Peter Meier-Beck on the judgment of the German Constitutional Court

In a sensational judgement last week, the German Federal Constitutional Court (Bundesverfassungsgericht) denied the primacy of European law in a case involving decisions of the European Central Bank. The decision caused “horror” with Prof. Dr. Peter Meier-Beck, a presiding judge at the German Federal Court of Justice (Bundesgerichtshof). In this article he speaks as a high-ranking judge and makes it clear that he does not share the opinion of the majority of the 2nd Senate of the Federal Constitutional Court.

It’s hard, but it has to be said: The judgement of the 2nd Senate of the Federal Constitutional Court of 5 May 2020, passed by seven votes to one, is an attack on the European Union as a legally constituted community of European democracies.

The first horror, still in ignorance of the details of the reasoning, is the thought with what pleasure the governments in Warsaw and Budapest and perhaps elsewhere will hear that the judgments of the Court of Justice of the European Union (CJEU) were “ultra vires”, i.e. outside the competence granted to the Court of Justice by the Treaties, and therefore should not be heeded, since they are “no more comprehensible”. At no time were the efforts of the Court of Justice to save the (remnants of the) rule of law and the independence of the judiciary in Poland anything other than unacceptable encroachments on national sovereignty for the actors in this dismantling of the rule of law. Anyone who has followed the steep career of the phrase about the lack of comprehensibility in current political discourses of all kinds can hardly imagine a consideration where no one could be found, who lacked the ability or the will to comprehend it. No one should console himself with the thought that such an edict is the privilege of the Federal Constitutional Court of the Federal Republic of Germany. In any case, no one outside Germany will believe this.

The second horror evokes the justification given by the Federal Constitutional Court for its statement. It is – like many of the court’s decisions – very long and in many places provided with extensive references, in the thicket of which the reader sometimes finds the path of thought only with difficulty. At decisive points there is – one could get over this – no reference to other judgments. But what is more: There is no reasoning.

The competence-competence and its redefinition

The Federal Constitutional Court considers that the Public Sector Asset Purchase Programme (PSPP) of the European System of Central Banks (ESCB) is an ultra vires act of the European Central Bank (ECB) “in so far as the ECB has not demonstrated its proportionality” (para. 232) – which the ECB can now catch up with. This is in itself an irritating statement, because – as far as I know – no one had ever heard before of a competence – i.e. a legal framework of powers within which an authority or a court can take action or make decisions, whether lawful or unlawful in individual cases – which ends precisely where the proportionality of an individual measure or decision is lacking and beyond which the abyss of action ultra vires lurks. A limit of competence, defined by an explanation (to whomever), had not been known until now.

However, since the CJEU has misjudged this limit of competence, its decision is simply not comprehensible and is therefore itself an ultra vires act. In the opinion of the Federal Constitutional Court, the competence of the Court of Justice to interpret EU law also ends where the result of the interpretation is not comprehensible – for whomever, but at any rate for the Constitutional Court itself. Consider this: It was the Federal Constitutional Court which, by decision of 18 July 2017, asked the CJEU to interpret European Union law on the content and limits of the ECB’s competences. For its part, the Court of Justice does not have many competences in such a referral procedure. For its final decision, it has only one: This competence is to answer the question put to it by the court of a Member State and thus to determine the content and scope of EU law not only for the referring court but for the entire European Union. This competence is called into question by the Federal Constitutional Court because it does not agree with the answer that the Court of Justice has given it to its questions.

How does this strange boundary of competence come about, both for the powers of the ECB and for the right of the Court of Justice of the European Union to interpret its law in a way that is binding on all Member States, and how is it justified?

The questions referred by the Constitutional Court

The Constitutional Court had asked the CJEU inter alia (question 3), whether the ECB decision in question infringed EU law, because it went beyond the ECB’s mandate on monetary policy and therefore encroached upon the (economic) policy competence of the Member States. In particular, the Constitutional Court had asked whether this was the case, because

(a) the volume of PSPPs had a significant impact on Member States’ refinancing conditions,

(b) in view of this and the improvement of the refinancing conditions of the Member States and its effects on commercial banks, the decision not only had ‘indirect economic policy consequences’, but its ‘objectively ascertainable effects suggested that the economic policy objective of the programme was at least as important as the monetary policy objective’, and

(c) the decision is contrary to the principle of proportionality ‘because of its strong economic policy implications’.

It is easy to overlook, and thus should be noted, that the questions referred for a preliminary ruling do not speak of economic consequences of the ECB decision, but of effects or consequences for economic policy. This will prove to be a difference of central importance.

The nexus of monetary and economic policy from the perspective of the CJEU

In its judgment of 11 December 2018 (C-493/17), the Grand Chamber of the Court of Justice referred, inter alia, to previous cases according to which, in order to determine whether a measure is part of monetary policy, the objectives of the measure must be taken into account. The fourth recital of the relevant ECB decision stated that it was intended to contribute to inflation rates returning to a level below, but close to 2% in the medium term. This objective, as the CJEU states in more detail, is not objectionable as a concretization of the objective of maintaining price stability as the primary objective of the Union’s monetary policy. That is not called into question by the fact, relied on by the national court, that the PSPP has a significant impact on the balance sheets of commercial banks and on the financing conditions of the Member States of the euro zone. It is not disputed that the PSPP, according to its rationale and modalities, may have an impact, both on the balance sheets of commercial banks and on the financing of the Member States covered and that such effects may also be sought through economic policy measures. However, the Treaty on the Functioning of the European Union (TFEU) does not provide for an absolute separation between economic and monetary policies, and a monetary policy measure cannot be equated with an economic policy measure merely, because it may have indirect effects, which may also be sought in the context of economic policy. The CJEU did not concur with the view of the Federal Constitutional Court, that the opposite must apply to effects, which were knowingly accepted and definitely foreseeable by the ESCB. The conduct of monetary policy would always entail an impact on interest rates and bank refinancing conditions, which necessarily had consequences for the financing conditions of the public deficit of the Member States. In particular, monetary policy measures influenced price developments, inter alia by facilitating the granting of credit to the economy and by changing investment, consumption, and savings behaviour. Consequently, in order to exert an influence on inflation rates, the ESCB necessarily had to adopt measures that have certain effects on the real economy, which might also be sought –– to different ends –– in the context of economic policy. In particular, if the ESCB had to try to increase inflation in order to maintain price stability, the measures it would need to take to ease monetary and financial conditions in the euro area could include an impact on government bond rates, which in turn play a key role in setting the interest rates applicable to market participants.

This is followed by comments on the appropriateness and necessity of the ECB’s decision to achieve the monetary policy objective and on the proportionality of this measure, which do not need to be further discussed here.

In short, the Court thus states that monetary policy measures necessarily have macroeconomic effects and that it is irrelevant that these effects could also be the objective of economic policy measures. It does not deal with the notion of “economic policy consequences”. The French translation of this term, the working language of the Court of Justice, was successful, as the French language version of its judgment confirms, but perhaps the Luxembourg court was not able to make sense of the Constitutional Court’s concept.

Lack of proportionality as an evident overstepping of competence?

I return to the verdict of the Federal Constitutional Court. It says that the CJEU’s view obviously fails to recognize the significance and scope of the principle of proportionality, which must also be observed in the distribution of competences (Article 5(1), second sentence, and (4) of the Treaty on European Union, TEU), and is no longer justifiable from a procedural point of view, because the actual effects of the PSPP are excluded (para. 119). The approach of the Court of Justice to disregard the actual effects of the PSPP, even in the context of the proportionality test and not to carry out an evaluative overall assessment, failed to meet the requirements for a comprehensible review of compliance with the monetary policy mandate of the ESCB and ECB. Thus, the principle of proportionality could no longer fulfil its corrective function to protect the Member States’ competences, which it was entitled to do under Article 5 (1), second sentence, and (4) TEU. This interpretation left the principle of conferral under Article 5 (1), first sentence, and (2) TEU “essentially empty” (para. 123).

The entire subsequent reasoning is based on the premise that the ECB’s competence in monetary policy must be distinguished from the economic policy competences of the Member States by means of a proportionality test (see explicitly para. 127). This premise is not substantiated by a single sentence. Its validity, however, is anything but evident; the Court of Justice of the European Union obviously does not share it, even if statements by the Constitutional Court (para. 128) sound different.

Under Article 5(1) TEU, the principle of conferral of powers on the Union applies to the delimitation of competences. The principles of subsidiarity and proportionality govern the use of EU competences. This is reasonable and plausible, because the proportionality test in the narrower sense, i.e. the examination of whether the use of appropriate and necessary means to achieve the objective has consequences or secondary consequences, which are disproportionate to the intended effect, almost always requires a difficult weighing of numerous points of view. Their uncertain and to a certain extent necessarily subjective result is inappropriate to limit the responsibility or competence for the measure as such.

The proportionality test for monetary policy measures

One may consider the proportionality test applied by the Court of Justice of the Union in its judgment to be insufficient. Such things happen. Even the judges of the Court of Justice are only human. But a judgment that is wrong or perhaps only inadequately reasoned must also be accepted if the legal system does not (any longer) provide for an appeal against it, and this applies to decisions of a local court as well as to those of Federal Court of Justice, the Federal Constitutional Court and the European Court of Justice.

Perhaps the Grand Chamber of the Court of Justice had also been influenced by the fact that, on politically and economically sensitive terrain, no Member State or other institution of the European Union has asked the CJEU to examine whether the ECB has exceeded its mandate. Rather, the Federal Constitutional Court has given itself the competence, in response to the constitutional complaint of even a single citizen, to put the ECB’s monetary policy and the reactions of German Parliament and Government to it to the test of judicial proceedings. It is very worthwhile in this context to read once again the dissenting opinion which Gertrude Lübbe-Wolff and Michael Gerhardt attached to the decision of the Constitutional Court of 14 January 2014 in the OMT proceedings.

Whatever the CJEU’s assessment of the proportionality test may be, its subject matter was in any event the question of whether the impact on the ECB’s inflation target by means of the PSPP was disproportionate to the undesirable economic consequences of using this instrument. This is an examination of the kind that must always be carried out in principle, as the CJEU and the Federal Constitutional Court unanimously assume (paras 146 et seq.). In this case, it is not quite easy to carry it out. It is also possible, under certain circumstances, to argue quite a lot about the questions whether economic consequences are to be regarded as desirable or not or less desirable and are therefore of greater or lesser importance in the proportionality test. In other words, it is not always easy to weigh desired positive effects against undesired negative consequences.

The new proportionality test: monetary policy objective versus ‘’economic policy consequences’’

The reason, why the Federal Constitutional Court cannot understand the considerations of the Court of Justice and declares them to be “methodologically no longer justifiable” (para. 141), is that the Constitutional Court misses a different proportionality test. It is supposed – which is postulated but not substantiated, as mentioned above – to serve the demarcation of competences between monetary policy and economic policy, and for this purpose the “monetary policy objective” is to be weighed against the “economic policy consequences” or the “economic and fiscal policy effects” (see, for example, paras 133 f., 138, 146, 163, 165, 167 f., 173, 176). This is not a weighing of consequences of the kind familiar to lawyers, and it is not easy to understand what is actually meant by it.

In any case, the equally simple and plausible statement by the Court of Justice, that measures motivated by monetary policy inevitably produce effects that economic policy could also intend, is rejected as completely unsuitable, and in fact it is of course not suitable for the purpose of defining competence. This explains formulations such as that the Court’s judgment allows the ESCB to conduct economic policy “as long as the ECB merely states, that it makes use of a means mentioned or invested in the Mandate of the ESCB and pursues the inflation target it has set itself” (para. 133), and, even more blatantly and almost unseemly, the Court also approves bond purchases in which the “substantiated disputed” (by whom and in what proceedings?) monetary policy objective is possibly only “pretended” because the programme is in substance pursuing economic and fiscal policy objectives (para. 137, similar to para. 142: “alleged intentions” of the ECB must not be accepted at face value).

It seems to be the case, that the Constitutional Court basically assigns the goal to monetary policy, but the means to economic policy. In other words, more or less all the economic effects of the PSPP are declared to be economic policy effects, with the exception of the influence on the inflation rate itself and “indirect effects” – which are merely the result of further intermediate steps and are not reliably foreseeable consequences of the challenged measure (para. 135, referring to preliminary reference; see also para. 173). Economic policy effects are by definition outside the ECB’s competence – because they are economic policy. They therefore represent negative consequences of monetary policy measures, if not in economic terms, then at least in legal terms (in terms of competence). Put simply, therefore, the monetary policy measure is – in terms of the law of competence – all the more disproportionate and thus an ultra vires act, the stronger its macroeconomic effects and their consequences for public debt, bank capitalization, property values and much more besides are, or more precisely: will likely be, because they can only be forecast if the measure is adopted. The Court of Justice is therefore charged with failing to discuss, to the detriment of the competence of the Member States, the fact that they may use the issue of low-interest government bonds in a targeted manner as a means of improving their refinancing conditions, that individual, unnamed but well-known Member States benefit more from the programme than others, that the economic situation of commercial banks is considerably improved by the programme and their creditworthiness is increased (para. 137), and in general not to take account of the “economic and social policy implications” (= economic and social effects or effects on the [framework conditions of] economic and social policy?) of the programme (para. 138).

The only thing that is on the safe side of undoubted competence of the ECB is a probably ineffective monetary policy measure.

No longer comprehensible?

The concerns regarding the PSPP and its proportionality may be heard by all and may be serious or even resounding, and they are shared by many. But they are to be examined by the Court of Justice of the European Union and by it alone and have nothing to do with the scope of the ECB’s competence. The thesis of the ECB’s exclusive competence to pursue a ‘proportionate’ monetary policy is a statement on the content of Union law which would have been worth at least to be submitted for a preliminary ruling from the Court of Justice of the European Union. At least this should have been done before the Federal Constitutional Court took the answers from Luxembourg to the questions asked as an incomprehensible antithesis to its own unfounded premises and, on this basis, established ultra vires acts of the Court of Justice of the Union and the ECB.

Prof. Dr. Peter Meier-Beck is a Presiding Judge at the Bundesgerichtshof, the German Federal Court of Justice, the highest court for civil and criminal proceedings. He chairs the Cartel Senate and the XIII. Civil Senate. From 2010 to 2019 he chaired the X. Civil Senate. Meier-Beck has been a member of the Bundesgerichtshof since 2000; and is one of its most senior members. He is also an honorary professor at Heinrich Heine University Düsseldorf.