Via Financial Times

Germany’s constitutional court sent shockwaves through Europe last week by ruling that the country’s government and the EU’s top judges failed to properly scrutinise the European Central Bank’s bond-buying programme.

The judgment threatens to turn the European Commission against Germany, the EU’s biggest member state. It raises doubts over the primacy of the European Court of Justice over national law. It also risks driving a wedge between the ECB and its biggest shareholder, the Bundesbank.

Germany’s highest court dismissed an earlier ruling in the ECB’s favour by the ECJ as “incomprehensible” and “meaningless”. That bombshell decision opened the door to potential legal challenges against the EU from other countries, such as Poland and Hungary, whose authoritarian governments are already at odds with Brussels.

The court in Karlsruhe ordered the German government and parliament to ensure the ECB provided a “proportionality assessment” of its bond-buying to check that its “economic and fiscal policy effects” did not outweigh other policy objectives.

Finally, it told the Bundesbank, Germany’s central bank, to stop buying bonds and to draw up plans to sell the more than €500bn it has bought if the ECB failed to comply within three months.

What will the German government do? 

German chancellor Angela Merkel told a meeting of her Christian Democratic Union on Monday that the ruling was “hugely significant”, but that the subsequent stand-off was “solvable”. She said the constitutional court had created a “bridge” by asking for an explanation from the ECB, while adding it was “crucial” to preserve the central bank’s independence. “All sides must deal with this issue with intelligence,” she said, according to meeting attendees.

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However, experts in the government and Bundestag fear that if the two institutions write to the ECB demanding a proportionality assessment, the central bank may simply ignore them, arguing that it is not beholden to Berlin. 

In the meantime, the European Commission might initiate an “infringement” procedure against Germany. As one Bundestag official said: “We have to avoid that scenario at all costs — there must be no escalation.”

At the same time, the German authorities must prove to the constitutional court that they are at least trying to comply with last week’s ruling.

An added complication is that Berlin cannot ask the Bundesbank to provide the assessment, because it is formally independent from both the Bundestag and government. And even if it were to provide this itself, how can the Bundesbank endorse a sovereign bond-buying programme that it voted against when it was launched in 2015? 

One potential solution, the Bundestag official said, could be for the Bundesbank “to take it upon itself” to provide the proportionality assessment to the constitutional court, by acting on its own initiative and not on the urging of the government or parliament.

“It is a very broad ruling that gives clear instructions and we will fulfil these instructions,” Dennis Kolberg, spokesman for Germany’s finance ministry, said on Monday.

Will the ECB find a way out of this mess?

When the ECB was created 22 years ago, the German government insisted that the independence of the new institution must be firmly enshrined in law. So it is ironic that it is Germany’s highest court that is now putting this independence to its severest test.

Analysts worry the ruling may constrain the ECB’s ability to provide more monetary stimulus just as Europe confronts its deepest postwar recession. 

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If the Bundesbank does stop buying German bonds, the ECB would be able to take legal action against it in the ECJ for not carrying out a decision of its governing council. To avoid such a messy outcome, the ECB is expected to do whatever it can via diplomatic back channels to resolve the issue. 

Christine Lagarde, left, has taken a defiant stance, while Angela Merkel believes the stand-off is ‘solvable’ © REUTERS

“For now, the ECB might mitigate the impact of this ruling by adding more detailed proportionality analysis to its policy announcements,” said Katharina Pistor, Professor of Comparative Law at Columbia Law School, in an article on Project Syndicate. 

However, most ECB governing council members are determined not to respond in any direct way to the court’s ruling, arguing this would impinge on the central bank’s independence and expose it to pressure from other national courts or governments. 

Christine Lagarde, ECB president, took a similarly defiant stance last week, saying the central bank remains “undeterred” in pursuing its mandate of price stability and stressing it is answerable only to the ECJ and the European Parliament.

Could the European Commission solve the problem?

Faced with what the commission sees as a profound threat to the EU’s legal cohesion, its German president Ursula von der Leyen has made it clear she is ready to take action against Berlin by starting a legal push that could end up in the ECJ. 

Her willingness to consider infringement action against Germany sent a tough message not only to the EU’s largest member state, but also to other countries which have been defying the union’s top court, above all Poland. “It is to take a stand against the German court, but also to take a stand with a demonstration effect to other courts,” said Daniel Kelemen, a professor at Rutgers University. 

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Yet infringement would amount to taking legal action against Ms Merkel’s government for something it had no hand in — namely a decision from an independent court. Indeed, Berlin opposed the action against the ECB’s bond-buying in Karlsruhe last year. 

Even if the ECJ rules in the commission’s favour in an eventual infringement hearing, it would not overturn the Karlsruhe court’s decision. Berlin has no power to issue instructions to its independent judges. 

So what is the point of infringement action? 

The basis of such a case would be what officials in Brussels see as a naked breach of EU law by the German court — its decision to cast aside an ECJ judgment and ride roughshod over the supremacy of the EU’s top court. 

EU officials argue that infringement proceedings should not be seen as some sort of criminal action against Germany, but instead as a multi-stage process that would involve intensive dialogue between the two sides before they even end up in court. 

This dialogue would aim to seek constructive ways of bringing “the situation back into full order”, one official said. 

Legal experts say the German constitutional court should in the first place have referred the problems it had with the ECJ judgment back to the EU court. That it did not do so suggests a breakdown in the legal dialogue between top national and EU-wide courts. 

Finally, if the matter is eventually referred to the ECJ, it would allow the latter to make a definitive declaration as to whether there was indeed a breach of EU law by the German court.