May 22, 2020

Macro series – Germany challenges the EU

BY John Nugée

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( 10 mins)
  • The German Constitutional Court’s latest ruling has opened a huge can of worms.
  • Its judgement on the actions of the ECJ and ECB is potentially traumatic.
  • There is more here than simply the conduct of unconventional monetary policy.
  • Rather, it is a challenge to the entire legal structure of the EU.
  • The net result could be a renaissance of European nation states.

Politics not on hold

For the past few months, the world has been preoccupied with the Corona Crisis, and the economic recession that inevitably will follow it. But this does not mean that all other politics is on hold.

Take three examples. As the health crisis eases in China, Beijing is using the fact that most other countries are still very much otherwise engaged to become increasingly assertive in its neighbourhood, tightening further its control in Hong Kong and sabre-rattling across the Taiwan Strait. Meanwhile in the US, the November presidential election is now less than six months away, and the pre-campaign campaigning is becoming more earnest. And in Europe the negotiations between the EU and the UK over future trade arrangements limp on, with achievements limited and agreement elusive.

The German ruling

All of these have the capacity to have more long-lasting effects (over say a 20-year horizon) than the health crisis. And to this list has been added one more, as on 5 May the German Constitutional Court in Karlsruhe gave its judgment on the legality of the ECB’s Public Sector Purchase Programme, a scheme under which the ECB has been bulk-buying government bonds to support the Euro Area’s various bond markets.

The ruling states that unless certain conditions are met within three months, the Deutsche Bundesbank, Germany’s central bank, must stop cooperating with this and subsequent schemes, including most pointedly the current ECB scheme to counter the economic crisis in several member states.

The reaction

The immediate reaction to the Karlsruhe court ruling was muted – there has long been hostility in some parts of Germany to the ECB’s various bond-buying programmes and the initial recourse to the courts was several years ago, so many commentators did not at first consider the ruling “new news”. And initial analysis of the ruling focused mainly on the consequences for the ECB, with the general conclusion being that, while the ruling is an irritant and creates work at a challenging time for the central bank, it is probably not a serious threat.

The bank itself certainly thinks it has a good enough defence of what it has done. It will therefore agree – or condescend – to go along with the demand for a review, happy to play its part because it expects the process not to derail what it is doing. Even if the threat to the ECB and its actions prove more serious, politicians will almost certainly ensure that the central bank survives – they might even misquote former ECB president Mario Draghi and say, “Within our mandate, we are prepared to do whatever it takes to preserve the ECB”.

A serious development

However, it is now dawning on commentators across the EU that the German ruling is actually a much more serious development than was at first realised. For in calling into question the legality of the ECB’s scheme, the Karlsruhe judges have also called into question the ruling by the European Court of Justice (ECJ) which had in 2018 declared it legal. Indeed, lest anyone miss the point, the German judges made this explicit, describing the ECJ’s ruling that the bond buying was legal as “not comprehensible”.

This is the first time that a national court in an EU member state has declared an ECJ judgment invalid within their national jurisdiction. And by giving this ruling, the Karlsruhe court has posed a direct threat to the uniform application of EU law across all member states. It is not a case of “Frustrated Germans objecting when they do not get their way” or even “Germany resisting the ever-greater federalisation of support finance”. It is a major challenge to the legal structures of the European Union and the heart of the European project.

A legal construct

To understand why this is so and how significant it is, it is important to realise that the EU is above all a legal construct, formed by the various treaties between the member states and bound by the terms and rules within those treaties. Unlike a sovereign state, the EU has no intrinsic authority of its own; all its powers are derived from the treaties, and all its actions are subject to them.

The treaties are very widely drawn and the powers they grant the EU are extensive. But they are not unlimited; and where the treaties are silent and do not grant a power (and even more where they explicitly deny the EU a power and reserve it for the member states), the EU cannot act.

Interpreting the treaties is the duty of the ECJ: it (and to date it alone) pronounces judgment over what the treaties permit, and whether the EU has stayed within its treatygiven powers or has acted ultra vires and outside its authority. And the ECJ is a final court, from which there is, in theory, no appeal.

Now, courts are fallible, even final courts, even the ECJ. And there is a mechanism for testing and correcting the rulings of the ECJ: bring a case before it to seek “clarification”. There are numerous occasions in the ECJ’s 60-year history where it has reversed an earlier judgment, in effect accepting that its earlier ruling was wrong. But the ECJ, like all final courts across the world, reserves that privilege to itself.

Yet the Karlsruhe court has allowed an appeal against an ECJ ruling to be brought before it, and has decided that as guardian of the German constitution, and therefore arbiter of what is and is not consistent with that constitution, it has the authority to hear it. And by, in effect, declaring that the ECJ erred, the ruling from the Karlsruhe court is a direct challenge to it, to the whole system of the Courts of Justice of the EU, and, ultimately, to the basis of EU law and how member states apply it and are bound by it.

A seminal moment

This could be a seminal moment in the long-running debate over whether the EU is an intergovernmental body or a supranational one. Just as no one at the ECB has in 20+ years answered the question of whether it is a classical hierarchical institution (ECB as senior institution, NCBs as operating arms, duty-bound to follow the Council’s rulings) or a simple joint venture (NCBs as independent institutions, ECB a special purpose vehicle they have created to execute some of their joint duties and to which they have voluntarily ceded some but not all of their powers), the same is true, writ large, of the EU itself.

Is the EU an intergovernmental body set up by sovereign nation-states which retain ultimate sovereignty or a supranational body with powers to bind its member states even against their wishes? Do national constitutions have to be consistent with EU law or do they take precedence when the two disagree?

Or, to bring the matter to specifics, when the Bundesbank, a German institution under German law and also a member of the ECB, which is under EU law, receives conflicting judgments in which the national court says one thing and the ECJ another, which does it follow?

For over 60 years the EU has been like Schrödinger’s cat: half supranational, half intergovernmental. It has benefitted from this helpfully ambiguous state, and until and unless someone opens the box to test it, it has been able to stay in it. But the Karlsruhe court has now opened the box. The ECJ’s fear is that in doing so it might force a resolution of the question – and the answer might be that the EU is in fact an intergovernmental body after all. In which case all the elaborate superstructure of supranationalism, including the authority of the Commission, the position of the ECJ, and the status and supremacy of EU law, might begin to evaporate.

For over 60 years the EU has been like Schrödinger’s cat: half supranational, half intergovernmental. It has benefitted from this helpfully ambiguous state, and until and unless someone opens the box to test it, it has been able to stay in it. But the Karlsruhe court has now opened the box. The ECJ’s fear is that in doing so it might force a resolution of the question – and the answer might be that the EU is in fact an intergovernmental body after all. In which case all the elaborate superstructure of supranationalism, including the authority of the Commission, the position of the ECJ, and the status and supremacy of EU law, might begin to evaporate.

Awkward compromises

Far too much has been invested in the EU for the 27 member states to allow this to happen. The EU will find a solution because the EU has to find a solution. But in doing so, the EU might be forced into some awkward compromises, and the solution they adopt risks opening other questions, such as its authority over member states.

This is already flouted routinely by various countries, including Poland and Hungary, that will not be slow to claim the same freedom to state that their constitution takes precedence over EU law that the Karlsruhe court has done. And the EU’s ability to rein back the Polish government’s heavy-handed approach to the independence of its judges, or the Hungarian government’s control over its press, diminish the sense of community.

Europe was thought to advance through crises. Emergencies, so the argument went, would allow visionary politicians to overcome national resistance and bring the continent towards the “ever closer union” dreamed of by its founders. But Europe has now been enmeshed in more than a decade of financial, political, and humanitarian crises, and the result every time has been to loosen the federal ties, the community spirit.

Whereas until say 2010, in every crisis the EU faced it emerged looking more like a supranational body, more like federal state in creation, since 2010 every crisis has seen states ever more ready to put their own interests first.

Both Greece’s financial problems and the whole question of Brexit pitted a member state against the EU and highlighted that national interests still matter greatly. The response to illegal immigration across the Mediterranean has sharply divided member states and shown solidarity in a crisis to be an unreliable doctrine, honoured mainly in the breach as Italy and Greece have found support from others very limited indeed. And most recently the responses to the virus and the health crisis and the resulting financial crisis have been on an overtly national basis.

In all of these recent challenges the nation state has played the dominant role, and national interests have trumped communal ones. And now for the first time the authority of the ECJ and the supremacy of EU law, the underpinning that the whole legal structure of the EU relies on, has been called into question.

The ruling of the German Constitutional Court will not cause the EU to collapse. But it aims a dangerous dagger right at its heart.

Watch fors

  • Bundesbank analysis of ECB monetary policy diffuses the immediate situation.
  • More regular and detailed analysis of the costs of unconventional monetary policy.
  • Other national courts are nevertheless emboldened to take on ECJ judgements.
  • Germany and France struggle to find a lasting solution.
  • The journey towards ever-closer union effectively grinds to a halt.

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Macro series – Germany challenges the EU

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