(Bloomberg) -- As Germany took its first cautious steps out of a stringent lockdown, Chancellor Angela Merkel dialed into the biweekly video conference with her party’s innermost circle. The dozen or so participants had a touchy subject to broach, involving two institutions from which Merkel would usually keep a safe distance: the European Central Bank and Germany’s highest court.
A week earlier, the court in Karlsruhe had stunned political and legal circles with a ruling that identified alleged flaws in the ECB’s quantitative-easing policy and called on its own executive and legislature to monitor the ECB’s progress. The verdict came with a three-month ultimatum to fix the shortcomings, causing an outcry in Brussels. The court was seen overstepping its authority by conflicting with a higher instance that had previously sanctioned the ECB’s behavior: the European Court of Justice.
The conflict has left Merkel and her party leadership in a bind. Unlike U.S. President Donald Trump, who routinely berates independent institutions like the Federal Reserve or the Supreme Court via his Twitter account, Merkel takes great pains not to wade into such waters. But in this case, she could not afford to ignore the view of her country’s highest legal authority. Nor could she be seen undermining key institutions of the European Union, particularly at a time when the economic and social fallout from the coronavirus is straining the fabric of the shared market.
Merkel had quickly grasped the implications of the verdict when it hit on May 5, urging the members of her caucus to carefully consider the ruling. By Monday, with the potential fallout widening far beyond Berlin and Brussels, Merkel had grown even more concerned. The Karlsruhe ruling would have far-reaching reverberations and required a response, Merkel told the closed-door meeting.
Saving Face
The chancellor proposed a workaround: The ECB could offer an explanation of its asset-purchase program via the Bundesbank, which would serve as an intermediary to the German parliament, according to a person familiar with the discussion, who asked not to be identified because the deliberations are confidential. Publicly, her spokesman, Steffen Seibert, let it be known that Berlin didn’t consider the German judges questioned in principle the authority of the European Court of Justice.
Evidence to back the ECB’s assessment of the program is plentiful: researchers at both the Bundesbank and the ECB have for years responded to public criticism of its policies by investigating their benefits and drawbacks, and could easily compile their arguments.
Ultimately, policy makers at those two institutions will need to decide whether and in what form to respond. In a statement last week, Bundesbank President Jens Weidmann seemed to suggest he was in favor of the ECB being at the forefront of any explanatory efforts, which his central bank would “support”.
The inherent conflict for the German government is that it has to abide by the rulings of its highest court, while at the same time not appearing to dictate rules of comportment for the ECB.
The Karlsruhe court has told the government and parliament to demand the ECB perform a so-called economic proportionality review. Such a letter of request to ECB President Christine Lagarde is now being considered both by the finance ministry and lawmakers, people familiar with the talks said. While that would make the government comply with the ruling, it complicates the ECB’s premise of political independence.
Tricky Times
Germany’s ambiguous approach on EU financing is coming to haunt the government. On one hand, Berlin continues to resist EU moves toward closer fiscal integration, relying on the ECB to keep the euro zone afloat while on the other hand criticizing the institution for its monetary expansion.
For Merkel, the ruling comes at a difficult moment, because it emboldens her caucus group that has been historically critical of the ECB’s bond buying program. Many CDU/CSU members of parliament now feel vindicated. And it has the potential to whip up support for the far-right AfD party, which has long opposed the perceived dominance of the EU.
“We will use the ruling of the Constitutional Court as an occasion to question its decisions once again, in a constructive and critical dialog,” caucus leader Ralph Brinkhaus said after the verdict.
Everyone’s Unhappy
The German ruling has been years in the making, but it nevertheless caught the political elite off guard, with Berenberg economist Holger Schmieding calling it a “legal bombshell.” Germany can ill afford to recuse the Bundesbank from the asset purchase program, which is running at 20 billion euros a month, with an additional 120 billion euros as part of measures to combat the current downturn.
The optics of barring the Bundesbank would be terrible. Germany is the euro zone’s biggest economy, with its central bank accounting for the biggest share of purchases under QE.
Then there are the political implications of national courts seemingly undercutting the authority of the top EU institutions. It’s an open flank that European Commission President Ursula von der Leyen was keen to protect by saying that “the final word on EU law is always spoken in Luxembourg. Nowhere else.” To drive home the point, the commission threatened twice over the weekend to sue Germany, potentially escalating the conflict that Merkel is trying to defuse.
“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,” Wolfgang Schaeuble, the country’s former finance minister who now presides over Germany’s lower house of parliament, said last week. “This situation makes nobody happy.”
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