by Peter Franklin
Thursday, 7
May 2020

Has Germany just blown up the Eurozone?

by Peter Franklin
Germany’s constitutional court (2018)

The most important story of the week? No, not the extramural activities of Professor Lockdown. Rather, it was a verdict handed down on Tuesday by the German Constitutional Court.

I know, that sounds deathly dull and the actual verdict (110 pages of Deutsche-legalese) was even duller. Who’s going pay attention to any of that when there’s bonking boffins to read about?

Except that this really matters. Wolfgang Munchau calls it “the German version of Brexit.” A slight exaggeration, perhaps — Germany isn’t quitting the EU just yet. But the ruling does appear to rewrite the relationship between the EU’s member states and its federal institutions — in particular, the European Central Bank (ECB).

Right now, there’s a battle raging over the proposal for “Eurobonds” (or “Coronabonds”) — i.e. debt that would be collectively issued by the Eurozone to fund spending in member states, especially those hit hardest by the current crisis. While the poorer, southern members are desperate for them, their richer, northern counterparts are firmly opposed. (Imagine opening a joint bank account with your brokest mates and being responsible for the overdraft.)

This week’s court case wasn’t about the legality of Eurobonds, at least not directly. It wasn’t even about the Pandemic Emergency Purchasing Programme (PEPP) —  i.e. the consolation prize offered by the northerners to the southerners in place of Eurobonds. (Basically, it’s a temporary tweak to the ECB’s quantitative easing (QE) programme that gives the most vulnerable countries a bit of extra support.)

Rather, the case before Constitutional Court concerned the ECB’s regular QE activities (i.e. what it was doing before the pandemic). The biggest component of these activities is called the Public Sector Purchasing Programme or PSPP (I do apologise for these awful acronyms).

The bombshell verdict was that those responsible for the PSPP haven’t gone far enough in demonstrating that it’s compatible with German law. Though the ECB does not answer directly to the German courts, Germany’s political institutions do — and, as a result, they could be forced to halt Germany’s participation in the ECB’s programmes. This would pretty much leave the Bank dead in the water.

Even if some sort of fudge is cooked up (by which the ECB indirectly satisfies the requirements of the German courts) that’s not the end of it. A precedent has been established. There will be other cases brought to assert national sovereignty over the EU’s federal institutions

Then there’s a further — and super-gnarly — aspect of the verdict. It’s highlighted by Miguel Poiares Maduro of the European University Institute. While the Constitutional Court found that the ECB’s regular QE activity (e.g. the Public Sector Purchasing Programme) does not contravene Article 123 of the Treaty on the Functioning of the European Union, the verdict specifies the necessary conditions that the PSPP satisfies. The implication is that the Pandemic Emergency Purchasing Programme does not satisfy them.

In other words, even the minor concession made to the vulnerable members of the Eurozone is now under threat. As for Eurobonds, forget it! They’re not happening. Not now, not ever.

Professor Maduro says that there’s a “silver lining” to all of this — which is that that it demonstrates the need for a “genuinely European approach to risk sharing… guaranteed by resources that do not depend on the States but are genuinely European.”

That’s sounds like fiscal integration to me, and I doubt the Germans will go for it. Whether it’s sacrificial resource sharing by the backdoor (i.e. mutualised debt) or by the front door (i.e. mutualised spending) they’re really, really not keen.

Join the discussion

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  • May 11, 2020
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