May 7, 2020 - 7:00am
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.
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Subscribe‘I know, that sounds deathly dull…’
No it doesn’t. It sounds extremely interesting, which it is. Personally, having recently read Ashoka Mody’s brilliant ‘EuroTragedy: A Drama In Nine Acts’, I have come round to the view that bond mutualisation should be implemented. This is for two reasons:
– In a rare example of economists getting something right, they warned from 1970 onwards that a single currency would lay waste to the economies of the southern states (and France). And these were mainstream economists, not outliers. Thus the politicians were warned and they were warned over and over again. The central bankers likewise – although they should have known anyway. But still they went ahead and it was Kohl who pushed most determinedly for the euro as a ‘good European’. (The quid quo pro for German reunification is a myth). In other words, they knew that fiscal transfers/debt sharing was inevitable, so they should get on with it.
– The electorates in northern Europe constantly talk about being ‘good Europeans’ and castigate the British for being ‘bad Europeans’. They praise (in the abstract, of course) the notion of European solidarity and all that nonsense. And for decades they have (mostly) voted for politicians who share this view. OK, then, put your money where your virtue-signalling is and pay up.
Of course, if this were to happen we would very quickly see anti-EU parties come to power in the Netherlands and elsewhere, followed by referendums on EU membership. And then the entire racket would probably collapse quicker than you can say ‘Jacques Delors’.
Good points and I think the EU is moving closer than is generally thought to a key moment when the Payers, now Germany and Netherlands, must decide what they want it to look like and what they want to pay to achieve that.
All the warm words in the world won’t pay the bail out bills much longer.
Delors knew the Euro was unviable without fiscal union. He regarded the inevitable crises as opportunities to advance fiscal union by stealth.
Excellent.
I wonder if I’m the only person who thinks that the collapse of the single currency would, in the long run, strengthen the EU. In the first place, the anaemic growth and / or outright recession that have beset countries such as Italy, Spain and Greece in recent years derives largely from the fact that they share an unsuitable and overvalued currency; after they devalued the new lira, the new peseta, and the new drachma, this would end. In the second place, there would be no need for Brussels to continue with its egregious interference in individual member states’ economies to meet arbitrary targets regarding things like deficit spending. In the third place, it would be much easier for the richer northern countries to provide financial support for the south after the new drachma and the new lira had halved in value relative to the euro. Eventually, the EU could return to what ought to be its real vocation: being a free trade area, and underwriting a minimum living standard and basic human rights norms.
The REALLY interesting question is,… “what happens next?”. Club Med Italy & Spain need (more ) money, but if the biggest lender won’t give away (more) good money after bad, then it’s likely to become a trend. So what are Italy’s options?;
1; Go even further into loan debts, with no chance of ever getting out of it….. or…
2; Quit the Euro and go it alone with the Lire.
Could it be the Germans have figure this out ( not hard), and are pushing them hastily in that direction?. If they leave, they still owe Germany for the first loan, but broke and free is perhaps better than broke and enslaved.
Can’t wait to see how the EU 7 yr budget discussions go.
The efficient, hardworking Germans have always resented paying for the tax dodging, lazy southern Europeans, except when they want to head there for a holiday and monopolise the sunbeds.
I think few ordinary Europeans would mourn the disintegration of the EU as they come to realise what a venal political project it always was. I do worry though that extremist right and left wing parties will successfully exploit the vacuum it leaves.
Maybe the right and even the far right have some valid policy positions. Mass immigration has hurt the poor in every nation by every rational measure. The first policy of the moderate and far right is halt immigration for a period of time. And change the model from unskilled workers to people who will add to the prosperity of the nation. Mass unskilled immigrants cost the American middle class $120 Billion + last year alone. Those taxes are the housing, education and health safety net for the American poor. But that money was diverted to non-citizens or legal residents. This is fundamentally unfair.
The key figure used by globalists is growth in GDP but this is not the true measure for the working people of any country. The true measure is the productivity per worker. This is the factor that increases real income per capita excluding the top 1% and bottom 5% of the population.
Knowing the Germans as I do this is their political move to stop the endless bail out of cash being printed. I doubt their goal is to dismantle anything, only to control the process.
My comment was about extremists of whatever persuasion. It is never good when extremists fill the vacuum.
As far as immigration is concerned, yes we need to control our own, but that does not mean turning off the taps. The lower skilled are doing jobs we don’t want to do ourselves but still want done. It will be interesting to see how the harvest gets brought in without migrant workers this year. Obey our laws and contribute to, rather than sponge off / rob our society and you are welcome is my totally non extremist view.
Serious related Q; How have Italy managed to hold on to their gold reserves for so long?
Probably because they are so small as to be financially insignificant, not sure. A new lira, i. e with zeros lopped off down to £1= 2.75 lire would work.
OK but:
– every court case comes with an appeal. This is just a discussion, not a decision as such.
– Germany had a huge debt to pay after WWII. But it manned up to that and has really tried to play its part in forging a new Europe. Arguably it has done that far better than we have. Certainly it has paid much more. Maybe now it is time to call it quits and say Germany has paid its debt and begin to treat them as the leaders of Europe that in fact they are …
COVID-19 is the perfect situation for Europe to finally move to Modern Monetary Theory. The member central banks must be allowed to directly finance their own governments – with approval by the ECB.
Inflation is just not going to be the problem. The supply/demand shock is the problem.
If, for example, the Italian central bank was allowed to finance their government directly, the threat to other states’ sovereignty would be nill and the threat to their economies would be notional.
Yes, central banks would start to open the spigots but, again, this is not the problem right now.
Well the EU has just slapped down the Germans very hard in response to the verdict of the German Constitutional Court. They insist that EU law takes precedence. And why not? It makes no sense to have all these courts contradicting each other. It’s madness. Either accept rule by Brussels or get out, as the British did.