The PSPP Decision (BVerfGE 154, 17): Ultra Vires and the ECB

The PSPP Decision (BVerfGE 154, 17, 5 May 2020) is one of the most controversial and consequential judgments in the history of the Federal Constitutional Court. For the first time, the Court found that an institution of the European Union — the European Central Bank (ECB) — had manifestly exceeded its competences (acted ultra vires) and that the ECJ’s judgment upholding the ECB’s Public Sector Purchase Programme (PSPP) was not comprehensible and therefore had no binding effect in Germany. The decision precipitated a constitutional crisis in the relationship between the German Constitutional Court and the European Court of Justice.

The Factual Background

The PSPP was a programme of the ECB, announced in January 2015, under which the ECB purchased government bonds of euro-area member states on secondary markets as part of its expanded asset purchase programme. The programme aimed to address the risk of deflation and to support the transmission of monetary policy in the aftermath of the eurozone crisis. The ECB purchased bonds in proportion to each member state’s capital key in the ECB, subject to certain restrictions including minimum remaining maturity (one year) and maximum maturity (thirty years) and a prohibition on purchasing bonds at negative yields below the deposit facility rate. The German Federal Constitutional Court received several constitutional complaints challenging the programme on the grounds that it exceeded the ECB’s monetary policy mandate and violated the prohibition of monetary financing of states.

The Preliminary Reference to the ECJ

The Federal Constitutional Court referred questions to the ECJ under Article 267 TFEU, asking whether the PSPP was within the ECB’s monetary policy mandate and whether it violated the prohibition of monetary financing under Article 123 TFEU. The ECJ, in its Weiss judgment (2018), upheld the PSPP, finding that it fell within the scope of monetary policy and did not violate the prohibition of monetary financing. The ECJ applied a broad interpretation of monetary policy and a narrow interpretation of the prohibition of monetary financing, affording the ECB a wide margin of discretion in the design of its monetary policy instruments.

The Ultra Vires Finding

The Federal Constitutional Court, in a judgment that shocked the European legal establishment, held that the ECJ’s judgment was not comprehensible (nicht nachvollziehbar) and that the ECB had manifestly exceeded its competences. The Court found that the PSPP was not consistent with the principle of proportionality as required by Article 5(4) TEU and that the ECJ had failed to conduct a proper proportionality review. Specifically, the Court held that the ECB had not adequately assessed whether the PSPP’s economic policy effects — including its impact on government borrowing costs and the potential for sovereign debt mutualisation — were proportionate to its monetary policy objectives. The Court concluded that the ECB’s decisions on the PSPP were manifestly disproportionate (offensichtlich unverhältnismäßig) and therefore exceeded the competences conferred upon it.

The Constitutional Crisis

The PSPP Decision created a direct conflict between the German Constitutional Court and the ECJ. The ECJ had held the PSPP lawful; the German Court held the ECJ’s judgment incomprehensible and declared the PSPP ultra vires. The European Commission initiated infringement proceedings against Germany. Legal scholars criticised the judgment for departing from the established Solange framework of judicial cooperation and for asserting a unilateral power to review and reject ECJ judgments. The German Court defended its decision as a necessary exercise of its constitutional responsibility to protect the German constitutional order against unauthorised transfers of sovereign powers.

The ECB’s Response and Resolution

In June 2020, the ECB provided the German government and the Bundestag with additional documentation and analysis concerning the proportionality of the PSPP. The Bundesbank participated in the continued implementation of the PSPP pending a final decision by the German government on how to respond to the Court’s judgment. The Federal Government declared that the ECB had satisfied the Constitutional Court’s requirements by providing additional proportionality analysis. The Court subsequently accepted this response and dismissed the further complaints, effectively ending the immediate crisis. However, the judgment has left lasting scars on the relationship between the German Constitutional Court and the European legal order.

Significance for EU Constitutional Law

The PSPP Decision has profound implications for the constitutional architecture of the European Union. It established that the Federal Constitutional Court will examine the proportionality of EU measures against national constitutional standards where the ECJ’s review is considered inadequate. The decision has been criticised as undermining the uniform application of EU law and the authority of the ECJ. Supporters argue that it demonstrates the healthy functioning of constitutional dialogue between national and European courts. The decision has influenced subsequent debates about the limits of EU competences, the role of national courts in reviewing EU action, and the relationship between national constitutional identity and European integration.

The Aftermath: OMT and Further Developments

The PSPP Decision followed the OMT Decision (BVerfGE 142, 123, 2016), in which the Court had accepted the ECJ’s validation of the ECB’s Outright Monetary Transactions programme but had asserted the power to conduct ultra vires review in the future. The PSPP Decision fulfilled that assertion. Subsequent ECB programmes, including the Pandemic Emergency Purchase Programme (PEPP) and the Transmission Protection Instrument (TPI), have been designed with greater attention to the proportionality requirements articulated in the PSPP Decision. The ongoing dialogue between Karlsruhe and Luxembourg continues to shape the constitutional framework of European monetary policy.