Is monetary policy too important to be left to judges?

Last week’s controversial judgment of Germany’s Federal Constitutional Court exposed the challenges for judges in ruling on macro-economic matters.

On 5 May 2019, the Bundesverfassungsgericht (Germany’s Federal Constitutional Court) delivered a controversial ruling (case 2 BvR 859/15) on the competence of the European Central Bank (ECB) to pursue monetary policy. The point at issue was the ECB’s Public Sector Purchase Programme (PSPP) launched in 2015 to buy over public bonds on the secondary market, as part of a bigger package of monetary policy decisions. In its decision, the Bundesverfassungsgericht considered that both the ECB’s decisions related to the PSPP and the preliminary ruling delivered by the European Court of Justice (ECJ) at the request of the Bundesverfassungsgericht (Weiss, C-493/17, ECLI:EU:C:2018:1000) were ultra-vires acts, i.e. exceeding the competences of the European Union, as conferred in the Treaties. By implication, the Bundesverfassungsgericht called into question the EU legal order, and the very role of law in governing monetary policy. While plenty of excellent comments and analyses of the Bundesverfassungsgericht’s decision have been published online (see e.g. here, here and here), this post discusses the role of law in monetary policy, underlining the difficulties for judges in adjudicating on macroeconomic matters.

With regards to the context, it is important to recall that judicial intervention in monetary policy is exceptional, and a European specificity that dates back to the post-crisis period.

A central bank’s intervention is in principle rare, discretionary, technical, and limited to the use of a few macro-economic instruments (interest rate, money supply). What it does is provide money in different forms, including via facilities for banks or securities purchase. Central banks have generally benefited from judicial immunity, derived from the acte de gouvernement doctrine. Post-war, while governments were increasingly subjected to judicial scrutiny, central banks progressively gained independence from governments to shield them from political pressures. Central bank independence became the nec plus ultra model of non-majoritarian, technical agency independence.

Does this mean that monetary policy is not subjected to the law? Evidently, no. The central bank’s legal framework is, usually, provided by statutory law, adopted by parliament. The statute, thus, details the objectives and the instruments of monetary policy, and also makes provisions for the governance and the independence of central banks. Although central banks are independent, they do not operate in a political vacuum. In general, the governors of the central bank are nominated by the executive and are accountable to parliament, which can decide in the last resort to revise the central bank’s statute.

In this context, EU law constitutes a bit of an exception due to three of its constitutional features. Firstly, it is not secondary law, but primary law, that frames monetary policy in the European Union. Article 3 TFEU confers an exclusive competence on the EU in the area of monetary policy for the Member States that share the Euro, while Article 127(2) TFEU explicitly provides that it is for the ECB ‘to define and to implement the monetary policy of the Union’. The exclusivity and vast extent of this discretion is further confirmed by Article 130 TFEU, which shields the ECB from any external influence both from within the EU and from the Member States. Yet this discretion is not unfettered: The Treaties list the objectives and the instruments of monetary policy. The ECB’s objectives are, primarily, to ensure price stability and, secondarily, to support the general economic policies in the Union. At the same time, the Treaties are brief where the accountability of the ECB is concerned (see Article 284 TFEU).

Secondly, the idiosyncrasies of the EU legal order have rendered litigation over monetary policy decisions possible. Whereas it is possible to challenge legal acts taken by the ECB, direct actions against monetary policy decisions have been systematically dismissed by the ECJ due to the lack of standing of their applicants. However, the validity and interpretation of monetary policy decisions may be challenged indirectly, via the preliminary reference procedure. The Bundesverfassungsgericht has, thus, remarkably resorted to this backdoor option to question the validity of monetary policy decisions. It did so first in the OMT case, in which the Bundesverfassungsgericht eventually accepted, albeit with reluctance, the validity of the ECJ’s decision in Gauweiler (C-62/14, ECLI:EU:C:2015:400). The PSPP is the second instance of such a case.

Thirdly, the fact that the EU is not a federal state, but a ‘federation of nation states’ means that in the last resort, states remain the ‘Masters of the Treaties’. The Bundesverfassungsgericht expressly relies on this constitutional feature of the EU legal system to rely on the German constitutional law principles of democracy in conjunction with the principle of conferral (which ultimately means that the Kompetenz-kompetenz lies within the Member States, not the EU), in line with its case law (Lisbon, 2009; Honeywell, 2010), to directly contradict the ECJ.

What happened in the PSPP case exposes the difficulty – which can be traced back to Pringle (C-370/12, ECLI:EU:C:2012:756) – for judges to make legal judgments about macro-economic matters. This is not only the case for the Bundesverfassungsgericht, but also for the ECJ.

Although the prohibition of monetary financing, as set out in Article 123 TFEU, was a core issue of the proceedings in both OMT and PSPP, it was the distinction between monetary policy and economic policy that resulted in the ultra-vires qualification of the ECB’s decisions and the ECJ’s judgment by the Bundesverfassungsgericht. This problem can be traced back to the Pringle judgment of the European Court of Justice. In this case related to the Treaty establishing the European Stability Mechanism (ESM), the ECJ made in retrospect three controversial affirmations: first, that the distinction between the two competences of the Union was based on objectives, rather than on means; second, it considered that the stability of the Eurozone could not be an objective of monetary policy; third, it began downplaying the role of the effects of post-crisis measures to support its reasoning. These three hasty affirmations laid the ground for the judicial dead end with the Bundesverfassungsgericht.

For the ECJ, the distinction between economic and monetary policies is based on a difference of objectives. Although the ECJ was correct in later affirming that the distinction between monetary policy and economic policy was not ‘absolute’, this is precisely the case because their objectives may be overlapping. While the primary objective of monetary policy is price stability, its secondary objective is to support the general economic policies in the European Union. Conversely, it is not uncommon for economic policy to aim at price stability, for instance to avoid a deflationary spiral or to preserve purchasing power. By contrast, the difference between the two competences is clearer when it comes to means. Monetary policy is characterised by a monopoly on the supply of money, while economic policies can take various forms (e.g. fiscal, tax, labour law). What is true is that the objectives of monetary policy are set in the marble of the Treaties, while the means are provided in the more technical Statute of the ECB and the European System of Central Banks (ESCB).

With regards to the stability of the Eurozone, it is assuredly not provided as such in the Treaties as an objective of monetary policy. However, it is more than an implicit objective. The EU action in this area is based on the cornerstone of a single currency and the conduct of a single monetary policy. In addition, the stability of what has become the Eurozone has underpinned the general economic policies in the European Union since the 1970s. Recognising the importance of the economic stability of the Eurozone would have avoided some misunderstandings at the core of the controversies surrounding the ECB’s monetary policy.

Thirdly, a critical issue for the Bundesverfassungsgericht was repeatedly downplayed by the ECJ: the effects of monetary policy. The ECJ’s avoidance strategy was already evident in Pringle where, in an attempt to safeguard the objectives-based distinction between economic and monetary policy, it incongruously asserted that a measure of economic policy aiming at the stability of the Eurozone ‘may have indirect effects on the stability of the euro’. Not only was this line of defence impossible to maintain in practice, but it also led the ECJ to disregard the effects of the measures brought to its attention. Although the ECJ partially redressed the problem in Weiss, its attempt to justify its previous assertions was particularly unconvincing. Thus, the ECJ clumsily asserted that the authors of the Treaties did not intend to make an absolute separation between economic and monetary policies, despite its own attempt in Pringle and Gauweiler to widen the gap between the two policies, by reference to their objective. This probably emboldened the Bundesverfassungsgericht to deem the PSPP ultra-vires, based on the side-effects of the programme, showing that courtrooms are arguably not the best place to have ex-post debates on the effects of monetary measures.

Finally, the control of proportionality of the measures became a stumbling block in this judicial battle, as the ECJ’s control over manifest errors of appreciation differed from the Bundesverfassungsgericht’s standard of full judicial review. Thus, the ECJ attempted to balance the need for leaving a wide margin of appreciation to a discretionary institution in a technically complex economic area with the Bundesverfassungsgericht’s demands. As a result, the ECJ relied heavily on a list of guarantees provided by the ECB that would limit the scope of its monetary policy measures. However, the reliance of the judicial review on these guarantees risked making the validity of future monetary policy measures contingent on them, irrespective of a future change in circumstances. The difficulty in establishing a proportionality test adequate for monetary policy, particularly with regard to the suitability of the decisions, can best be appraised in light of the outcomes of the decisions. While the PSPP was inadequate for boosting inflation swiftly, it was considered disproportionate by the Bundesverfassungsgericht because of its indirect effects. Similarly, the current Pandemic Emergency Purchase Programme could be considered disproportionate in light of the ECJ’s proportionality test, despite the fact that the situation required much bolder action than at the time of the PSPP. Interesting to note in the assessment of the courts, is the minor consideration that was given to the emergency situations in which measures were taken.

Judges certainly have a responsibility when it comes to ‘guarding the guardians’ in the absence of more accountability, but they do not have sufficient qualifications, nor democratic legitimacy, to adjudicate on macroeconomic matters. Ruling macroeconomics with constitutional law is particularly risky, as a given set of rules may only fit certain circumstances.

By alleging an excess of competence of the ECJ and the ECB, the Bundesverfassungsgericht was not so much following the law, but more Milton Friedman’s maxim that ‘money is too important to be left to the central bankers’. This judicial saga, however, is likely to continue since money may actually be too important to be left to judges.


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