EU — German court ruling may weaken European recovery and solidarity

Germany’s Constitutional Court has effectively given the European Central Bank (ECB) three months to provide evidence that the economic consequences of its Public Sector Purchase Programme (PSPP) are balanced against monetary policy objectives, lest the Bundesbank must quit the scheme. The court’s ruling on ECB’s operations potentially undermines the cohesion of the bloc in three important ways.

  • Limiting future monetary policy flexibility. The ECB’s €750 billion Pandemic Emergency Purchase Programme (PEPP), announced in March, was not intended to be bound by limitations that the court expressly cited as safeguards against illegal monetary financing. Imposing these constraints would diminish the ECB’s ability to keep sovereign borrowing costs low (Chart).
  • Undermining ECB independence. The verdict implies that a national court has the power to set standards for monetary policy decision making, thereby assailing the EU treaty which states that the ECB shall not take instructions ‘from any government of a member state or from any other body’.
  • Undermining the status of EU law. The ruling deviates from a 2018 verdict by the Court of Justice of the European Union (CJEU) which found the PSPP to be legal. Following the Constitutional Court’s judgment, the CJEU reiterated its judicial authority by stating: “In order to ensure that EU law is applied uniformly, the Court of Justice alone…has jurisdiction to rule that an act of an EU institution is contrary to EU law”. The precedent may encourage others to challenge the CJEU’s legal authority.

The ruling creates a problem, given that the German government and Bundesbank are bound by the Constitutional Court, and the ECB is bound by the CJEU and EU law, which supersedes national law. The Bundesbank’s withdrawal from bond purchases, if it ultimately occurred, would substantially diminish the ECB’s ability to stimulate the economy.

Fig 4 EU Government Debt Interest Payments