The ECB Needs to Rediscover Itself: And return to its conceptual and legal foundations.

• Author: Stark, Jurgen

The doubts of the German Federal Constitutional Court about the conformity of the Public Sector Purchase Program of the European Central Bank with its mandate (published in a ruling on May 5, 2020) have sparked a new controversy about the independence, mandate, and power of the ECB.

The German Federal Constitutional Court argued that for "safeguarding the principle of democracy, it is imperative that the bases for the division of competences in the European Union be respected." The Federal Constitutional Court (2020) criticized the European System of Central Banks for not carrying out a sufficient "proportionality test" of the PSPP, that is, it had not sufficiently weighed the unintended side effects of the program (on public debt, personal savings, pension and retirement schemes, real estate prices, and the keeping afloat of economically unviable companies) against the monetary policy objective that the program aims to achieve and is capable of achieving. The Court obliged the German federal government and the German parliament, the Bundestag, to ensure within three months that the ECB conducted a proportionality assessment, communicated their legal view to European Central Bank, or took other steps to ensure that conformity with the European Treaties was restored.

The ECB has signaled on many occasions that it regards itself obliged only to the European Court of Justice and not to national constitutional courts. Thus, the dispute is about both the ECB's understanding of the design of monetary policy and its accountability. It reopens the question of the central bank model of the European Monetary Union, which seemed settled in the Maastricht Treaty in favor of the blueprint provided by the Deutsche Bundesbank.

STATUS AND MANDATE

The Deutsche Bundesbank, and its predecessor, the "Bank deutscher Lander" under the influence of the United States and United Kingdom after World War II, were politically independent prior to monetary union and committed to the objective of price stability. Pursuing a consistent policy for price stability in the medium term, it delivered low inflation and a strong currency for Germany. By contrast, in France, Italy, and many other southern European countries, the central banks were subordinate to the ministries of finance. Interest rate changes were decided politically, with central banks obliged to implement these decisions. As a result, inflation rates were higher than in Germany, and the southern European currencies depreciated against the D-mark.

With the creation of the European Monetary Union by the Maastricht Treaty of 1992, important and proven principles based on the model of the Bundesbank were established. They included the independence of the ECB and the national central banks, as well as a narrow mandate to maintain price stability as the primary objective of monetary policy. The ECB was endowed with an even higher degree of independence from political influence than the old Bundesbank, since its status was enshrined in international law.

Furthermore, limits were imposed on the Member States with regard to public budget deficits and debt. Within the framework of European rules, fiscal policies remained the responsibility of the Member States. Other constitutive elements were the prohibition of monetary financing of government expenditures (Article 123 of the Treaty on the Functioning of the European Union) and the ban of the European Union or single Member States on assuming liabilities of individual member states--known as the "no bailout" clause (Article 125, TFEU). Economic policy remained largely a national responsibility, unless competences were explicitly transferred to the European Union in whole or in part in Article 3 and Article 4, TFEU (which stipulate the principles of transfers).

The independence of the ECB is thus limited exclusively to the mandate of price stability. This...