purchase programme, which, taken as a whole, must result in Euro states not being sure that the ECB will purchase their government bonds.

For Van Roosebeke, the ruling is particularly relevant for the ECB's new Corona purchase programme (PEPP). "The Federal Constitutional Court highlights two "decisive guarantees" that are up for discussion in the PEPP programme: The purchase ceiling of 33% for government bonds and the allocation of purchases according to the capital key of the euro states at the ECB. Unlike PSPP, PEPP does not necessarily meet the latter criterion. PEPP purchases allow for fluctuations regarding the compliance with the capital key of the national central banks at the ECB. It can be assumed that the ECB will initially purchase a disproportionately high volume of Italian government bonds. The ECB has also announced that it will consider buying up more than 33% of the government bonds of any given issue. By emphasising both criteria, the Federal Constitutional Court expresses serious doubts as to whether PEPP in this form is compatible with the bail-out ban".