Tag: european union

Germany’s Constitutional Court Ruling and the European Legal Order

In 2015, the European Central Bank (ECB) launched a massive quantitative easing plan, purchasing government bonds and other securities worth some €2.6 trillion in order to increase money supply, keep inflation at around 2%, encourage private lending and spur economic activity in the midst of the eurozone debt crisis. The largest part of the scheme, known as the Public Sector Purchase Program (PSPP), involved the ECB’s purchase of bonds issued by euro-area governments worth some €2.1 trillion. At the program’s peak in 2016, before it ended in 2018, the ECB was buying up to €80 billion of assets monthly.

On May 5 of this year, the constitutional court of the EU’s largest economy — the German Federal Constitutional Court (BVerfG) — issued a landmark ruling on this stimulus plan. In its judgement, the BVerfG expressed its concern that the PSPP violated the limits set in Article 123 of the Treaty on the Functioning of the EU (TFEU) regarding the purchasing of public debt instruments by the ECB, as well as the principle of conferral in Article 5(1) of the Treaty on EU (TEU), which declares that unless a power is explicitly mentioned in one of the two EU treaties, it should be exercised by national governments rather than an EU institution. Given these facts, the judgment ruled that the ECB’s decision from March 2015 to expand quantitative easing in the form of the PSPP was ultra vires, or beyond the authority of the ECB. It gave the ECB’s Governing Council three months to prove otherwise.

However, the ruling comes as a shock not so much to the ECB, but rather the European Court of Justice (ECJ) — which, under Article 263 of the TFEU, is tasked with interpreting EU law, ensuring is application across EU member states, and reviewing the legality of actions undertaken by the EU institutions. In December 2018, the ECJ issued its own ruling about the ECB’s quantitative easing program in response to similar concerns from Germany. The ECJ found that the ECB’s actions did not infringe EU law, nor did they exceed the ECB’s legal mandate. In the simplest of terms, since the program constituted monetary policy — over which the EU has exclusive competence for eurozone member countries — the ECB acted within its powers. And since the ECJ found that neither decreasing the volume of asset purchasing, nor the program’s duration, would have been able to achieve as effectively and rapidly inflation targets, the ECB’s actions adhered to the principle of proportionality in that they were legitimate, suitable, necessary, and reasonable to achieve the aim of keeping eurozone inflation at around 2%.

The European Court of Justice in Luxembourg (source: Die Zeit)

The BverfG disagreed with this, dismissing the ruling as “incomprehensible” and arbitrary. While acknowledging that the Treaties stipulate that only the ECJ may conduct ultra virus reviews on EU institutions, the German court held that the principle of conferral means that member states can judicially intervene when the threat of an expansion of competencies that has not been codified in one of two EU treaties exists. The ECJ’s failure to consider the fiscal effects of the ECB’s monetary actions and the proportionality of the PSPP justified the BverfG’s decision to rule that the ECJ, just like the ECB, had acted ultra virus.

Federal Constitutional Court in Karlsruhe, Germany (source: karlsruhe-erleben.de)

The ruling is important for several reasons. The first is the potential limits that it sets on actions that the ECB may take to prop up the eurozone during downturns such as the current coronavirus crisis. The ECB is currently engaged in a €1.35 billion Pandemic Emergency Purchase Program (PEPP) which involves the purchase of private and public sector securities to lower the cost of borrowing and prompt economic activity — a scheme that is similar to its response to the debt crisis five years ago. While the ruling explicitly says it doesn’t concern the ECB’s PEPP, it may result in a reduction of the ECB recession toolkit in future and the actions it allows itself to take during downturns. Within the context of Europe’s worst recession downturn, this may put recovery in jeopardy.

The second reason why the BverfG decision is important is the implications it has for the supremacy of EU law and the ECJ’s ability to ensure its uniform application throughout the Union. The May 5 decision is not the first time the German court has challenged the primacy of EU law and the authority of its top court. In 1974, the BverfG ruled that EU law — then known as European Community law — cannot take priority over national law when it comes to inalienable rights. In another case in 2016, the BverfG ruled that national courts must counter actions of EU institutions, including the ECJ, when those actions are ultra vires. Czech and Danish courts have reached similar rulings in the past. Some experts argue that these push-backs from national courts actually strengthen Europe’s legal landscape: given the ECJ’s power to sanction member states when their legislation violates EU law, in a system of checks and balances the ECJ should also be subject to constraints.

Yet others argue that the recent decision could lead to the erosion of the ECJ’s status as the highest arbitrator of EU law, with serious consequences for the enforcement of the rule of law in the Union. In response to the BverfG judgement, the ECJ issued a statement in which it stressed that it alone holds the power to rule whether an act of an EU institute contravenes EU law, and that “divergences between courts of the Member States as to the validity of such acts would … place in jeopardy the unity of the EU legal order.” Legal experts D. Sarmiento and D. Utrilla agree: they write that the decision “clears the way for the ultra vires test to become an ordinary part of the toolbox of every national court,” which could be leveraged by courts in countries like Poland and Hungary where the executive branch has implemented reforms compromising judicial independence.

The Polish government has previously criticized what it calls ‘EU meddling’ in its judicial system; after the BVerfG decision, Poland’s Deputy Minister for Foreign Affairs said that the judgement was revolutionary “in terms of the effects it could have [on] the competence of national authorities … to verify whether the EU institutions are acting within the powers assigned to them in the Treaties.” Should national courts assume the role of arbitrating the legality of decisions undertaken by EU institutions, any ECJ judgement that finds a member state violating EU law or attacking core EU values like judicial independence could be scrutinized and deemed ultra vires by a politically-controlled national court.

There are several ways to help prevent this scenario from unfolding. The first and most straightforward is the initiation of infringement proceedings, which are a set of actions the Commission undertakes when member states are suspected of violating the Treaties. Commission President Ursula von der Leyen, reacting five days after the BverfG decision, stressed that “the final word on EU law is always spoken in Luxembourg,” and that the Commission was considering such proceedings against Germany. In the long term, further steps proposed by some include the creation of a type of upper chamber within the ECJ to be tasked with reviewing national court judgements that, like the BVerfG ruling, find an EU institution to be overstepping its mandate. In this way, the ECJ would once again be the last arbitrator in all matters concerning EU law.

Europe needs an ECJ whose decisions are respected not only for the sound functioning of the single market, but increasingly for the enforcement of the rule of law in a number of member states. In an era of populism and pandemics, this is increasingly important. The Commission should take all actions necessary in order to maintain the ECJ’s authority — even if this means reforming the ECJ and pursuing an infringement procedure against one of the EU’s most Europhile members.

John Mourmouras, Deputy Governor of the Central Bank of Greece, Talks Euro and the North-South Divide

Written by Lyubomir Hadjiyski

John (Iannis) Mourmouras is Deputy Governor of the Bank of Greece with responsibilities pertaining to the implementation of monetary policy, global capital markets, payment and settlement systems, and bank resolution. He is also Chairman of the Bank’s Financial Asset Management Committee.  He served as Deputy Finance Minister of Greece (2011-2012) and was Chief Economic Advisor to the Greek Prime Minister, as well as Head of the Prime Minister’s Economic Office (2012-2014). He is Professor of Macroeconomics at the Department of Economics, University of Macedonia – Thessaloniki, Greece, and has previously held academic positions at a number of British universities. He holds a PhD from the University of London and is a graduate of the London School of Economics (LSE).

John Mourmouras spoke to Princeton students and faculty today on the topic of the Euro — the common currency of the European Union. He highlighted the currency’s achievements and drawbacks in the 21 years since its implementation, and his predictions for the opportunities and challenges that lie ahead.

The two decades of the Euro can roughly be split into two, each with its own distinct characteristics. The first, from the introduction of the currency in 1999, ended in 2008 with the global financial crisis. During this time, the Euro emerged as the world’s second reserve currency behind the US Dollar — a position it still holds today. The second period, from 2009 to 2019, was marked by ten years of European economic turmoil that hit Southern countries particularily hard. During this time, four EU member countries participated in EU bailout programs — included Greece, Portugal and Cyprus — while the European Central Bank (ECB) engaged in unconventional monetary policy like setting negative interest rates and engaging in quantitative easing.

However, the North-South divergence existed far before the Eurozone crisis. In the ten years after the 1999 introduction of the Euro, North European countries saw, on average, a 30% increase in their GDPs. For Southern Europe, this number was closer to 10%. Indeed, the split between the North and South appears to be chronic, and largely due to three reasons. The first is historic differences in unemployment rates: while some countries like Spain have a long-term unemployment rate of 12%, most Scandinavian countries hover around 5%. This means that potential output is lost in Southern European countries. Second, labor and total factor productivity is significantly lower in the South. Third, asymmetries in incomes have arisen due to lower wages and stricter austerity measures in the South, which has also impacted consumption. All in all, the North-South divide has widened since 2009, which poses a substantial challenge to the unity of the EU.

There are several lessons to be learned from the Eurozone crisis, the most important of which is that the sovereign debt crisis was not inevitable: the existence of a common fiscal authority (in addition to the common monetary authority in the face of the ECB) would have lessened the impact of the crisis by formulating a common fiscal response in both prior and after the Eurozone crisis. National governments failed to use fiscal and other policies to manage the credit boom of the early 2000s, and subsequently relied on excessive austerity to manage the crisis. Further, the ECB was too slow in moving towards unconventional policies like quantitative easing, all of which prolonged recession.

There are several challenges that lie ahead. Among the greatest are what role, if any, the ECB will take with regards to Climate Change. While some, including ECB President Lagarde, argue for an active role, the question remains whether this is within the purview of the institution. Second, the emerge of digital currencies will bring multiple difficulties and opportunities, and Central Banks all over the world will have to contend with tech giants and corporations that control these alternative currencies. Finally, Europe’s populist wave may threaten both the unity of the bloc and the ability of the ECB to make independent, technocratic decisions; the prospect of politicizing the institution is real and dangerous.

The Euro’s 21-year history has been eventful. However, Mourmouras argued that this is the natural evolution of monetary unions — after all, the United States only established its Federal Reserve more than 100 years after independence. The Euro is a global currency: it remained strong throughout the debt crisis and is here to stay. Whether it will overtake the US dollar, continue to be the world’s second reserve currency, or lose this title to the Yuan depends on political will and smart policy.

The EU and Turkey: event with Mario Zucconi, author of ‘EU Influence Beyond Conditionality’

Written by Riccardo Talini Lapi

Mario Zucconi studied at the universities of Perugia and Palermo, Italy. In 1968-1970 was a postdoctoral fellow at Princeton University with a Harkness Fellowship. He then taught or was a guest/research fellow, among other places, at Naples University, Urbino University, Johns Hopkins’ SAIS (Bologna Center), NATO Defense College, Columbia University, University of Maryland (College Park), Woodrow Wilson International Center for Scholars. He taught (as visiting professor and later lecturer) at Princeton’s Woodrow Wilson School of Public and International Affairs first in 1987 and then regularly from 2003-04 to 2017-18. He led research projects for the Italian Ministries of Defense and Foreign Affairs and was, on several occasions, expert witness at hearings of the European Parliament and at UN’s consultations. His research has focused on transatlantic relations, East-West relations, the Balkans, Turkey and the Middle East and, most recently, on democratic transition.

Professor Zucconi came to present his new book “EU Influence Beyond Conditionality: Turkey Plus/Minus the EU.”  Professor Zucconi tries to fill the gap in the literature on EU conditionality, which rarely looks at what happens within the target country and focuses too often on normative problems, rather than political conditions. His research centered on analyzing the difference in Turkish domestic politics before and after the start of the accession talks to the EU.  Professor Zucconi’s thesis is that EU enlargement can bring peace and stability, and the case of Turkey proves it.

Turkey became candidate country to the EU in 1999, after years of political instability and military rule. In 1995 there were a dozen parties in Turkey, of which 6 represented in parliament. The Welfare party, the Islamist party, became the leader of government, but in 1997 the secularist military staged a coup and took over. By the turn of the century, the EU had become the “substitute authority” Turkish people looked upon for hope and direction. The Islamist AKP, born from the ashes of the Welfare and the Virtue parties, the party still ruling today, adopted EU conditions as their official political platform at the 2002 elections. In 2002, the AKP won over 2/3 of seats in parliament, and was thus able to govern without coalition partners. This victory did not only come about because of the mass migration of the rural population to the cities, but mainly because Islamist was the first alternative to authoritarianism. The periphery was, in fact, emancipating itself through the process of migration and political participation in the cities. By 2001, over 75% of the Turkish population favored being part of the EU. The popularity of the EU could not even be stopped by the military, whose chief of staff declared in 2003 that the military would respect the people’s democratic decisions. This positive cycle was reinforced in 2004, when formal negotiations to enter the EU began.

A staff adjusts European Union and Turkish (L) flags ahead of the arrival of Turkey’s Prime Minister Tayyip Erdogan (not pictured) at the EU Commission headquarters in Brussels January 21, 2014. REUTERS/Francois Lenoir

However, in the same year, Cyprus joined the EU thanks to Greek pressures and the Cypriot question became the scapegoat to suspend the accession talks in 2006. As Professor Zucconi noted, perhaps Europe was not ready to accept a majority Islamic country in the Union and to have borders with Iran and Syria. Yet, he thinks that Turkey would have been a strategic member for the EU, as much if not more than the UK as he was once told in Brussels. In 2006, Europe disappeared from Turkish domestic politics, while the AKP has remained in power under Erogan’s leadership. Without the EU, Turkish politics went back to the polarization between secularism and Islamism, with the latter succeeding in the creation of an authoritarian regime under Erdogan’s leadership. The Islamists used the military’s own methods to construct a regime where the links with Europe would progressively disappear.

Today, Turkey is still ruled by Erdogan’s AKP and it has redirected most of its trade and political network from the EU to the Middle East. It is playing an aggressive role in the eastern Mediterranean and is far from the stabilizing Middle Eastern power it used to be in the 1990s and early 2000s. The case of Turkey teaches us that the EU enlargement process should be reformed, and conditionality should be tailored to the domestic politics of the target country to ensure successful entry into the EU.