In EU Law Live, Ana Bobić and Mark Dawson say the decision may spur reconsideration of the monetary union's basic rules.
The 5 May decision of the of the German Federal Constitutional Court's Second Senate seems to have thrown a grenade into the academic community of EU law. This explains the ferocity of some of the reactions, and the instinctive reflex to seek to defend the integrity of the EU legal order. The surrounding economic and public health context adds to the shock: the feeling that EU law is being questioned at a time when it is at its most vulnerable. The truth, however, is that any student reading the German Court’s jurisprudence on quantitative easing (a student who was a good positivist and sought to guide their expectations about future cases through reading the reasoning of previous ones) would not be surprised by this judgment in the least. The Court does little more than follow through on applying criteria that it has articulated as binding on the European Central Bank (and Court of Justice when reviewing ECB acts) for several years.
The academic reaction in this sense tells us something about the changing nature of EU law as a discipline: we now expect our Courts, for better or for worse, to be political actors, sensitive to their institutional position, and to the political consequences of their rulings. This feeling underpins one common reaction: that the German Court is ‘dogmatic’. What is normally seen in EU law terms as desirable – consistency in applying rules and the development of jurisprudence based on long-developed constitutional and democratic principles – is this week a moral failing. The irony is that this accusation is most often made by those most committed to EU law’s own dogma, namely the unconditional primacy of EU obligations.
Against this backdrop, this contribution will briefly seek to adopt a different perspective – if the German Court has developed a kind of ‘dogma’ in its jurisprudence on QE, what is useful about it? As we will argue, its main use is that it challenges and provides an impetus to reform dogma underpinning the law of EMU: one that provides EMU’s most powerful actor with almost unfettered discretion. This narrative has played an important role in producing an accountability structure for EMU that has actively undermined the liberatory potential of EU law, namely the use of EU law to give individuals meaningful tools to challenge the decisions of the powerful. If the German Court’s dogma is of use, it is because it may provide the spur to look again at EMU’s basic rules. In addition, we will draw some conclusions concerning the accountability of the ECB, and the status of the principle of primacy of EU law.
What is wrong with the EMU’s rules? As we have argued before, a central problem concerns the delineation of the ECB’s mandate, which forces both the Court of Justice of the European Union (CJEU) and the German Court to see fiscal and monetary policy as segmented policy fields. For the CJEU, this forced it early on to adopt a distinction between the ‘direct’ and ‘indirect’ effects of monetary policy measures that does not hold-up to substantive scrutiny. In the PSPP, like other QE programmes, price stability is achieved only as a consequence of general liquidity in financial markets, which bond-buying seeks to induce. In this sense, the ‘effects’ of QE manifest themselves in both prices and general economic conditions with neither effect being more direct than the other. Seeing this error, the Second Senate focuses much of its analysis on the failure of the CJEU to weigh the fiscal impacts of QE either when delineating the ECB’s mandate or assessing the proportionality of PSPP. It is ultimately precisely the failure of either the Bank or the Court to conduct this balancing which makes the PSPP ultra vires.
On this point, the German Court is surely correct. Ironically, while the Court is often critiqued as a key actor within ‘German neo-liberal hegemony’, it is here precisely mirroring a common complaint against the ECB’s activity raised by the progressive left. In the early years of the Euro crisis (and today), numerous academic proposals were ventured as to how to execute QE. Given that its general goal was to tackle deflation through liquidity, this could be achieved through numerous means – from providing liquidity directly to citizens, to investing in green infrastructure, or other social projects. In the end, the main beneficiaries of QE programmes have been investors buying government securities on primary markets. More broadly, nowhere in the ECB’s submissions before the CJEU was there evidence of serious consideration of the distributive effects of ECB programmes, that is, who is advantaged by QE and who is weakened in the societies affected. In short, the weighing of interests the German Court demands is precisely what any progressive citizen should demand of the Bank.
The difficulty is that this ‘weighing’ is not just a question of institutional procedures but relates precisely to the delineation of monetary and economic policy. The judgment in effect places the ECB in a bind: it is asked to weigh fiscal and monetary policy as equally compelling public policy objectives. Yet its legal framework tells it precisely not to do this, namely to treat fiscal and monetary policy not on equal but weighed scales, with monetary objectives taking priority. The core difficulty the Second Senate points to thus cannot be interpreted away by proportionality analysis. It goes to the mandate of the Bank itself. An honest appraisal of the nature of the Bank’s policy challenges suggests an alternative dual mandate: one where the linkages between monetary and fiscal policy are recognised. While such a mandate is contrary to the German Court’s current view on the structural division of competences and the principle of conferral, it confirms that the back and forth between the ECB, the CJEU and the German Court may have reached the limits of its usefulness. Importantly, as will be explained below, the German Court – by not engaging in an identity review – did not prevent the political actors to in fact set some of these reforms into motion
Such a change in the Bank’s mandate does not seem likely in the near future. Does this then make the Second Senate’s proportionality analysis redundant? In fact, it may have a second important benefit. This relates to another frequent criticism running through the Second Senate’s analysis, namely the way in which proportionality analysis is conducted between different measures and different areas of EU law. To go back to our positivist student of EU law, they would also surely re-enforce one of the Second Senate’s points: that there is a long-standing discrepancy between how the CJEU treats proportionality analysis in relation to national v EU measures. The Second Senate’s concerns though goes beyond this: there are important discrepancies as regards how proportionality is conducted in different areas of EU law.
Even strong defenders of the CJEU’s approach have been largely unimpressed with the proportionality analysis conducted in the Court’s QE jurisprudence. It has consistently provided the ECB with a significant margin of discretion with little scrutiny of the underlying evidentiary basis of the ECB’s arguments regarding the suitability and necessity of QE programmes, limiting its analysis to merely manifest errors of assessment. A more exacting standard is normally used, even when reviewing the discretionary acts of other EU institutions delegated with powers to execute complex tasks. This discretion is justified by the CJEU on the basis of the ECB’s operational independence and the complexity of its activities.
The key point here is that the ECB’s independence (and the political economy underlying it) suggests freedom from political not legal interference. It is precisely the Bank’s political independence that limits the meaningfulness of political mechanisms to challenge and seek justification of ECB activity, meaning that judicial review is one of the few mechanisms available to render the ECB accountable to citizens. The Second Senate thus draws the right conclusion regarding the applicable standard of review (but, by focusing on the competence question, often does so for the wrong reasons). The ECB’s political independence suggests greater rather than lower legal scrutiny of the proportionality of its acts. At the very least, it suggests that the proportionality analysis applied to ECB activity should be consistent with that used across other fields of EU law. Ironically, for an institution seen as ordo-liberal, the judgment could also act as an impetus to rethink how we see central bank independence from a legal point of view.
This relates to the wider use of judicial review in fostering political accountability. Judicial review is an important device to enable a number of the public goods which accountability seeks to render in modern societies. By engaging in meaningful proportionality review, courts play an important role in ensuring that public policy carries a rational basis, take different viewpoints into account, consider alternative measures, and are understandable to the public. Delivering these ‘goods’ seems of some importance to securing the legitimacy of future QE programmes, of which the latest PEPP programme is the foremost example. In this sense, it is unclear what is lost and clear and what is won by encouraging the CJEU to demand more of the ECB in proportionality terms. At worst, the outcome of this case seems likely to be a bland document, produced by the Bank’s legal service to assuage the Second Senate’s concerns. At best, the judgment could act as a lever to pluralise the policy process of an institution that has (perhaps unfairly) been accused of monolithic thinking in the past.
Outside the EMU legal framework specifically, the EU academic community saw great trouble in the German Court’s finding of an ultra vires act for two main reasons: the status of primacy of EU law, and the Polish abuse of the decision.
First to primacy of EU law, this is often misunderstood by legal academia as absolute supremacy. The difference cannot be more important here – EU law does not stand in hierarchical superiority to national law, but operates alongside it. In fact, even the Court of Justice rarely uses the term supremacy of EU law, and a supremacy clause inserted into the failed 2004 Constitutional Treaty did not make it to the Lisbon Treaty. The Court of Justice has, for its part, consistently held that it has the final say for all matters of EU law, and it has for this purpose created its own self-referential framework of analysis. However, within a more nuanced appreciation of the realities of the EU’s specific constitutional setup, the principle of primacy is but one part of the story. Drawing upon Germany’s model of ultra vires review, courts with constitutional jurisdiction in, for example the Czech Republic and Denmark, have both found judgments of the Court of Justice outside its mandate. It is therefore beyond obvious that the final authority of the Court of Justice remains contested by constitutional and supreme courts of Member States, forming a permanent manifestation of a pluralist structure of EU law.
In consequence, the analysis of the judgment would require a less sensationalist approach that takes a comprehensive look at the earlier jurisprudence of the German Court. Ultra vires review was introduced in the German constitutional jurisprudence back in 1993 on the occasion of ratification of the Maastricht Treaty. It was further qualified by conditions set out in the Honeywell decision in 2010, demanding that an act of an EU institution must be ‘highly significant in the structure of competences between the Member States and the Union’.
As was mentioned above, the EMU case law of the German Court and the Court of Justice, and in specific relation to the ECB, left little to no wiggle room left in assessing the PSPP. The question is thus whether the German Court should have engaged in legal acrobatics and incoherent reasoning, in order to reconcile the conflicting demands of the Treaties, the EMU legal framework, Gauweiler and Weiss, and the Grundgesetz. There is nothing scandalous about a national court demanding more coherence and accountability of the ECB, and the EU level more generally. It is sufficient in this regard to remember how celebrated the German Court was after increasing the standard of EU fundamental rights protection – in defiance of the principle of primacy (!) – through Solange I and II. The Court of Justice itself considers the preliminary reference procedure and judicial cooperation to be of central importance in EU law. Sometime in the future we may well yet recognise this decision, from a constitutionalist perspective, as forming part of the jurisprudence of national courts of permanent contestation of the primacy of EU law, that the academic community has often praised as an impetus for the incremental development of EU law.
Second, to abuse of the decision by some Member States. One of the main reactions to the Weiss decision is that it opened the door to authoritarian regimes in the EU to reject the primacy of EU law by invoking constitutional identity. Indeed the Polish Government did invoke the decision to uphold the absolute protection of their sovereignty and constitutional identity. Now that one Member State court has rejected a decision of the Court of Justice, so the argument goes, so others will too. However, we find this point particularly flawed.
Here, the misinterpretation of what the German Court said could not be more obvious: the decision clearly and unequivocally rejects identity review, focusing on ultra vires review only. The difference is crucial: identity review assumes that certain content simply cannot be touched by EU law; conversely, ultra vires is content-neutral, and looks at the proper method of conferring competences upon the EU. As the German Court stated in Gauweiler II: ‘Unlike the ultra vires review, the identity review does not examine whether the transferred competences were exceeded or not.’ Thus, the German Court left open the possibility of rethinking the EMU legal framework, without rejecting even the theoretical possibility of such a development outright. Moreover, this is not the first, and not even the second instance of a national court determining an EU act ultra vires (as mentioned above, the courts of the Czech Republic and Denmark having already done so).
The Polish Government has used any and all possible misinterpretations of national sovereignty, democracy, judicial independence (to name a few), and are further testing the limits of a lawless state. Does that mean all discourse on the EU’s constitutional framework by EU or Member States’ institutions should be put on hold in the fear that the unfettered Polish or Hungarian governments might abuse it? It has been suggested by Daniel Kelemen that developments in Poland should not be analysed in the context of a law-abiding state. Why then give importance to yet another misreading of the EU’s foundations?
It is precisely here that it is crucial to underline the difference between a legitimate contestation of the way the Treaties are interpreted, on the one hand; and a breach or abuse thereof, on the other. This relates to a point made by Damian Chalmers – the hierarchy between EU and national norms partly depends on their ‘democratic authority’, that is, the democratic quality of the norms which national or EU law may seek to protect. Should we reduce the standards of the EU constitutional framework simply because Polish politicians are misusing its tenets? This is akin to blaming the German Court for the Commission’s difficulties in policing the behaviour of Member States, and in particular in relation to its foundational principles such as the rule of law and the mechanism enshrined in Article 7 TEU. The lack of a functioning political framework for remedying breaches of the rule of law on the EU level seems little reason for other participants in the EU constitutional space to lay down their constitutional functions. Remedying the breach of the rule of law by some Member States should not be done by lowering the collective standards of EU constitutional law (understood broadly), that have been introduced and developed for decades prior, and are precisely what makes the EU such a successful project. A more hopeful reading of this judgment would be to make good on its positive aspects: the impetus the German Court’s decision may establish to reform EMU, with participation at all levels of EU governance.
This op-ed originally appeared on 12 May 2020 on EU Law Live.