German Court Issues a Dangerous Verdict for the ECB

(Bloomberg Opinion) -- Germany’s constitutional court has issued a dangerous verdict on the European Central Bank’s original quantitative easing program. The ECB won’t find it particularly hard to comply with the court’s demand to show that it acted proportionately in launching its bond-buying scheme. However, the judgment poses deep institutional questions about the independence of the euro zone’s central bank and the relationship between domestic and European Union law.

The near-unanimous ruling from the eight red-robed judges is doubly ironic. Since the ECB’s creation, the dominant view in Germany has been that it should be shielded from political influence, in the same way as the Bundesbank. The country also hoped that the ECB would interpret its mandate narrowly, prioritizing its objective to keep inflation “below but close to 2%” over any wider concerns. Yet the court in Karlsruhe has essentially ruled that German institutions should be doing more to monitor the central bank’s actions, calling into question its independence, and demanded that the Frankfurt institution shows that it took broader economic and fiscal considerations into account — not just inflation — when deciding to pursue QE.

The judges have asked that Germany’s government and parliament press the ECB to show that it acted proportionately in launching its original asset-purchase program, including taking into account those non-inflation concerns. Were the central bank to fail to provide this assessment within three months, Germany’s Bundesbank would have to withdraw from the bond-buying scheme.

The ECB should be able to clear this bar pretty easily. It’s obvious to any casual observer of central-banking matters that policy makers weren’t fixated solely on inflation as they launched QE at the start of 2015. There are dozens of speeches and papers in which members of the ECB’s Governing Council and officials look at areas such as income, wealth distribution and financial stability. If these points need repeating for the sake of satisfying a court in Germany, so be it.

The trouble is that in doing so the ECB would accept two dramatic institutional points that the constitutional court is asserting. The first is that the German judges have a duty to scrutinize the ECB since the European Court of Justice hasn’t done so properly. If that’s the case, then surely the courts of all member states have the right to quibble with anything the ECB has done. That would create a legal and institutional nightmare, making the central bank’s life next to impossible.

The court’s second point is that the German parliament and government has the right to put the ECB under greater scrutiny. It’s not clear why this should be the case. The ECB is already held accountable to European citizens via the European Parliament, which holds regular hearings with Christine Lagarde, the central bank’s president. It also publishes the minutes of its decisions and governing council members regularly give speeches and interviews to explain what they’re doing. It’s not clear why Germany’s politicians and courts deserve better treatment than everyone else.

The ECB’s council will meet on Tuesday evening to discuss the decision. Investors will watch its next steps with great anxiety. In theory, it can keep buying sovereign and corporate debt under its original QE program even without the Bundesbank’s involvement. Moreover, its new pandemic-related QE scheme isn’t subject to this ruling. It can continue unfettered — at least until a new legal decision is made.

However, were the Bundesbank to stop purchasing bonds in the original QE scheme, it would raise deep doubts about the strength of the monetary union. There are also indirect questions over the future of the pandemic-related program, which doesn’t abide by a number of rules that were part of the original QE program and which the court says are “crucial” to ensure that the central bank doesn’t engage in monetary financing (the direct funding of government by a central bank). These include limiting the ECB’s purchases of a country’s bonds depending on the relative size of its economy and buying less than a third of each state’s outstanding debt. 

The ECB has always managed to paper over the institutional incompleteness of the euro zone, thanks to flexible and creative thinking. However, the inevitable tensions of having a monetary union without a federal state can’t be suppressed forever. This week’s ruling shows the severe limitations of the current setup. Politicians must decide what euro zone they want — and do it quickly.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Ferdinando Giugliano writes columns on European economics for Bloomberg Opinion. He is also an economics columnist for La Repubblica and was a member of the editorial board of the Financial Times.

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