In a shock ruling, Germany’s constitutional court has declared that a bond-buying programme pioneered by the European Central Bank would be illegal under German law, unless a satisfactory justification for the programme could be provided. The Bundesbank has been ordered to acquire such a justification in writing from the ECB.
The scheme, known as the Public Sector Asset Purchase Programme, is designed to help ailing governments still suffering from the fallout of the global financial crisis. Unveiled by Europe’s former central banker, Mario Draghi, it was intended to alleviate economic strain in countries such as Italy, Greece, and Spain by providing monetary stimulus at low interest, ramping up quantitative easing to support European banks and combat deflationary trends in their economies.
The ECB has purchased a total of EUR 2.1 trillion worth of eurozone bonds since the policy began in 2015. The court in Karlsruhe has judged that this project, in effect, slides into direct financing of eurozone governments at the risk of German taxpayers.
The dispute essentially hinges on the mandate of central bankers – they are supposed to do everything they can within the limits of monetary policy. If monetary policy creeps into fiscal policy, then this is deemed to be overreach. Such measures need to be agreed by the member states, not by the central banks. The German court, based in Karlsruhe, is asking the ECB to prove that their bond-buying programme is strictly a monetary policy tool, and not pioneering elements of a European fiscal policy by the back door.
This is why the court’s decision has important consequences for the European project. The ruling has established a potentially dramatic precedent, by overruling a 2018 European Court of Justice judgment declaring that the scheme is legal. This clash throws into sharp relief how tensions between the fault lines of national sovereignty and the structures of the European Union run deep not only in Brexit Britain but also across the European continent.
The Italian Prime Minister, Giuseppe Conte, was particularly stinging in his response to the court ruling, telling the Italian newspaper Il Fatto Quotidiano that: “It is not for any constitutional court to decide what the ECB can do or cannot do”. And it is still possible that, upon receiving the ECB’s reply, the German court will amend its decision.
As always with the crippling challenges faced by the European Union – a feature of European political life exacerbated but not created by the Covid-19 crisis – this latest twist has been interpreted differently by the warring camps. European federalists have denounced the decision as a catastrophe, while rampant Eurosceptics have revelled in what they see as yet another blow to the EU superstructure.
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Wiser minds have steered a more sober course. The German court is, of course, quite correct to protect legal parameters. Yet Germany’s political class has woefully failed to grasp the critical juncture at which the European project now stands.
The difficulty is that the EU does need greater fiscal transfers, if not a fiscal policy, to save the Eurozone. But it is caught in an interminable gridlock between the indebted southern states and the fiscal hawks in the north. The fact of the matter is that monetary policy alone can only do so much to alleviate the struggles of countries such as Italy, Greece, and Spain
A polemical, but prominent, argument has gained traction, which says that German taxpayers and pensioners are picking up the bill for their profligate neighbours. But in reality, Germany is a great winner from the Eurozone, and has built up a large balance of trade surplus through the competitive devaluation that the Euro affords its manufacturers. It has amassed this vast surplus in no small part by selling artificially cheap goods to southern European neighbours.
The Eurozone is a symbiosis. The debt of southern Europe helps elevate the manufactures of the north. A less short-sighted management of Germany’s economic interests would acknowledge the importance of this fortunate dynamic. And a more compassionate approach to European statecraft would have sought to remedy imbalances through economic solidarity.
Yet when these southern neighbours were groaning under the debt burdens incurred by reckless borrowing, permitted by Europe’s statesmen while times were good before 2008, the policy in Berlin was centred on recovering debt. It was the people of Italy and Greece who were made to pay the price of collective failures in European policy making through punishing austerity programmes introduced after the global financial crisis. Fiscal hawkishness prevailed over compassionate cooperation.
As a result, the EU’s indebted states had already been caught in stagnation for a decade before the Covid-19 crisis finally hit. But at the same time they had lost the normal means by which a country suffering from high unemployment and stagnant growth can recalibrate its economy – currency devaluation and the manipulation of interest rates. European statesman have so far been unable to provide a remedy for this. The monetary union is plagued by the absence of a Eurozone-wide mechanism for permanent fiscal transfers that does not come attached with requirements to carry out “restructuring” austerity measures.
As the economist Ashoka Mody, has argued, the answer to these dilemmas is not necessarily “ever closer union”, especially not at a time when further integration lacks both political momentum and popular legitimacy. What it does mean is managing that integration that already exists much better, writing off loans that cannot be repaid and introducing some generous fiscal firepower to voluntarily invest in the countries devastated by the Covid-19 pandemic.
In the long run, the EU and ECB will have to be able to do more than simply turn on the taps of cheap debt. There will have to be a New Deal to lift Europe’s ailing economies out of this health catastrophe, focusing on boosting competitiveness without the vitality-sapping restructuring forced on Italy, Greece, and Spain during the aftermath of the financial crisis. These countries will need reconstruction, not retribution.
Such endeavours will have to overcome the tensions that are rooted in the founding structures of the European Union itself. As in so many other areas – from foreign policy to fiscal transfers – the EU is at a crossroads.
The Treaty of Maastricht not only committed its member states to a regulated single market, its signatories also pledged “to promote economic and social progress which is balanced and sustainable”. Yet how balanced or sustainable is it to have southern Europe shackled in the miseries of a mountainous debt while the north prospers?
The Treaty of Lisbon goes further – it outlines that the single market “shall work for the sustainable development of Europe based on balanced economic growth and price stability, a highly competitive social market economy, aiming at full employment and social progress”. But how progressive or socially conscious does the Union seem when it is viewed through the eyes of those swathes of young men and women who are unemployed in the mountainous climbs of Calabria or the coastal plains of Campania?
There, as elsewhere, the unforgiving forces of globalisation, financial crisis, and a global health catastrophe are bringing European solidarity onto a collision course with a wasteland of lost opportunities.
Now, the architects of the European project need to decide whether their Union exists only to be an expedient marketplace for goods or whether it will seek to promote the common good of Europe and European values. Europe’s statesmen need to determine whether the EU’s purpose is only to defend consumer standards and the interests of debtors in the customs union, or whether it will also fight to expand opportunities, the rule of law and standards of human rights throughout an uncertain world.
This is why the decision of Germany’s constitutional court is merely the latest episode in what will prove to be an ongoing battle between the forces of national sovereignty and monetary union, and a continuing clash over the legal letter of the EU’s founding treaties and their more expansive spirit. It is one crucial moment in the contest that is raging over the very nature of the European Project itself.