Germany’s federal constitutional court has made a ruling that potentially undermines the European Central Bank and the European Court of Justice – and could unpick the EU’s legal order. By Justin Pugsley.

What is happening?

The German federal constitutional court ruled on May 5 that the member states are the EU’s masters and that its institutions, namely the European Central Bank (ECB) and the European Court of Justice (ECJ), can only act within the bounds allowed by the treaties that underpin the union. 

Reg rage anxiety

Furthermore, the German court gave the ECB three months to prove ‘proportionality’ with one of its former quantitative easing (QE) programmes. It then rubbished an earlier ECJ ruling that rubber stamped that QE programme, calling it “untenable from a methodological perspective” and “objectively arbitrary”, and then questioned the applicability of the ECJ ruling in Germany. Ouch! 

If the ECB can’t prove to the federal court’s satisfaction that it had acted legally, then the Bundesbank, Germany’s central bank, ceases to participate in any more ECB QE programmes, which would be a hammer blow to the eurozone’s credibility. Almost no one thinks it will come to that, but the ECB will have to deliver its case without recognising the German court’s authority, because to do so would further undermine the ECJ – the only court it legally recognises – and would leave it open to other national challenges. This will take some clever legal gymnastics. 

But bigger consequences may lie further ahead. 

The court has effectively boxed in EU institutions, particularly the ECJ. First, EU integration tends to happen around the grey areas where member state jurisdiction ends and EU jurisdiction begins. Reasserting the central role of the treaties makes the mission creep of EU institutions more difficult. Second, if the German national court can challenge the ECJ on constitutional grounds, then why can’t other national courts? Third, and this might be a stretch, but some lawyers think there could be some scope for member states to challenge various aspects of EU bank regulation.

A case in point might be a bank bailout under the EU bank recovery and resolution directive, whereby a member state wants to use taxpayer funds to rescue a failing bank arguing that its national constitution takes precedence over EU rules forbidding it. 

Why is it happening? 

The case was brought by a group of academics, economists and politicians in Germany in 2015, which argued that ECB monetary policy was straying into fiscal policy. On that point at least, the German court didn’t think the ECB was financing government expenditure, which must have come as a big relief to the EU. 

The anti-inflation hawks hold considerable sway in Germany and are deeply sceptical about the ECB’s QE operations. 

What do the bankers say? 

Bankers have not expressed a great deal of concern about this ruling. They are either too distracted with Covid-19 pandemic issues or simply dismiss it as one of those EU dramas that occasionally flare up and then quickly dissipate. Indeed, senior German politicians and even some of the German court judges have gone to great lengths to play down the significance of the ruling. 

Nonetheless, this ruling might be different and so is worth monitoring. The threat is that over the long term, governments of a eurosceptic persuasion could use it as a basis to pick away at the EU’s legal order, eventually leading to paralysis and the failure of the bloc.  

This would undoubtedly cause a systemic shock to the global financial system and result in huge risks for banks with exposure to the eurozone. 

Will it provide the incentives?  

Most crises are a spur to European integration – some within EU institutions welcome them for that reason. But the very nature of this potential crisis, with the EU’s most important state upholding the sanctity of its constitution and the inalienable democratic rights of its citizens, makes it particularly dangerous for the bloc.  

Though it is probably too early to draw definite conclusions over the long-term consequences, the ruling certainly gives those wanting to disrupt the EU’s legal order food for thought. Some lawyers believe a rewrite of the German constitution or of the EU treaties is needed – neither of which is likely to happen. 

It remains to be seen if those challenges ever emerge and whether they even succeed. Ultimately, the most powerful glue to keep the eurozone intact is the will of its members and, for now, they fear the very damaging consequences of ripping it apart. 

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