An unexpected blow to the ECB

Since the beginning of the year, the corona crisis has come to monopolize the news coverage to the extent that a lot of very important stories and developments either went underreported or were ignored altogether. One such example was the very surprising ruling out of the German Constitutional Court in early May, that challenged the actions and remit of the ECB. This decision could have severe repercussions if it were to be held up, but the reactions to it were arguably even more consequential and telling of the ECB’s and the EU’s stance on national sovereignty, on respecting member-states’ own laws and on their own expansive powers.  

ECB “went too far”

In essence, the court’s decision made it clear that the ECB’s QE program did not respect the “principle of proportionality”, abused its mandate, while the German government failed to challenge the bank’s policies as it should have. The ruling also mentioned the side effects of the program and of the ECB’s overall ultra-loose policy direction, such as penalizing savers and pensioners. As was highlighted in the official decision, “the ECB fails to conduct the necessary balancing of the monetary policy objective against the economic policy effects arising from the program. Therefore, the decisions at issue…exceed the monetary policy mandate of the ECB.” As a result, the court issued an ultimatum and directly asked the Bundesbank to comply with its ruling and therefore to stop buying government bonds under the ECB’s QE program in the next three months.

This decision, which was largely unexpected, has once again reignited serious concerns over the stability of the euro area. It also brought to the surface existing frictions not just over monetary policy, but over the legal standing of the ECB, the EU and their relationship with member states. Serious questions over sovereignty, national law, and institutional overreach were once again raised, as did challenges to the legitimacy of centralized EU authority and institutions.

Given the severity of these challenges, especially in a time like this of great uncertainty and increasing public discontent, it is not surprising that those institutions wasted no time in responding to the German court’s decision. Chief ECB Economist Philip Lane directly contradicted the court, claiming that the QE program is indeed “proportionate” to the economic situation, while President Lagarde, appeared unflinching in her stance, declaring that the ECB is “undeterred” in the face of the decision. 

The European Court of Justice also appeared dismissive of the ruling, reiterating that it was the bloc’s judicial authority and that it alone has jurisdiction to decide whether EU bodies are breaking EU law. This stance was made even more plain by the President of the European Commission, Ursula von der Leyen, who in her official statement on the matter highlighted in no uncertain terms that “EU law has primacy over national law”. 

Momentous implications

There are two important takeaways from this legal challenge, or more accurately, from the response to it. For one thing, the core principle that was reflected in the ECJ’s reaction, namely that only the European Court can decide if EU institutions are breaking EU laws is deeply, seriously troubling to begin with. Admitting that member states get no say in any of this is problematic enough, but the idea of concentrating power and legal authority to this incestuous degree is plainly an affront not just to western justice principles, but also to common sense. 

There is a reason for the separation of powers and in a rough analogy, it is clear why the duties of the lawmaker, the judge, jury and executioner cannot be all be assigned to the same person. This basic commonsensical idea about fairness, that even children understand in their playground disputes, is frequently stepped upon by any kind of state or “public” court of course, as the concept of impartiality often goes out the door, especially when the state is responsible for adjudicating cases against itself. 

The same principle applies in this case: It is simply ridiculous to have the same group of technocrats, bureaucrats and functionaries, who are largely unelected and unaccountable to the citizens they rule over in any real way, control all the levels of legislation, governance and justice. In other words, not only do they get to write the rules and enforce them, but they also police themselves, check each other’s work and then deliver “justice”, without any interference or argument by the representatives of those who are directly affected by their actions. Member states are entirely excluded from the process, even those whose citizens are forced to pay the bill for all the generous programs and ambitious initiatives. 

Such a perverse construct is not only abominable in terms of fairness and transparency, but it is also entirely unsustainable. The nonchalant dismissiveness of Ms. Lagarde and Ms. Von der Leyen might make for good PR and their efforts to exude confidence in their institutions is certainly necessary in their respective positions, however, they both probably understand the hollowness and limitations of this kind of blasé stance, as does everybody else. Not being worried over a legal challenge out of Greece or Italy, or any other highly dependent net-receiver out of the bloc would be understandable. Not so with Germany. 

The second lesson out of this confrontation was best summed up by an unlikely supporter of the ECB in this fight. Former German Finance Minister Wolfgang Schaeuble, a vocal critic of QE and of the bank’s loose policies in general, appeared to be displeased by the court ruling, but for very interesting and clearly articulated reasons. As he put it, “It’s very possible that the existence of the euro is now put into question in other European Union member states, because every national constitutional court can decide for itself. This situation makes nobody happy”.

In even clearer terms, what the former Minister actually seems to lament, is the fact that there is an albeit remote possibility that member states might get a say in monetary policy decisions. The floodgates could open and every country could conceivably decide for itself, not just on the currency they use, but also on how to use it, according to its own specific needs and economic realities. What Mr. Schaeuble and his peers appear to be dreading is the idea of decentralization. 

In the upcoming second part, we look into the implications of the corona-crisis on this issue and how the timing of the ruling factors into a wider economic and political shift that’s underway.

Claudio Grass, Hünenberg See, Switzerland

This article has been published in the Newsroom of pro aurum, the leading precious metals company in Europe with an independent subsidiary in Switzerland.

This work is licensed under a Creative Commons Attribution 4.0 International License.

Source: Pixabay