The ECB is deluding itself over German court ruling

In the end, the German constitutional court has done us a favour. Its ruling last week highlighted the toxic idea that the eurozone can forever rely for its survival on its central bankers, and their enthusiasm in pushing EU laws to the limits. Or maybe beyond — as the German court wrote in a case last week on the European Central Bank’s public sector purchasing programme.

The court asserted that the ECB transgressed its competences and violated German constitutional law.

The original German version of the ruling is 110 pages long, while the English translation runs to more than 90. I don’t think many people have yet fully digested all the technical details. I do not believe, as some commentators have suggested, that the court was only asking the ECB for a clarification. Although a member of the bank’s council suggested that it would take the ECB five minutes to satisfy the request, I do not agree. They are still in denial.

In particular, I do not see how it is possible for the ECB to meet the court’s criteria for making the purchasing programme conform to the law unless it changes some of its parameters. The ECB will in future still buy assets and provide emergency relief. But I suspect that the central bank will, in the long run, hold fewer assets on its balance sheet as a consequence of this ruling.

In section 212 of the decision, the court states that the lack of a pre-determined exit strategy increases risks. In section 235, near the very end, it obliges the Bundesbank, the German central bank, to “ensure that the bonds already purchased . . . and held in its portfolio are sold based on a — possibly long-term — strategy.”

Earlier it argues that the €2tn stock of assets on the ECB’s balance sheet constitutes a risk that encroaches on the competences of national parliaments. I think the ECB will struggle to answer all, or even most, of the court’s concerns.

Beware of innocuous sounding words in the judgment like “obvious”, “evident” or “proportionate”. What is obvious to a lawyer may not be obvious to the rest of us — and vice versa.

The notion of proportionality is particularly central to German constitutional law. It requires government and lawmakers to ensure that policy does not overreach and takes account of the interests of all parties. The court tends to subject its assessment of proportionality to rigorous tests. But it is in the nature of monetary policy that it has to be disproportionate at times.

The ECB is, of course, not subject to German law. As an EU institution it answers to the European Court of Justice. But this ruling is binding on the Bundesbank. I doubt that Jens Weidmann, its president, will want to fob off the German judges with a superficial response.

The ruling only allows the Germans take part in the asset purchase programme for another three months unless they find a way to comply. Theoretically, the ECB could proceed without Germany. But I would strongly advise against it because that could precipitate a eurozone break-up.

Since its 1993 ruling upholding the legality of the Maastricht treaty, the German constitutional court has become more radical. But it avoided outright confrontation, until last week.

I find the most troubling aspect of this ruling is the assertion that the ECJ was also transgressing its competences by approving the bond buying and has gone ultra vires, in the Latin jargon of German constitutional lawyers.

This part of the ruling raises deeply troubling issues for the relationship between the EU and its member states. The German court accepts the principle that EU law overrides national law for areas they specifically recognise lie within the EU’s competence. But they reserve the right to decide whether the EU and the ECJ are operating inside or outside their legal remits. It sets a troubling precedent.

The smartest response to this ruling would be for the EU to address the problems of the eurozone head on: lack of convergence between north and south, debt sustainability and, most important right now, the issuance of mutualised debt to finance a recovery fund.

The German constitutional court cannot stop the European Commission from raising €1tn in debt in the form of a perpetual bond. But it is important this debt is guaranteed by the EU rather than member states, because other national courts might raise their head.

Arguments over the future of the euro are only just starting. To win them, supporters of political and monetary integration must let go of the ECB as their comfort blanket, and the idea that it can always do whatever it takes. That battle was lost last week.

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