A Need for a New Order in the EU Legal Order?

On 5 May 2020, the German Federal Constitutional Court (Bundesverfassungsgericht or BVerfG) ruled a 2018 European Court of Justice (ECJ) judgment regarding a bond purchase programme for the System of European Central Banks inapplicable in Germany. While this is not the first time in EU history, where a national court has opposed the ECJ’s binding preliminary ruling, it, however, is a case that can have potentially dangerous implications. A case coming from the BVerfG, challenging the supremacy of EU law and the legal order that is currently present in the EU, sets a dangerous precedent for potential malicious interpretation of national law to undermine EU primary and secondary law.

The Case In Question
The Asset Purchase Programme (APP) is a European Central Bank (ECB) framework programme, which exists to assist monetary policy by “facilitating credit provision to the euro area economy, easing borrowing conditions of households and firms, and contributing to returning inflation rates to levels closer to 2%.” It envelops four other programmes, out of which the Public Sector Asset Purchase Programme (PSPP) is the programme in question throughout the whole case.

The PSPP was first announced in the judgment of 22 January 2015. It allowed the European System of Central Banks (ESCB) - the European Central Bank and all of the National Central Banks - to purchase outright eligible marketable debt securities from eligible counterparties on the secondary markets. This was intended to have the goal of propping up struggling economies following the sovereign debt difficulties in Greece and several other eurozone members following the 2008 Recession. The ECB had set out to buy bonds with the hopes that it would lower interest rates faced by heavily-indebted members that were struggling to borrow money at competitive rates on the markets. The PSPP ran from 2015 until 2018 and was further restarted in September 2019.

The BVerfG on 18 July 2017 referred multiple questions to the European Court of Justice (ECJ) for a preliminary ruling, after having received numerous constitutional complaints from applicants regarding a violation of Germany’s Constitution - the Basic Law - by the ECB and Germany’s government. Constitutional complaint applicants stated that the Basic Law had been violated because Germany’s government had failed to challenge the validity of the ECB judgment, which first established the PSPP. The claim was that the need to challenge the decision’s validity arises from the ECB’s lack of competence to purchase debt instruments from governments or the Member States, as seen in Art. 123(1) TFEU, which prohibits the European System of Central Banks (ESCB) from granting overdraft facilities or any other type of credit facility to public authorities and bodies of the Union and of Member States, and prohibits it from engaging in initiatives that facilitate the direct purchasing of debt instruments issued by Member State governments. By not challenging the validity of the ECB judgment, Germany was allowing and committing a twofold violation:
a) A violation by the EU regarding the principle of the conferral: This principle states that the EU only has the capability to act in those competences, which are conferred onto it by the Member States. By not challenging the validity under Art. 123(1) TFEU Germany would be permitting a breach by the ECB, and freely losing some of its sovereignty.
b) The unconstitutional loss of sovereignty under the Basic Law: Germany’s Basic Law protects the sovereignty of the State, and the unlawful conferral of it to the EU by non-intervention is a violation of that same Basic Law.

On 11 December 2018, in judgment Weiss, the ECJ decided to uphold the ECB judgment, where the PSPP was first established by stating that it did not fall in the prohibition of Art. 123(1) TFEU. This judgment meant that the creation of the PSPP was within the ECB’s competence, it did not take away any sovereign rights of States that weren’t willingly conferred to the EU already, and that the PSPP could still continue operating in the EU. The argument went along the lines that under the PSPP the ESCB still wasn’t capable of directly buying debt instruments from other Member States, they were only able to indirectly acquire them through secondary markets - from the creditors of the Member States who issued the bonds. The Court stated that for this reason the programme cannot be equated to a measure that grants financial assistance to a Member State directly. Similar points had been already brought up in previous judgments - Pringle and Gauweiler.

Germany’s Ruling
Normally, this is where the case ends. The CJEU decision on a preliminary ruling has force res judicata - it is binding on all national courts of Member States. However, on 5 May 2020 the BVerfG declared both the ECJ judgment Weiss and the decision of the ECB to create the PSPP as ultra vires - beyond their legal authority. Not only is this the first time that a Member State has opposed a preliminary ruling, but this is also the first time that a Member State has also stated that the judgment of the Court itself has gone beyond its judicial mandate under the EU treaties.

In para. 102 of its judgment the BVerfG states that the Basic Law forbids the transfer of sovereign power to the EU in such a way where the EU is allowed to create competences for itself. It goes on to further State in para. 106 that ”[t]he supremacy of the Constitution [..] obliges constitutional organs participating in the execution and in the further shaping and development of the [European] integration agenda to ensure that its limits are respected.” Where measures by the EU exceed the limits of the Basic Law, then it is the duty of the Federal Government and the Bundestag to restore the order of these competences. It is important to note that the constitutional bodies of Germany do have the option to amend the Basic Law in light of EU primary law within certain limits. This means, where both parties agree, Germany can change its Basic Law to adapt to EU law In the case where such an option is either not possible or not wanted, the constitutional organs must, by legal or political means, aim to rescind the legislation in question, and while it is still in effect - to limit its domestic impact. And Germany did exactly that. To limit the domestic impact of the PSPP, the BVerfG stated that “the CJEU Judgment itself [..] has no binding effect [in Germany].” The BVerfG goes on to criticize the ECJ in para. 112 for its overreaching and broad interpretation of EU law.. While it affirms that interpretation and application of EU law is the role of the ECJ, the Court also has a duty to ensure that “the law is observed when interpreting and applying the Treaties,” and that it “cannot simply disregard the methodological standards that are based on the legal traditions common to the Member States, which are notably reflected in the case-law of the Member States’ constitutional and apex courts and of the European Court of Human Rights.”

Potential Implications
The Judgment of 05 May 2020 - 2 BvR 859/15 by the BVerfG is a landmark case in the history of EU law. Firstly, it calls into question the legal supremacy of EU law. Secondly, it challenges all European courts' competence under the name of the Court of Justice of the European Union to rule on the validity of EU law.
The BVerfG has had frequent and decisive clashes with EU institutions' legislative acts beforehand, but the current one will arguably be one of the most important. The precedent set by the BVerfG now signals to the other Member States the ability to participate in competence control more actively. However, by granting Member States the ability to call into question CJEU judgments, there is a wrench being thrown in the gears of the EU legal order. The CJEU’s supremacy and finality is a must-have requirement for a) harmonization of EU legislation and judgments across the Member States, and b) an effective and last-resort system for application and interpretation of EU law. While the case at hand will have a positive effect in further establishing EU’s legislative limits, and limiting ultra vires acts by EU institutions, it will, however, carry with it much more negative implications. Attention needs to be directed towards countries such as Poland and Hungary, where the rule of law has been continuously under threat, and the principle of separation of powers is slowly falling apart. With the ability to undermine legal supremacy of EU law and the finality of CJEU judgments, there is nothing stopping countries from maliciously interpreting EU legislation in light of their Constitution. Germany is now in negotiations with the respective EU institutions, and the ball is now in the EU’s Court. Whatever the resolution to this case might be, it will have a massive impact on the European Union's future. But, it is important to recognize that without an effective and fully functioning EU legal order, there can be no EU.

Published 01 July 2020

Author Marts Eduards Ivaskis