Germany’s Supreme Court and ECJ Go to War Over the Nature of Money – Trustnodes

Germany’s Supreme Court and ECJ Go to War Over the Nature of Money

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In the Name of the People. So begins a judgment by Germany’s highest court with its conclusion sending shockwaves throughout the continent for it affects two most fundamental matters: the nature of governance and the nature of money.

This five year long case laid judgment on May the 5th 2020 with seven of Germany’s top legal minds concurring, and one dissenting.

It concerns the public sector purchase programme (PSPP) conducted by the European Central Bank (ECB and here also referred to as ESCB) to buy government debt through commercial banks even at potentially a negative interest rate, meaning the bank has to pay back ECB less in capital, with more than €2 trillion purchased from EU governments through commercial banks so far.

“Under the PSPP [€2 trillion], the Eurosystem central banks purchase government bonds or other euro-denominated marketable debt securities issued by central governments of a Member State whose currency is the euro, and by ‘recognised agencies,’ international organisations or multilateral development banks located in the euro area.

Under certain circumstances, Eurosystem central banks may propose public non-financial corporations as issuers of marketable debt instruments to be purchased ; moreover, since April 2016, securities issued by regional or local governments may be purchased.

The complainant in proceedings challenges the omission on the part of the Federal Government, with regard to… the ECB violating the prohibition on central banks providing monetary financing and infringing the constitutional identity of the Federal Republic of Germany.”

The European Court of Justice (ECJ or here CJEU) was asked by the German Constitutional Court a number of questions including whether:

“In light of the improvement in refinancing conditions of Member States and its effect on commercial banks… not only [does this programme have] indirect economic consequences, but rather, its objectively ascertainable effects suggest that the programme in question pursues an economic policy objective with at least equal priority, in addition to its monetary policy objective?”

As context is given here the fact that “The President of the ECB explained at successive press conferences that it was the exceptionally low level of inflation rates, by comparison with the objective of maintaining price stability by returning annual inflation rates to levels closer to 2%, that justified establishing the PSPP and making regular adjustments to that programme. Indeed, prior to the adoption of Decisions 2015/774, 2015/2464, 2016/702 and 2017/100, the annual rate of inflation was, respectively -0.2%, 0.1%, 0.3% and 0.6%. It was only at his press conference on 7 September 2017 that the President of the ECB announced that the annual rate of inflation had reached 1.5%, thus approaching the target…

It follows from all those factors that the ESCB explained how persistently low levels of inflation and the exhaustion of the instruments normally used for the conduct of its monetary policy led it to consider that the adoption and implementation, with effect from 2015, of an asset purchase programme with the features of the PSPP was necessary, both in principle and in its various practical aspects.”

In its response the ECJ stated, and we quote at some length the indicative parts:

“In the present case, it is undisputed that, by virtue of its underlying principle and its procedures, the PSPP is capable of having an impact both on the balance sheets of commercial banks and on the financing of the Member States covered by that programme and that such effects might possibly be sought through economic policy measures…

The authors of the Treaties did not intend to make an absolute separation between economic and monetary policies.

In that connection, it should be recalled that a monetary policy measure cannot be treated as equivalent to an economic policy measure for the sole reason that it may have indirect effects that can also be sought in the context of economic policy…

The Court cannot concur with the referring court’s view that any effects of an open market operations programme that were knowingly accepted and definitely foreseeable by the ESCB when the programme was set up should not be regarded as ‘indirect effects’ of the programme…

The conduct of monetary policy will always entail an impact on interest rates and bank refinancing conditions, which necessarily has consequences for the financing conditions of the public deficit of the Member States…

If the ESCB were precluded altogether from adopting such measures when their effects are foreseeable and knowingly accepted, that would, in practice, prevent it from using the means made available to it by the Treaties for the purpose of achieving monetary policy objectives and might –– in particular in the context of an economic crisis entailing a risk of deflation –– represent an insurmountable obstacle to its accomplishing the task assigned to it by primary law…

PSPP is intended to ease monetary and financial conditions, including those of non-financial corporations and households, thereby supporting aggregate consumption and investment spending in the euro area and ultimately contributing to a return of inflation rates to the levels sought over the medium term.

The ECB has referred in this regard to the practices of other central banks and to various studies, which show that large-scale purchases of government bonds can contribute to achieving that objective by means of facilitating access to financing that is conducive to boosting economic activity by giving a clear signal of the ESCB’s commitment to achieving the inflation target set, by promoting a reduction in real interest rates and, at the same time, by encouraging commercial banks to provide more credit in order to rebalance their portfolios…

In view of the foreseeable effects of the PSPP and given that it does not appear that the ESCB’s objective could have been achieved by any other type of monetary policy measure entailing more limited action on the part of the ESCB, it must be held that, in its underlying principle, the PSPP does not manifestly go beyond what is necessary to achieve that objective…

According to the wording of Article 123(1) TFEU, that provision prohibits the ECB and the central banks of the Member States from granting overdraft facilities or any other type of credit facility to public authorities and bodies of the Union and of Member States and from purchasing directly from them their debt instruments.

It follows that that provision prohibits all financial assistance from the ESCB to a Member State, but does not preclude, generally, the possibility of the ESCB purchasing from the creditors of such a State, bonds previously issued by that State…

[But] the ESCB cannot validly purchase bonds on the secondary markets under conditions which would, in practice, mean that its intervention has an effect equivalent to that of a direct purchase of bonds from the public authorities and bodies of the Member States…

When bonds are purchased from a central government of a Member State, a private operator necessarily runs the risk of not being able to resell them to the ESCB on the secondary markets, as a purchase of all the bonds issued is in all cases precluded [PSPP limited to purchasing 33% of bond and there’s a blackout of how long before maturity they can buy them]…

The ESCB has retained the option of selling purchased bonds at any time, which enables it to adapt its programme according to the attitudes of the Member States concerned and means that the operators involved cannot be certain that the ESCB will not make use of that option…

Although the issue of bonds at a negative yield to maturity is advantageous in financial terms for the Member States concerned, those bonds can be purchased, under the PSPP, only on the secondary markets and they do not therefore give rise to the grant of overdraft facilities or any other type of credit facility in favour of public authorities and bodies of the Member States, or to the direct purchase from them of their debt instruments.”

To students of English law, and that includes the entire natively English speaking world as well as even India, the above 2018 judgment by ECJ comes across as lacking the usual rigorous logical analysis you’d expect even from the ECJ, but certainly any common law highest court where they tend to begin, in UK at least, at the beginning of legal history which for England is 1080.

So unfortunately we can’t quite benefit from some rigorous analysis of the matter of money and the role of central banks in it where this judgment is concerned and the German judges do not quite assist us there either.

Instead we have here the approach of the Roman law. The German judges said, and we quote in full the parts we find interesting:

“The constitutional complaints of the complainants in proceedings I to III are admissible to the extent that they challenge – with different nuances – that the Federal Government and the Bundestag failed to take action against the PSPP…

Where measures taken by institutions, bodies, offices and agencies of the European Union exceed the limits of the European integration agenda (Integrationsprogramm ) in a manifest and structurally significant manner, it is incumbent upon the Federal Government and the Bundestag to actively address the question how the order of competences can be restored and to make a positive determination as to which course of action to pursue…

If any Member State could readily invoke the authority to decide, through its own courts, on the validity of EU acts, this could undermine the precedence of application accorded to EU law and jeopardise its uniform application. Yet if the Member States were to completely refrain from conducting any kind of ultra vires review, they would grant EU organs exclusive authority over the Treaties even in cases where the EU adopts a legal interpretation that would essentially amount to a treaty amendment or an expansion of its competences…

Under the Lisbon Treaty, the Member States remain the ‘Masters of the Treaties’ and the EU has not evolved into a federal state…

In applying the principle of proportionality, German law distinguishes between the elements of suitability (Geeignetheit ), necessity (Erforderlichkeit ) and appropriateness (Angemessenheit )…

According to the case-law of the CJEU, a measure is appropriate [or suitable] (geeignet ) if it genuinely reflects a concern to attain the objective in a consistent and systematic manner…

The specific manner in which the CJEU applies the principle of proportionality in the case at hand renders that principle meaningless for the purposes of distinguishing, in relation to the PSPP, between monetary policy and economic policy, i.e. between the exclusive monetary policy competence and the limited conferral [the principle that the EU acts only within the limits of the competences that EU countries have conferred upon it in the Treaties] upon the EU of the competence to coordinate general economic policies, with the Member States retaining the competence for economic policy at large…

The review of proportionality is rendered meaningless, given that suitability and necessity of the PSPP are not balanced against the economic policy effects – other than the risk of losses – arising from the programme to the detriment of Member States’ competences, and that these adverse effects are not weighed against the beneficial effects the programme aims to achieve…

Determining whether an act constitutes a measure of monetary policy or economic policy should not be limited to assessing the objective pursued and the means employed but should also give consideration to relevant effects resulting from the measure in question…

The CJEU expressly acknowledges the economic policy dimension of the asset purchase programme yet declares this aspect to be irrelevant in view of the monetary policy objective purportedly pursued. As a result, the CJEU allows asset purchases even in cases where the purported monetary policy objective is possibly only invoked to disguise what essentially constitutes an economic and fiscal policy agenda. In this respect, the CJEU simply accepts, as it did in Gauweiler , the ECB’s assertion – despite the substantiated objections challenging this assertion – that the PSPP pursued a monetary policy objective, without questioning the underlying factual assumptions or at least reviewing whether the respective reasoning is comprehensible, and without testing these assumptions against other indications that evidently argue against the classification as a monetary policy measure. Therefore, it is not discussed at all whether there is or was a possibility that Member States of the euro area could deliberately issue low-yield government bonds as a means to improve their refinancing conditions, that certain Member States benefitted more than others from the programme, that recent economic studies did not find evidence of the purported monetary policy effects […] and that the programme significantly boosted the economic situation and credit rating of commercial banks…

As the economic policy effects of the PSPP are disregarded completely, the application of the principle of proportionality by the CJEU cannot fulfil its purpose, given that its key element – the balancing of conflicting interests – is missing. As a result, the review of proportionality is rendered meaningless…

The fact that the ESCB has no mandate for economic or social policy decisions, even when using monetary policy instruments, does not rule out taking into account, in the proportionality assessment… the effects that a programme for the purchase of government bonds has on, for example, public debt, personal savings, pension and retirement schemes, real estate prices and the keeping afloat of economically unviable companies, and – in an overall assessment and appraisal – weighing these effects against the monetary policy objective that the programme aims to achieve and is capable of achieving…

It is furthermore imperative that the mandate of the ESCB be subject to strict limitations given that the ECB and the national central banks are independent institutions which means that they operate on the basis of a diminished level of democratic legitimation.

The independence afforded the ECB relates only to the powers conferred upon it in the Treaties and the substantive exercise of such powers but is not applicable with regard to defining the extent and scope of the ECB’s mandate. To ensure that the ECB cannot validly adopt a programme that, contrary to the principle of conferral, exceeds the monetary policy mandate vested in the ECB under primary law, it is imperative that adherence to limits of the ECB’s competence be subject to full judicial review…

The interpretation of the principle of proportionality undertaken by the CJEU in its Judgment of 11 December 2018 and the determination of the ESCB’s mandate based thereon, manifestly exceed the judicial mandate conferred upon the CJEU in Art. 19(1) second sentence TEU (see (1) below) and result in a structurally significant shift in the order of competences to the detriment of the Member States. In this regard, the aforementioned judgment thus constitutes an ultra vires act that is not binding upon the Federal Constitutional Court…

The distinction between economic policy and monetary policy is a fundamental political decision with implications beyond the individual case and with significant consequences for the distribution of power and influence within the European Union. The classification of a measure as a monetary policy matter as opposed to an economic or fiscal policy matter bears not only on the division of competences between the European Union and the Member States; it also determines the level of democratic legitimation and oversight of the respective policy area, given that the competence for monetary policy has been conferred upon the ESCB as an independent authority.

Rendering the principle of proportionality more or less meaningless, resulting in a failure to conduct an overall assessment and appraisal of relevant circumstances, carries significant weight for the principle of democracy and the principle of the sovereignty of the people….

The effects of the PSPP on the banking sector must be taken into account. The programme affects balance sheets in the commercial banking sector by transferring large quantities of government bonds, including high-risk ones, to the balance sheets of the Eurosystem, which significantly improves the economic situation of the relevant banks and increases their credit rating. At the same time, it creates an incentive for banks to increase lending despite the low level of interest rates.

Relevant economic policy effects of the PSPP furthermore include the risk of creating real estate and stock market bubbles as well as the economic and social impact on virtually all citizens, who are at least indirectly affected inter alia as shareholders, tenants, real estate owners, savers or insurance policy holders. For instance, there is a considerable risk of losses for private savings. This has direct consequences for (private) pension schemes and the returns they generate […]. Both factors lead to, in part excessive, portfolio shifts […], while risk premiums are in decline. Real estate prices are on the rise with trends of sometimes particularly sharp increases – especially regarding residential property in major cities – […], which possibly already come close to creating a “market bubble”, as the oral hearing confirmed. It is not for the Federal Constitutional Court to decide in the current proceedings how such concerns are to be weighed exactly in the context of a monetary policy decision; rather, the point is that such effects, which are created or at least amplified by the PSPP, must not be completely ignored.

As the PSPP lowers general interest rates, it allows economically unviable companies to stay on the market since they gain access to cheap credit.

In addition, the longer the programme continues and the more its total volume increases, the greater the risk that the ESCB becomes dependent on Member State politics as it can no longer simply terminate and undo the programme without jeopardising the stability of the monetary union.

In view of the considerable economic policy effects resulting from the PSPP – not all of which are discussed here –, it would have been incumbent upon the ECB to weigh these effects and balance them, based on proportionality considerations, against the expected positive contributions to achieving the monetary policy objective the ECB itself has set. It is not ascertainable that any such balancing was conducted, neither when the programme was first launched nor at a any point during its implementation; it is therefore not possible to review whether it was still proportionate to tolerate the economic and social policy effects of the PSPP, problematic as they may be in respect of the order of competences, or, possibly, at what point they have become disproportionate. Neither the ECB’s press releases nor other public statements by ECB officials hint at any such balancing having taken place.

For this lack of balancing and lack of stating the reasons informing such balancing, the ECB decisions at issue violate Art. 5(1) second sentence and Art. 5(4) TEU and, in consequence, exceed the monetary policy mandate of the ECB deriving from Art. 127(1) first sentence TFEU…

Government bonds purchased under the PSPP have so far – with few exceptions in particular cases – not been sold before maturity.”

The above judgment sends shockwaves in certain corners for numerous reasons, starting with first the balance of power.

The German court is ruling the national constitution is superior to EU law, so stating a basic hierarchy that has been generally established in scholarly circles where power is derived from the constitution, which allows parliament to implement laws enforceable by the government, and which allows the government to sign treaties that have superiority above these parliamentary laws, but as the government derives power from the constitution, such treaties of course can not have superiority over the constitution.

This very logical position is somehow shocking to some groups which claim the ECJ is absolutely superior, a stance that can apply where national parliaments are concerned but with rigor, not where the constitution is concerned.

This fairly long established scholarly understanding has now explicitly been stated by the force of judgment in the supreme court, with this being the first time a national court claims the national constitution is superior, and thus a national court claims they have the power to declare an EU law or judgment as unconstitutional.

In form, plenty can argue with that conclusion of the german judges, but in substance they can’t for they can’t escape that fundamental analysis of legitimate power and where it derives from.

The second aspect of this concerns money, is ECB buying government debt in effect no different than the government itself printing money and so engaging in regressive stealth taxation where even bread is taxed and where that tax is paid even by starving people or those on welfare.

There are many complexities here and abstractions, but ultimately the deal is very simple. The government takes a certain percentage of everyone’s crop, with the question being who should it take more from in overt taxation.

With devaluation they can bypass that question in a way that takes half of the bread from a starving family and half of the bread from a billionaire, with the latter being the very best case scenario because realistically it’s none of the bread from the billionaire as he or she can escape inflation through investing in assets.

In this way the German court is saying, although far more subtly and politely than we are about to, that this ECB bond buying programme subverts democracy and the sovereignty of the people as those people are not having a say on who should give more of their crop, if any at all, to the government.

The third punch is this court’s claim to oversight over the European Central Bank which they say is and must be subject to judicial review especially as they are set up as an independent body and therefore have no democratic legitimacy.

Overall, 10/10 for substance, but for form it would have been useful to have a mini lesson on the proportionality principle like the english judges would have done and quite rightly because these top judgments are rare and thus so too are the opportunities to potentially update what naturally through the course of time eventually sometime becomes old principles or indeed develops into new ones.

It also would have been useful to have some analysis on the extent of judicial review on ECB, or some attempt to with broad brushes kind of box in monetary policy and economic policy, instead of just making statements in what to an english law student might appear as basically sentences without the pyramid below them, especially in situations like this where there’s an historic judgment which may well be read centuries henceforth.

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