As the FT has reported:
A bombshell ruling by Germany's constitutional court questioning the legality of European monetary policy impinges on central bank independence and imperils the EU legal system, former policymakers and legal experts have warned.
The court on Tuesday ordered the German government to ensure the European Central Bank carried out a “proportionality assessment” of its vast purchases of government bonds to ensure their “economic and fiscal policy effects” did not outweigh other policy objectives. It threatened to prevent the Bundesbank, Germany's central bank, from making further asset purchases if the ECB failed to comply within three months.
I am not, of course, an expert on the German constitution. I have no idea if this court ruling is technically right, or wrong. But I do know this decision is dangerous.
I have not been a big fan of the European Central Bam (ECB). Nor have I ever been a fan of the Euro, which was a deeply misconceived idea from its outset. It was always a case of politics getting in the way of necessary economics in a way that was eventually bound to cause stress for all involved.
But what I do know is that, whatever the rights or wrongs, the Euro exists, and so, by necessity as a result dues the ECB. And in that case it has a duty to behave like a central bank. By necessity that now means it must do one of two things. The first is quantitative easing (QE) and the second is direct monetary funding (DMF) of government spending by central banks. Since DMF is very hard indeed in the ECB's case, QE it has to be. There is no monetary policy otherwise. That it looks like fiscal policy is beside the point: it's all the Eurozone has.
And this matters: the livelihoods and economies of many countries across Europe do now, whether German courts like it or not, depend upon the intervention of the ECB in this way. Pragmatically, and with nosepegs applied, the ECB's role is essential at present.
But what is happening is that a group of hard right politcians and economists (and for these purposes, they can be presumed to be the same) are seeking to prevent Germany playing a part in the necessary process of saving the community of which it has chosen to be a part. This is blatant nationalist intervention. It is intended to create hardship. The object is international division. The weapon used is the integration of neoliberal thinking into legal structures that was always intended to be used for this purpose. Even as a pro-European I recognise all the flaw in its institutions that have been created to permit this.
This legal action is entirely malign. Its sole aim is to create havoc. I suspect that the courts knew that. I wonder if the ambiguity of the ruling is intended to avoid it.
Real leadership will be required to address this issue. And we can be sure that such claims will be replicated elsewhere: right wing interests are not going to give up the claims that they have established over society without a fight, including in courts, with which they are, of course, so familiar.
I have no idea how the situation will resolve in Germany. What I do know is that this is a warning signal: a crisis is coming, and upon its outcome depends the well-being of people for decades to come.
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Hi Richard,
just a small note, the German Supreme Court is not composed of politicians or economists – by default I suppose all judges are conservatives but nonetheless…
The action was brought by such people
I thought that is what I made clear…
I recall the negotiations over the Maastricht Treaty well and the Treaty is quite clear – direct lending to governments by the ECB is prohibited, purchases of bonds in the primary market are prohibited, purchases in the secondary market are permitted. Germany fought hard and got their way on many things but they made a clear concession on secondary market purchases. To claim after the event “oh, that is not what we meant” is disingenuous. Germany spun it as a ‘win’ – that secondary market purchases would only be used as part of normal open market operations but those involved knew that it could always mean more than that. Of course, nobody foresaw where we are today but the possibility was INTENTIONALLY embedded in the Treaty. German conservatives have been fighting a rearguard action ever since and their complaints long predate QE. Some Germans might regret Monetary Union but they can’t argue that “this is not what we signed up for”.
Could Germany ever pull out of the Euro? Never say never, but one overlooked reason for staying together are TARGET 2 imbalances – where they are now and where they might go if ever there was a whiff of German secession. It’s a complicated subject but in short, the Bundesbank would have liabilities in “Neumarks” and assets in Euro….. and they would be HUGE (currently EUR 1 trillion). So, despite Germany’s desperate attempts to avoid liability for other nations debts, the reality is that they are already on the hook. If someone owes you £1 they call you sir….. if they owe you £1,000,000 you call then sir… what a about EUR 1 trillion?? So, Germany cannot call the shots…… they know it but they don’t want us to know it!!
I am amused..
This is a good page with a reasonable explanation of TARGET2 (im)balances.
https://www.bundesbank.de/en/tasks/payment-systems/target2/target2-balance/target2-balance-626782
My takeaway from this page is the fact the key number is in a red box….. no, of course the Bundesbank is not worried??!!
Nothing to see there 🙂
What’s €935 billion between friends?
Actually I think the opposite is true,but it’s an interesting debate. These are reserves held by the Bundesbank,they are already there in Germany,the reserves have been sent from the French central bank(in their example) and placed with the German central bank,who then and only then, can credit the German exporter’s commercial bank account. In effect this is a real resource moving from France to Germany. Target 2 acts a one gigantic hoover in the euro ,sucking up real reserves from the rest of the EU to Germany. This is an inevitable outcome, with Germany being a net exporter and running a surplus trading account.
Of course Warren Mosler would try to say the opposite, namely that it is the trading deficit countries get the benefit of real goods here,that may be partly true, but the Germans are getting the money here. So vast sums of money (and with that real wealth)have been transferred from the rest of the EU to Germany.
If they ever left,the Germans would leave with the same reserves and would owe no-one anything. They would most likely convert Euros to Marks overnight and move on untouched.The ECB would be the one left holding the baby regarding its holding of Euro sovereign debts. Germany would however face an immediate rise in the value of that new currency,making all their Mercedes and BMW’s suddenly very expensive.This would be a real German worry. They currently do very well out of selling cars valued in an undervalued Euro,though Warren Mosler seems to think not. Selling those cars with a new Mark would be a whole different scenario.
It would be incredibly irresponsible for any eurozone country to not move forward with minibot’s or similar alternative currencies immediately. Maybe this is just the push needed to gently shadder the common currency.
An important story I agree and one I became aware of day of via my Twitter feed. But no mention on the Today programme that I heard this morning. They (and the BBC generally) really are having a very bad Covid crisis. They spent the last 5-10 minutes discussing Neil F.
Apologies for being slightly off topic, but the glaring omissions are just becoming too much. That and the consistent pro-Government framing.
The Neil Fergusson story is a stitch-up
They’ve known about it since April 8 at least
They issue it when we hit biggest deaths in Europe
There is no chance of coincidence in that
I agree that the ECB & EU are under threat from nationalist tendencies but the tragedy of it is that they have brought it upon themselves (and us) for using neo-liberal/libertarian policies and austerity.
The Marxists were right in that people have risen up – but what they did not know was that such revolution would be led by Fascist Right sentiment – not Bolshevism.
The architecture for this was the legacy of the Nazis and the resulting de-Germanification of Poland, Hungary, Czechoslovakia etc., after the war. We have been living in a much less integrated Europe since then and it is no surprise nationalistic sentiment has grown recently. The EU has really only been papering over the cracks, but also makes us realise how important its creation really was.
Sadly, stuff like this reminds us that we are all prisoners of history. And stupidity.
Dear Pilgrim
The old saying -From Cicero I think, that those who forget their history, are condemned to repeat it-has some relevance here.
The past does influence us but we need not be prisoners. In the 1930s the world economic crisis saw the May report and cuts to govt. spending, including the dole. All the parties more or less agreed, apart from some of the Labour Party, Lloyd George and Oswald Mosely!
The Depression brought the Nazis to power with all that followed. Before then they had been a fringe party.
The 2008 Global crisis was handled better. The G20 agreed a stimulus but it was followed by austerity, the euro-crisis with many of the same issues as being on a gold standard. It has seen the rise of the populist movements who have no real answers and spew hate.
This is a different sort of crisis but the consequences could be similar and even worse.
Can we not get it right on the third attempt and break the chains of our history?
The German court has intervened on this before,when Draghi initiated his initial rounds of QE after the 2008 financial crisis. The Germans court ruled then that the government was treading on thin ice as this was a breach of the German constitution that strictly forbids monetary funding of sovereign debt. So this is round 2 of that issue if you like. This is taken very seriously in Germany,whether we like it or not.
The Germans will only ever give up on this when they have achieved a full political union with the rest of the EU members,whence state tax and spending issues are controlled from the centre and not nationally,which is a long way off at the moment.
It is however the ultimate goal of the EU, until that happens Germany will not relent. Merkel is in a dilemma,as a pro EU supporter she wants to keep the EU moving forward, but she has to do it within the severe confines of the German constitution ,it is a circle that is almost impossible to square.
What is really worrying about this from an EU perspective is that the German court is saying it can over-rule the ECJ
And under EU law it can’t….
So this is a threat to the EU itself
There have been predictions of the EU’s demise for many years,it is still plowing on.
I think there is some grandstanding going on in the German court, Merkel will negotiate a way round ,she usually does in the German parliament. But she faces much domestic pressure, of that there is no doubt.
Since there is zero chance of treaty change surely one of two things must happen. The legal challenge ultimately wins, the ECB’s hands are tied by the consequential German veto, and the Eurozone collapses as a resulting (I imagine that means the EU also breaks up, but it would at least be massively damaged). I believe the much more likely outcome is a further fudge by the ECB that allows the German court to dismiss the challenge and the ECB continues to prop up (note ‘prop up’ not ‘support’) Club Med’s Governments while also promoting the asset bubbles that have been decried here for so long and further accelerating unsustainable foreign currency debts in those countries (Italy’s euro debt is just the same as Argentina’s USD debt). The latter will naturally be considered the better outcome.
Would not the best outcome be to leave this mob and to be able to fund your Government’s deficit spending by whatever means your sovereign parliament considered appropriate?
We are not in the Euro
Are you saying you hadn’t noticed?