The 5 May Ruling of Germany’s Federal Constitutional Court Regarding the Unconstitutionality of the ECB’s Purchase of Government Securities

The Ruling of the Second Senate

(7 yes votes, 1 no)

1. The securities purchase programme of the European Central Bank to support the European Monetary System with an emphasis on the purchase of government bonds (Stand 2,1 Bio. Euro), known as the Public Sector Purchase Programme (PSPP), is judged in part unconstitutional.
2. The violation of the Basic Law is seen in the fact that the federal government and the Bundestag had not, it is claimed, examined the ECB resolutions on government securities purchases. In this the Court partly found in favour of the plaintiffs (see below). The key sentence in the ruling of the Second Senate reads: ‘Accordingly, the Federal Government and the German Bundestag violated the rights […] of the plaintiff by failing to either demonstrate or examine whether the resolutions issued by the European Central Bank (ECB) for the introduction and implementation of the PSSP are proportionate.’
3. The ruling contradicts the 11 December 2018 judgement of the European Court of Justice (ECJ), which validated the purchase programmes.
4. The president of the Federal Constitutional Court (BVerfG), Andreas Voßkuhle, points to the novelty of this ruling within the EU: A national constitutional court determines that community actions and decisions – in this case by the ECB – are not covered by Europe’s division of powers. Therefore they could not come into effect in Germany. The message is clear: In the next three months this has to change or the German Bundesbank will no longer participate in the ECB’s purchase activities (the German Bundesbank’s share in the whole programme is 26%).
5. What is therefore important is that the Second Senate has established no fundamental prohibition on the purchase of government securities on the secondary markets on the part of the ECB. Rather, the unconstitutionality is said to lie in passive standing and watching. What is thus criticised is the inadequate informing regarding monetary-policy measures that involve German financial policy in the area of state debt. The ruling reads: ‘By virtue of their responsibility for integration, the Federal Government and the German Bundestag are required to oppose the way the PSPP has been handled.’ Although the common system of European law is certainly recognised, law is claimed  to be the firm common foundation’ for crisis management.
6. It should be noted that the Pandemic Emergency Purchase Programme decided by the ECB in March – with 750 billion euros up to the end of the year – has not been taken into account (see below).
7. The European Central Bank has announced that it will, regardless of the BVerfG ruling, continue with its expansive monetary policy. Certainly it will comply with the requirements for a complete explanation of its massive purchases of government securities, deploying an army of experts to do so. Here it would be important to include the BVerfG’s Second Senate in this explanatory procedure. This is indicated in the key statement of its Chairman Voßkuhle: The ECB has overstepped its competence, for the purchase programme which has ‘considerable effects on almost all citizens, who are affected as stockholders, renters, real-estate owners, savers, and insurance-policy holders’. This recalls the dissemination of populist prejudices that regard ‘savers as victims of the ECB’. However, the interest rates e.g. on German government bonds have decreased since the expansion of financial-market-driven capitalism in the mid-1980s due to over-accumulation and over-saving. The ECB, driven as it is by the financial markets, has long since lost its power to successfully enforce interest rates on savings deposits.

Read the full text of the ruling here (English, German).

Conclusion

This ruling weakens the capacity to act on the part of the ECB, which also has to react quickly against the speculation and shock waves. A stronger participation of the national democratic parliamentary decision-making organs can easily be derived from the spirit of this judgement. Furthermore, a criticism of current fiscal policy can be ruling in the judgement. Up to now the foregoing of an active financial policy – to favour instead of the debt brake and zero-deficit requirements – have massively increased the pressure on the ECB to adopt a more active monetary policy. Here we see that the effectiveness of the extremely expansive monetary policy has to be reinforced by a sustainable financial policy. The urgent need for assistance and economic stimulus programmes to deal with the consequences of the corona economic crisis is increasing the pressure for state action affecting the whole economy.

What is important now is to harmonise the monetary-policy goals and the ECB’s instruments derived from them with the requirements of Germany’s constitutional law.

On the background of the ruling:
The origin: ‘Whatever it takes […]’

On 4 March 2015, within the Expanded Asset Purchase Programme (EAPP), the Governing Council of the ECB established ‘the most substantial sub-programme for the purchase of the government securities of Member States, the Public Sector Purchase Programme (PSPP)’ (amended version 11 January 2017).

The monetary-policy offensive goes back to the strategy announced by Mario Draghi on 26 July 2012 in London: ‘Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.’

On 6 February 2012 the modalities of the future Outright Monetary Transactions (OMT) were established by the ECB Council. The EAPP, established on 22 June 2015 needs to be distinguished from the OMT. The focus of the EAPP is above all the purchase of government securities of Member States by the ECB, admittedly only on the secondary markets, for the purpose of averting deflationary risks and lowering the real interest rates.

Objective of the government securities purchase programme

The purchase of government securities owned by banks and traded on the secondary markets is justified by the desired effects: lowering the real interest rates and increasing the incentive to lend to investors. At its centre is the combating of deflation and with it the raising of the rate of inflation towards the goal of ‘below, below, but near 2%’.

Complaint of unconstitutionality before the Federal Constitutional Court

Among the plaintiffs are radical opponents of the Euro system such as Bernd Lucke, Peter Gauweiler, and Hans-Olaf Henkel. In their view, citing Article 123 of the Treaty on the Functioning of the European Union (TFEU), the previous purchases of government securities were unconstitutional, for this, they say, involves financing of government debts by the ECB (monetary-policy financing of public sectors).

Sequence

1. On 18 July 2017, after a hearing, the BVerfG determined:

2. In its ruling of 11 December 2018 the ECJ finds against the BVerfG that the purchase of government securities by the ECB is constitutional in the framework of Article 123 of the TFEU. This ruling emphasises that the objectives set by the ECB have been fully realised. The successful stabilisation of the Eurosystem is especially underscored. According to the ruling the ECB has fulfilled its monetary-policy mandate.
3. On Tuesday, 5 May 2020, the BVerfG declared the ruling discussed here.

Note on the ECB’s previous behaviour

Up to now the ECB has not let itself be stopped by the constitutional dispute and has expanded its purchase activities.

1. In the ECB’s balance sheet the total holdings of purchased government securities (PPBS) amounted in March 2020 to just under 2.136 trillion euros. By contrast, the purchase of asset-backed securities and corporate bonds within the entire purchase programme (EAPP) are is at a distinctly lower level. Overall, since November 2019 the ECB spent 20 billion euros per month on purchases.
2. The Pandemic Emergency Purchase Programme (PEPP) approved in mid-March added 750 billion more euros for the purchase of state titles. The ECB Council ‘will terminate net asset purchases under PEPP once it judges that the coronavirus Covid-19 crisis phase is over, but in any case not before the end of the year’. In addition this will also involve large purchases of government securities. Incidentally, in this programme Greek government securities once again become purchasable decentrally by the ECB. The distribution among the individual countries, however, occurs according to the capital key of each national central bank.