The German Federal Constitutional Court’s new scepticism about Europe – why it wrongly contradicts the Court of Justice of the European Union and what this means for the Unified Patent Court

Recently, the German Federal Constitutional Court declared the ratification law on the Unified Patent Court to be incompatible with the Basic Law for formal reasons. In this blog, I have assumed a European law-friendly view of the Federal Constitutional Court for the future. However, after the Federal Constitutional Court explicitly disregarded a decision of the European Court of Justice (CJEU) on 5 May 2020 on the public sector asset purchase program (PSPP) of the European Central Banks, I can no longer see this Europe-friendly view of the Federal Constitutional Court. For the first time, it had invoked a transgression of competences of the European institutions and considered a contradicting decision of the CJEU as not binding in itself, since the interpretation of the treaties by it would “not comprehensible and must thus be considered arbitrary from an objective perspective” (see already second guiding principle of the decision). As judge rapporteur, Professor Huber is largely responsible for both decisions. Simply because I was obviously mistaken in the Federal Constitutional Court’s attitude towards Europe, I wanted to take a closer look at the Federal Constitutional Court’s decision of 5 May 2020. It became clear to me that the Federal Constitutional Court does not adhere to its own standards and that the decision was by no means mandatory.

 

In order to understand the decision, it is necessary to know that the institutions of the European Union operate on the basis of limited individual authorisations. This means that the Member States only transfer individual competences selectively, as it were. Thus, monetary policy is a Union task (Art. 127 (1), Art. 282 (2) TFEU); economic policy, however, is reserved for the Member States. Another important point of understanding, in my opinion, is Article 18 of the Protocol on the Statute of the European System of Central Banks and of the European Central Bank. It states that both the ECB and the national central banks may buy government bonds. The Federal Constitutional Court does not question the legality of this basis.

1. The CJEU’s reasoning

In response to the questions referred by the Federal Constitutional Court, the European Court of Justice stated that the package of measures serves the inflation target of close to 2%. It was therefore to be assigned primarily to the objective of monetary policy (quoted in the decision of the Federal Constitutional Court, para. 120; unless otherwise stated, all other paragraphs refer to the decision of the Federal Constitutional Court of 5 May 2020). The economic policy competences of the Member States were not affected. Thus, the bond purchase programme could indeed have effects on the balance sheets of commercial banks and also on the financing of Member States, which could possibly just as well be achieved by economic policy measures of the Member States. However, the authors of the European Treaties had wanted the independence of the European Central Banks, which meant that the monetary policy measures taken by them in their independence could also have indirect effects on the economic policy of the individual states (para. 121). Moreover, monetary policy continuously influences the interest rates and refinancing conditions of the banks, which inevitably always had consequences for the financing conditions of the Member States. In order to be able to influence inflation rates at all, the European Central Banks must therefore inevitably take measures which have some impact on the real economy. The fact that these effects can also be achieved within the framework of economic policy and not just monetary policy does not change their fundamental classification as measures of monetary policy. Finally, the CJEU emphasises that the European Central Banks must act quickly in the event of an economic crisis, so that the effects cannot always be precisely predicted (para. 122). Accordingly, the institutions must have a discretion margin that is beyond judicial review.

In any event, I do not believe that this reasoning is unreasonable from the outset.

2. The rejection by the Federal Constitutional Court

However, the Federal Constitutional Court does not allow this reasoning to apply. It believes that the consequences for economic policy should always be included in a proportionality test. I was not convinced by this.

a) The independence of the European Central Bank in Article 88 of the German Constitution

The independence of the German central bank was historically regarded as one of the guarantees for the economic success of the Federal Republic of Germany. Article 88 of the German Constitution expressly confirms that the tasks and powers of the Bundesbank can be performed by the European Central Bank, which is independent and committed to the primary objective of securing price stability. Thus, the independence of the European Central Bank even enjoys German constitutional status.

b) Independence may justify a different standard of review

In my view, it is therefore already methodologically wrong to assess the acts of this independent institution against the standards of other tests of proportionality, as the Federal Constitutional Court does in para.s 124 to 126. That the central banks have margins for assessment and prognosis here is at any rate recognised in the German constitutional literature (see Maunz/Dürig/Heerdegen, GG Art. 88 para. 7). A correspondingly limited judicial review of the question of proportionality under Article 5 TFEU, especially for acts of the European Central Banks, is therefore quite understandable.

c) Independence from politics but not from the courts?

Finally, the Federal Constitutional Court is also guided by the requirement that the mandate of the European Central Banks must be “narrowly limited”. Because of the limited individual authority to conduct monetary policy, “compliance with the limits of the ECB’s competence must be subject to full judicial control” (para. 143). This restrictive interpretation was constitutionally required. Now, one can ask pointedly whether the ECB may be independent of politics but not independent of the courts. For if politics and the constitution guarantee its independence and a discretion margin, full control of the courts must not counteract this independence. The Federal Constitutional Court does not seem to have recognised this contradiction between central bank independence and complete judicial control.

I am therefore closer to the line of arguments of the Court of Justice of the European Union, which, in granting the European Central Bank comprehensive monetary policy competence, recognises the will of the Member States to accept the curtailment of their economic policy competences in return for the independence of the European Central Bank. There is no need to prefer this interpretation. It seems comprehensible to me in any case.

d) Limitation to manifest errors justified on grounds of independence

The Federal Constitutional Court’s criticism that the CJEU confines itself to manifest errors in reviewing ECB decisions (para. 156) is therefore not an expression of a creeping extension of the European institutions’ powers, but an expression of the independence of the European Central Bank. We know from numerous examples that the review of official or judicial measures can be limited. Lawyers and judges can therefore easily deal with an undefined legal concept such as “obvious”. Here too, I miss a discussion of the aspect of the independence of the European Central Bank.

3. The Federal Constitutional Court’s own proportionality test

Having established that it is not bound by the decision of the CJEU, the Federal Constitutional Court then examines the legality of the stabilisation programme itself. At this point at the latest, it becomes clear that the economic policy effects it cites are nothing more than reflexes of monetary policy.

a) No difference in impact between bond purchase programme and interest rate cuts

The bond purchase programme undoubtedly improves Member States’ refinancing conditions by enabling them to borrow money on much more favourable terms (para. 170). However, this support succeeds not only with a bond purchase programme, but with any interest rate cut. If the average interest rate level has been considerably higher in recent decades, a reduction to one or two percentage points makes borrowing just as easy. This statement is nothing more than that monetary policy, namely the setting of interest rates and the purchase of government bonds, has an impact on the general interest rate level. That is precisely what it is supposed to do when central banks set the conditions for lending. In this aspect I cannot see any difference between the bond purchase programme and a general reduction in interest rates.

b) Monetary policy as the basis for economic policy measures of the Member States

Nor can it be criticised that several Member States announced, as part of the ECB’s bond purchase programme, that they would launch investment programmes to revive the economy on account of the favourable interest rate level (para. 171 at the end). This is an example of how interest rate policy and the bond purchase programme set the framework within which the Member States conduct their economic policy.

c) Lower interest rates allow for better opportunities for commercial banks

It is also self-evident that low interest rates improve banks’ business prospects (see para. 172 on this aspect). A reduction in central bank interest rates from, say, 4 % to 2 % allows higher profit margins for banks. Again, there is no specific difference between a general interest rate cut and the bond purchase programme.

d) Effects on the private sector also in the opinion of the Federal Constitutional Court only indirectly

In para. 173, the Federal Constitutional Court lists as relevant economic policy consequences the risks of real estate and stock market bubbles as well as economic and social effects on citizens as shareholders, tenants, property owners, savers and insurance companies. From the outset, the Federal Constitutional Court characterises these effects as “indirect”. They too are no different from the effects of a general interest rate cut.

It is also self-evident that in a crisis companies can finance themselves more easily at lower interest rates (para. 174). It is equally clear that more companies can be rescued with cheap loans. The other effects of interest rate changes are similar in their indirect effects.

e) As a result, the CJEU would also have to examine simple interest rate cuts for their economic policy effects

As a result, the Federal Constitutional Court is now demanding that the CJEU take into account the effects of economic policy whenever interest rates are lowered. As a result, every interest rate cut by the European Central Bank should be reviewed by the CJEU and it would no longer be able to operate independently. The independence of the European Central Bank was, however, an essential prerequisite for the Federal Republic of Germany becoming a member of the Monetary Union in the first place. This independence was promised to us at the time by the Federal Government under Helmut Kohl.

This shows that the result of the decision of the Federal Constitutional Court is no longer comprehensible. The Federal Constitutional Court is not able to show any economic policy effects of the bond purchase programme that would not also occur as a result of any reduction in the interest rate level. Why then in the case of an expressly permitted bond purchase programme (see above) the CJEU should include, one might almost say exceptionally, the economic policy effects is not comprehensible.

4. Speculations about the true motives of the Federal Constitutional Court

Once again, I would like to stress that the issue here is not whether the approach of the Federal Constitutional Court or that of the CJEU is the more sensible one. According to the Federal Constitutional Court’s standard of review, the sole issue must be whether the decision of the CJEU is in itself no longer comprehensible and therefore has no effect in Germany. And, of course, social and economic policy effects could be taken into consideration. However, the Federal Constitutional Court has decided that one must do so. I do not see this as a requirement because of the guaranteed independence of the European Central Bank.

a) Low economic competence

One might ask why the Federal Constitutional Court is creating a crisis of the European institutions here. On closer analysis of the decision, one is also shocked at how little economic knowledge was incorporated into the decision. Page over page it criticises the fact that the bond purchase programme leads to a general lowering of the interest rate level, without asking itself whether setting an interest rate level is not one of the characteristic tasks of monetary policy as a whole. In any case, the Federal Constitutional Court expressly does not recognise that the interest rate level always limits the scope of action of economic actors.

b) Integration-friendly basic attitude of the CJEU

Thus, the most plausible explanation is that the judges at the Federal Constitutional Court expressed such harsh criticism that they simply did not like the decision because the CLEU’S intention to integrate went too far for them. Thus, the former judge at the Federal Constitutional Court, Dieter Grimm, in a guest article [German], insinuates exactly this, only to conclude that the Federal Constitutional Court had little more left to do “than to at some point turn this language intended to protect the CJEU against it” (Frankfurter Allgemeine Zeitung of 18 May 2020), i.e. to consider the high requirements to have been met, although they were not. In doing so, however, the Federal Constitutional Court no longer takes itself seriously and loses its credibility. Nobody should set high requirements for himself or herself, only not to stick to them afterwards. In my opinion, a little more restraint would have done the Federal Constitutional Court good here. Not everything that the judges do not like is “no longer comprehensible”.

c) Even the Federal Constitutional Court judges did not find a consensus

It should also have made the members of the 2nd Senate sceptical that the decision was not made with eight to zero votes, but with seven to one vote. A constitutional judge, we unfortunately do not know which one, seems to have at least considered the CJEU’s decision to be comprehensible and therefore did not vote with the majority of his colleagues. But how can it be that something is “simply incomprehensible and arbitrary” if a Federal Constitutional Judge contradicts it? Once again, according to the definition of the Federal Constitutional Court, it is not about the best approach. It is about the fact that one, i.e. all, should no longer be able to comprehend the decision of the CJEU.

d) Analysis by interested circle

By the way, if you would like to read a more detailed analysis of the decision, please refer to the article by Prof. Meier-Beck, Chairman of the Cartel Senate at the German Federal Court of Justice, who is well known in the patent world, since until recently he was Chairman of the X. Zivilsenat at the Federal Supreme Court, which is competent for patent matters. He was and is “appalled [German]”.

5. Public statements by the rapporteur Prof. Huber

The rapporteur, Professor Huber, in particular, seems to want to put his view of things above that of others. I do not think that he can necessarily be described as shy of publicity. For example, he had himself interviewed about the decision on the Unified Patent Court even before it was published. A judge to be interviewed before his decision is issued is probably a one-off occurrence. Now, he again thinks he has to justify his decisions in public discussions. Unfortunately, he does not address the obvious points of criticism (see above).

I am particularly pessimistic about his statement that the Federal Constitutional Court had already doubted the absolute primacy of European law in the decision on the Unified Patent Court. In an interview with the FAZ newspaper of 12 May 2020 [German], for example, he says that Germany should not have joined the European Union in the first place if European law had been applicable without restrictions before the German constitution. The Federal Constitutional Court would have made this clear already “in the decision on the Unified Patent Court in January”. Apart from the fact that the decision was issued in February and published in March, it expressly states there that the question of priority can remain open (BVerfG, 2 BvR 739/17, decision of 12 February 2020, para. 166 [German], an English translation is available here). It must therefore be concluded from his statement that Professor Huber probably would have wanted to reject the primacy of European law already in this decision.

6. Consequences for the Unified Patent Court

This does not bode well for the Unified Patent Court. For in its Opinion 1/09 the CJEU has called for precisely this primacy of European law. If the Federal Constitutional Court did not allow this primacy – as Professor Huber indicates in the interview – the Unified Patent Court would indeed be dead. Whether Professor Huber is aware of the consequence that a European Patent Court would then never be able to exist, I venture to doubt. As I have experienced him so far, he will not care much about that. In case of doubt, he will think he has the upper hand and will be able to put his opinion above that of the Court of Justice of the European Union. Germany would then not be able to participate. That is not good news for the Unified Patent Court.

Dr. Christof Augenstein

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