Realist, not conformist analysis of the latest financial, business and political news

Germany’s Constitutional Court Puts The Boot Into The Euro

Thanks for all the fish, obviously

Germany’s Constitutional Court has rather caused a little problem here. Stripped of the legalisms it’s an insistence that Germany cannot be forced to pay for everything. Which is a bit of a blow given that the base political calculation of this “ever closer union” stuff is that Germany should pay for everything.

Moving back to the technicalities here, the question is about what the European Central Bank may do. All agree that it may – must even – conduct monetary policy operations. That’s what a central bank is for, after all. However, there’s a line somewhere – not so much fine as rather broad and hazy – at which monetary policy becomes fiscal policy. Instead of it being about interest rates, bank management and inflation rates, it becomes aiding a government to spend lots of money without having to tax to gain the money being spent.

Some monetary policy has this effect anyway – quantitative easing for example – which is why that line is hazy. The current situation is that the ECB can do all the stuff that is monetary policy but only if it is monetary policy that is the driving force. Those spillover effects into fiscal policy can be ignored as long as the aim is interest rates, currency value and so on. But when the aim is to allow spendthrifts to carry on blowing the cash – fiscal policy – then the actions are “ultra vires”, beyond the legal capacity of the ECB.

Blurry line there. In modern terms we might say that Modern Monetary Theory, print the money and spend it, isn’t allowed. Or the older terminology, that monetisation of fiscal policy isn’t allowed.

What this means in detail is that sure, the ECB has to buy the government bonds of the eurozone constituent nations in order to be doing QE. That’s what it means. But if the ECB were to veer off into buying and buying the bonds of the weaker nations (everyone means Italy here) to the effect that they could continue to borrow and spend while sticking the ECB with the bill, that would be the monetisation that isn’t allowed. Wide and fuzzy here.

The answer has been to say that the ECB can buy such bonds but must do so in proportion. Countries have paid in capital to the ECB in proportion to the size of their economies. The ECB may only buy bonds in proportion to their capital contributions. What this means is that (making up the numbers you understand) if the ECB buys €100 of Italian bonds then it must also buy €150 of German bonds – and €100 French, €50 Dutch and 13 cents Slovene. It cannot say well, there’re lots and lots and lots of Italian bonds therefore we’ll buy €400.13 of them.

This limits what the ECB can do. Because Germany has been running a budget surplus for some time now, the supply of Bunds (the German government bonds) is pretty low. This places a limit on how many Italian etc can be bought.

Another way to look at the same point is to think whose credit is backing the ECB. If everything must be done in proportion to the capital base of the ECB then each nation is on the hook in proportion to economic size. But if we ever get to general ECB issuance of bonds – what is suggested for the coronavirus recovery – where there’s a joint and several liability for repayment then that’s effectively Germany on the hook. And if the ECB can buy any bonds it likes, without proportionality, then there will be lots of Italian bought, very few German, but Germany will be on the hook as the largest part of the capital base. Or, one of the joint and severally liable peeps and as we all know the only one with pockets deep enough to actually cough up.

To make it very simple indeed every wisher for closer economic union – thus the entire federast apparat – wants Germany to pay for everything. The Germans are rather less sure about this. Thus there is this line in the sand about what the ECB may or many not do in buying and issuing debt. The line, wide and fuzzy though it may be is that monetary policy may not stray over into fiscal and the monetisation of that fiscal policy. And every federast continues to hatch schemes to make exactly this line be crossed.

At which pointpoint:

Germany’s top court clashes with European Central Bank in revolutionary ruling
The German court decision threatens to undermine confidence in the euro and kills off any hope of eurobonds or joint debt issuance

Ambrose Evans-Pritchard

Ambrose isn’t exactly right here as this isn’t revolutionary, rather it’s simply a restatement of the status quo ante. Although we might then go on to say that someone insisting the EU stand by its previous word is revolutionary. The court has, basically, said that the line may not be crossed, as was agreed back at the foundation of the euro.

Sven Giegold is rather more unhappy about this ruling:

In its ruling today, the German Constitutional Court declared the ECB decisions on the bond purchase programme (PSPP) to be in breach of competences. The judges declared the previous positive preliminary decision of the European Court of Justice to be incomprehensible and thus arbitrary, because the Court had excluded the economic effects of the programme from its assessment. The judgment states that the ECB failed to consider the proportionality of the bond purchase programme.

Of course, he’s away with the fairies in his proposed solution:

The judgment must be a wake-up call for the German government. The shifting of responsibility from governments to the ECB must now come to an end. The ECB’s actions are the consequence of the euro countries’ inability to adopt a common economic and financial policy. The German Government should now present a proposal for a common democratic fiscal policy for the euro countries.

The entire aim, from the point of view of the Bundesbank etc, is to avoid having a common fiscal policy for this will mean Germany paying for everything. This is what all the restrictions are about.

The ruling itself is here. Possibly a minority sport that, German legalise translated into English.

As to what is a more mainstream sport we all get to watch as the grand illogic of the eurozone itself comes to the fore. The basic aim from the federasts is that there should be that common fiscal policy whether it’s gained through a common Treasury or the monetisation of fiscal policy. They don’t care how, getting Germany to pay for everything is the point. Certain parts of the German establishment demur. We get to watch the catfight, what fun, eh?

And aren’t we all glad we didn’t join the euro in the first place, also that we left the organisation itself?

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Arthur the Cat
Arthur the Cat
4 years ago

It’s not just the money side – effectively the German court has declared that it outranks the ECJ, so there’s going to be one hell of a dogfight on the legal/political side as well. This one will run and run.

4 years ago

The way the euro and EU end is that the Eurofederalists get their way and pretty soon after the Germans decide that they really, really don’t like working hard so others can party. Until then, this farce will drag on and on, with successive German governments lying to their taxpayers, and German taxpayers lying to themselves.

Tim the Coder
Tim the Coder
4 years ago

Whenever there was an awkward decision by the EU for UK, it was explained to us that EU law took precedence over member state law, and hence it was irrelvant whatever the UK Parliament, the UK courts or the UK people might want or rule, the EU law was it. So the same for Germany. The EU has decreed, via the ECB, that the Germans pay for everyone. It doesn’t matter what the German Governement says, nor the Constitution, nor the red-garbed clowns in Kahlsruhe, nor the German voters: the EU law is it. In the EU, do what you… Read more »

4 years ago
Reply to  Tim the Coder

I thought this was only meant to apply to the UK. When the foreigners would have been screwed, well the UK should cough up and apologise for not having done it sooner.

Quentin Vole
Quentin Vole
4 years ago

What’s the UK’s current position vis-à-vis the ECB? I remember a Bruges Group paper a few years ago suggested we were potentially on the hook for hundreds of billions if it all went tits up. Do we just have to hope that we’re out before the faeces contacts the rotating air mover?

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