German Supreme Court: Disintegrating the Eurozone

When politics enters an impasse, courts tend to move in to make ultimate decisions. Courts also take action when called upon by complainants who feel that politics is not serving their purpose. In Germany, the Federal Supreme Court is often seen as a last resort arbitrator when political actors are not able to act. The Second Senate of the Federal Supreme Court this week took up precisely this role when it decided about the compatibility of the 2015 public sector asset purchase program of the European Central Bank (ECB) with the German Basic Law. The verdict was a political bomb, one with a long alert period, though. The launch of the Euro was accompanied by loud, critical voices in Germany, not only from the political fringe but also from the mainstream of the German academic economic profession. Latter argued that the common currency would lead to uncontrollable processes of inflation. Former made the point that the ECB is hurting the national interests of Germany by destroying currency stability. The incarnation of this convergence of fringe and mainstream is best represented by Bernd Lucke, professor of economics at the University of Hamburg and prominent co-founder of the Alternative für Deutschland. Lucke also belongs to the group of critics of the ECB who brought the case to the German Supreme Court. When the European Court of Justice (ECJ) had to deal with the legality of the bond purchase program, it was the head of the German Central Bank, Jens Weidmann, who adopted the arguments of the critics and made a compelling presentation against the policy project favoured by Mario Draghi and supported by a majority of the board. And yet, the ECJ was not impressed and decided against the critics. The German Supreme Court decided differently. In strong language, it made the case that the ECB overstepped its legal mandate and needs to regularly justify any side-effects of its policies – to the German Parliament and/or the Bundesbank. The message of the verdict is troubling for two main reasons. First, it poses that national Supreme Courts ultimately decide over the policy of an independent EU-institution. The Hungarian and Polish governments made the case before, and now are being confirmed by the highest German Court. The hubris of the German Second Senate may result in an infringement procedure as it is the job of the Commission to safeguard the viability of European institutions. History shows, though that such a procedure is protracted, and probably not fit for the purpose. More so, in a post-verdict interview with the Frankfurter Allgemeine Zeitung the reporting judge of the Second Senate took a even more aggressive tone when he stated that a potential infringement procedure would lead to more strife that eventually would question the overall integration project. Sure, given the legal structure of the ECB within the Treaties, the verdict could be ignored. But then the German Bundesbank may come into the situation that it no longer can participate in bond purchases of the ECB. Given the prominent role of the Bundesbank by size and volume, this would question the policy efficiency of the ECB. The argument that the ECB could in five minutes adhere to the reporting duty asked for by the Supreme Court goes nowhere: It stills implies that each national institution can decide about monetary policy of the ECB. This would be the end of the ECB as a guardian and manager of the common currency.

The second troubling implication of the verdict affects overall economic policy-making in the Eurozone. For a start, any hope that the EU may eventually dare the step and introduce forms of Eurobonds can be buried. It needs only a look at the aggressive language of the verdict to see that the combative Second Senate will not hesitate to stop such a policy project. The economic bomb of the judgement can’t be exaggerated. It is well-established knowledge that the ECB was the only gun in town when it came to fighting the Eurozone crisis. This lonely role is the direct consequence of the rule book of the Eurozone that makes aggressive fiscal policy even in times of crisis very difficult to impossible. It is also the consequence of well-maintained political attitudes towards public debt, where debt is seen as public sin. Even during the period of intense Eurozone crisis, the European Council and, in particular, the group of finance ministers of the Eurozone (Ecofin) insisted on strict conditionality for emergency credits that resulted in severe austerity. Given these restrictions, it was up to the ECB to save the day. The verdict of the Supreme Court potentially takes the ECB out of the equation. A verdict-constrained central bank in combination with a politically-constrained fiscal policy arm – is nothing else than a recipe for disaster.