May 28
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15th May 2020
Banking & Finance Institutional law Justice & Litigation

Op-Ed: “Between Karlsruhe and Luxembourg, lies Frankfurt? The Bundesbank and the Bundesverfassungsgericht’s PSPP decision” by Nathan de Arriba-Sellier

May the Bundesbank simply curb its participation in European Union monetary policy? No, answered the Masters of the Treaties, who introduced clear rules of jurisdiction, should a National Central Bank (NCB) fail to fulfil its obligations under EU law. Infringement proceedings, jurisdiction of the Court of Justice, revocation of its president: these are some of the challenges the Bundesbank could face in the coming months, if it decides to follow the decision of the Bundesverfassungsgericht on 5 May 2020. On that date, Germany’s Federal Constitutional Court ruled that six decisions of the European Central Bank (ECB) related to its Public Sector Purchase Programme (PSPP) and the preliminary ruling of the Court of Justice in Weiss constituted ultra vires legal acts. Uncertainty unfolded, particularly after the ECB refuted that its actions fall under the Bundesverfassungsgericht’s jurisdiction. This Op-Ed explores the conflict of laws in monetary policy and suggests that, in case of a non-cooperative solution, the Bundesbank abides by the jurisdiction of the Court of Justice.

In its decision, the Bundesverfassungsgericht directed that the Bundesbank – an integral part of the European System of Central Bank (ESCB) – should: (i) cease its participation in the implementation of the Public Sector Purchase Programme – a programme for the purchase of public bonds – and (ii) coordinate with the ECB the divestment of its public bonds portfolio. The Bundesbank is dispensed from following these demands, however, if within three months the ECB issues a decision that in a comprehensible manner substantially demonstrates the proportionate character of the PSPP. The Bundesbank is expected to follow the Bundesverfassungsgericht, as the latter ruled that the ECB’s decisions and the Court of Justice’s judgment were in breach of the Kompetenz-kompetenz principle and, hence, the right of self-determination of the German people according to Article 20(2) of the Basic Law. While the Bundesverfassungsgericht recognises the primacy of EU law, it does not mean supremacy as is set out in Article 31 of the Basic Law or in Article VI, Clause 2 of the U.S. Constitution. According to Karlsruhe, the Member States remain the ‘Masters of the Treaties’ as long as the EU is not a federal state.

The decision led to speculation as to the Bundesbank’s future participation in EU monetary policy, as the Bundesbank would be torn between its loyalty to the German and EU legal orders. An omission to contribute to the implementation of monetary policy would be detrimental not only to the effectiveness and consistency of EU law, but also to the overall efficiency of monetary policy in the Eurozone. The Bundesbank is indeed a major contributor to the ESCB, as it was responsible for the purchase of a quarter of the eligible securities under the PSPP. While there are less risks for the implementation of the PSPP, which is in most part a concluded programme, risks are significant for the current Pandemic Emergency Purchase Programme (PEPP) and the future of EU monetary policy. The conditions set by the Bundesverfassungsgericht for the validity of a monetary policy decision are a fortiori more difficult to fulfil for the PEPP, which is more extensive than the PSPP. Yet, the Bundesbank’s president in a recent interview deemed ‘necessary’ the expansionary monetary policy response to the pandemic emergency in a recent interview, implying that he considers the PEPP to be proportionate.

However, the Bundesbank’s lack of participation in the conduct of monetary policy in the ESCB should not be hastily presumed. Indeed, the question here is not one of ‘loyalty’ to the EU legal order or the ECB, but one of jurisdiction in a conflict of laws. Despite the Bundesverfassungsgericht’s decision, to which the Bundesbank is bound, any future decision of the Bundesbank will not only have to take the Bundesverfassungsgericht’s decision into account, but also the Treaties, the binding character of which has been reaffirmed by Karlsruhe. A cooperative solution would be for the Bundesbank to fulfil its obligations of information vis-à-vis the Bundestag and the Federal Government, pursuant to Article 13 of the Bundesbank Act. The Bundesbank could do so by communicating evidence that would prove the proportionate character and effects of the PSPP. However, this solution does not entirely satisfy the demand of the Bundesverfassungsgericht that a new decision is taken by the ECB for which there may be no legal basis under EU law. In addition, the uncertainty is not going to be so easily resolved by a simple proportionality assessment. The PEPP is likely to be affected and if a related complaint was brought before the Bundesverfassungsgericht, it would probably also be considered ultra vires.

The Bundesverfassungsgericht takes in its decision an ambiguous stance vis-à-vis the Bundesbank. On admissibility, the Bundesverfassungsgericht ruled the claims challenging the Bundesbank’s participation in the PSPP inadmissible, given that the Bundesbank is an administrative authority and not a constitutional organ. Therefore, the Bundesverfassungsgericht could not legally require the Bundesbank to take action against the implementation of the PSPP. Although not a constitutional organ, the Bundesbank, as a German institution of public law, is bound by constitutional law pursuant to Article 20(3) of the Basic Law, Germany’s Constitution, and thus concerned by the ultra vires determination of the Bundesverfassungsgericht, which rendered the ECB’s decisions and the Court of Justice’s judgment void of any binding force in Germany. Yet, the Bundesverfassungsgericht took the odd step of addressing the final parts of its reasoning to the Bundesbank, calling on it not to participate in the development or the implementation, execution or operationalisation of the PSPP, and to coordinate with the ECB for the divestment of its portfolio, unless there is evidence of the PSPP’s proportionality. This call is, nonetheless, absent from the operative part of the Bundesverfassungsgericht’s decision, which is exclusively addressed to the Federal Government and the Bundestag, as constitutional organs of the Federal Republic of Germany. Therefore, it is likely that the constitutional organs, rather than the Bundesbank, will be in charge of evaluating the proportionate character of the PSPP. Not only did the Bundesverfassungsgericht refrain from directly ordering the Bundesbank to withdraw its participation in the PSPP but it also did not rule on the Bundesbank’s participation in any other, present or future, similar monetary policy programmes.

In this context, it is necessary to closely consider EU law, particularly the Treaties. Monetary policy is an exclusive competence of the EU, which is – according to Article 127(2) TFEU read in conjunction with Article 132(1) and 282 TFEU – defined by the ECB. Although the Bundesverfassungsgericht decided that the ECB’s decisions and the Court of Justice’s judgment were ultra vires, this ruling was mostly based on an interpretation of the Treaties, which remain – in the view of the Karlsruhe Court – good law, equally binding on EU and German institutions. The Bundesverfassungsgericht considered invalid only the Court of Justice’s interpretation of the Treaties regarding the proportionality of the effects of the ECB’s decisions.  In case of a non-cooperative solution, and in the absence of jurisdiction of the Bundesverfassungsgericht on the Bundesbank, the obligations of the Bundesbank under EU law will be of fundamental importance to avoid a de facto withdrawal from the ESCB.

In this respect, the Treaties establish an authentic federal framework regarding the relationship between National Central Banks (NCBs) and the EU. Pursuant to Article 12.1 of Protocol No. 4 to the Treaties on the Statute of the ESCB and of the ECB, NCBs act upon the instructions of the ECB. Article 14.3 of Protocol No. 4 further provides that NCBs are under an obligation to respect the ECB’s recommendations and guidelines. NCBs are, thus, placed in a directly hierarchical relationship vis-à-vis the ECB, as agents of the EU’s monetary policy. The NCBs’ subordination to the ECB is equally clear from Article 14.4 of the Statute, according to which the NCBs’ performance of functions other than those provided by the Treaties is possible only where the ECB’s Governing Council does not object by a majority of two thirds. Furthermore, the Treaties provide for a number of requirements that NCBs ought to respect – such as on monetary policy, holding of foreign reserves, accountancy and auditing. Notably, pursuant to the principle of independence set out in Article 130 TFEU, Member States are prohibited from influencing the members of the decision-making bodies of the ECB or NCBs. Conversely, the ECB, NCBs and the members of their decision-making bodies are precluded from taking instructions from national governments. While the European Commission may launch infringement proceedings against Member States where their agents fail to fulfil their obligations under EU law, the ECB has a similar prerogative. Pursuant to Article 271 TFEU, the Governing Council of the ECB is entitled to bring infringement proceedings directly against a NCB before the Court of Justice. Moreover, the ‘Masters of the Treaties’ introduced a clear rule of jurisdiction in case the participation of NCBs to the ESCB would be called into question. Article 271 TFEU entrusts the Court of Justice with the jurisdiction over NCBs in disputes concerning the fulfilment of their obligations under the Treaties. Finally, Article 14.2 of Protocol No. 4 provides that a decision to relieve a governor from his office may be referred by the ECB to the ECJ on grounds of infringement of the Treaties or ‘of any rule of law relating to their application’. As such, NCBs are comprehensively governed by EU law. The Masters of the Treaties have granted to the ESCB a federal character, as they instituted a comprehensively hierarchical relationship between national administrations and an EU institution that is unique in EU law.

The Bundesbank is, thus, bound to respect EU law, even where it contradicts national law. The fact that the ECB’s decisions on the PSPP have been ruled ultra vires and without binding force in Germany does not prevent the Bundesbank falling, as far as monetary policy is concerned, under the jurisdiction of the Court of Justice, rather than that of the Bundesverfassungsgericht. The Court of Justice decided in Weiss that the PSPP was valid under EU law and, hence, it is binding on the Bundesbank. The fact that some acts have been ruled ultra vires by the Bundesverfassungsgericht does not change the fact that the Treaties are good law and clear as to the subordination of the Bundesbank to the ECB.  Furthermore, despite the orders of the Bundesverfassungsgericht being addressed to Germany’s Federal Government and the Bundestag, these institutions cannot influence the ECB or Bundesbank governors. Similarly, the ECB and the Bundesbank cannot take instructions from the German Federal Government. Besides, it is notable that such instructions would also be a violation of German law, and more precisely, of Article 12 of the Bundesbank Act, and Article 88 of the Basic Law. Moreover, Article 23(1) of the Basic Law requires the participation of German institutions to the EU. Thus, the Bundesbank would also be violating Article 23(1) of the Basic Law by not participating in the ESCB. If the Bundesbank were to, nonetheless, fail to fulfil its obligations under the Treaties, it would fall under the Court of Justice’s jurisdiction. The ECB could bring infringement proceedings against the Bundesbank before the Court of Justice, without waiting for the Commission’s decision. And if the president of the Bundesbank were to ultimately be relieved from his office, such a decision would also fall under the ECJ’s jurisdiction.

In these conditions, and irrespective of the ECB’s response to the ultimatum of the Bundesverfassungsgericht, the Bundesbank is bound to respect EU law, it is subordinate to the ECB and it falls under the jurisdiction of the Court of Justice. Reinterpreting the Treaties in light of the Kompetenz-kompetenz principle and the democracy principle is one (bold) thing to do, ignoring their clear, precise, and unconditional provisions, to which its ‘Masters’ consented, is another, especially as it would amount to a breach of the very constitution the Bundesverfassungsgericht ought to defend. Should the Bundesbank choose nevertheless to follow the Bundesverfassungsgericht’s instructions, it would be in contradiction with its obligations under the Treaties and its failure to fulfil its obligations would be adjudicated by the ECJ.

Nathan de Arriba-Sellier is a PhD Researcher at Erasmus University Rotterdam and Leiden University

 

(This article was amended on 28 May 2020 to change ‘Article 140 TFEU’ to ‘Article 14.4 of the Statute’)

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