kotz11_Sebastian Gollnowpicture alliance via Getty Images_germanconstitutionalcourtECB Sebastian Gollnow/picture alliance via Getty Images

Did Germany’s Constitutional Court Inadvertently Strengthen the Eurozone?

Despite the knotty issues raised by the court’s recent ruling on the European Central Bank's program to purchase member states' public-sector bonds, there could be a silver lining. It is now more likely that the European Union will be forced to confront the main institutional weakness of its monetary union head-on.

FRANKFURT – In its recent ruling on the European Central Bank’s program to purchase member states’ public-sector bonds in secondary markets, Germany’s Federal Constitutional Court (GCC) concluded that the ECB failed properly to assess and explain the “proportionality” of its policies. In the process, the Karlsruhe-based court rejected the primacy of European law, a core and constitutive principle of the European Union, by also ruling that the decision by the Court of Justice of the EU (CJEU) to uphold the ECB program was “simply incomprehensible,” unconvincing for “methodological reasons,” and exceeded the court’s remit.

And yet, despite the knotty issues raised by the German court’s decision, there could be a silver lining: It is now more likely that the EU will be forced to confront the main institutional weakness of its monetary union head-on.

Admittedly, the move to limit the ECB’s capacity to respond to a global public-health and economic crisis is extremely untimely. But this is a debate about constitutional issues. Principles either count or they don’t, regardless of circumstances or consequences. As one German commentator argued, the ruling could be understood as a face-saving exercise: Karlsruhe demonstrating to the CJEU who is ultimately in charge. Indeed, this is far from the first time that the GCC can be said to have waged a turf war with the CJEU.

Admittedly, Karlsruhe is, at best, only a reluctant convert to deeper European integration. Still, the GCC has consistently insisted upon democratic legitimacy. Delegating power to higher levels of hierarchy would be acceptable only when aligned with commensurate parliamentary accountability. Thus, the recent ruling throws the eurozone’s main design flaw into sharp relief: although member states have supra-nationalized their monetary policy, they have refrained from federalizing a stabilizing fiscal capacity.

In terms of fiscal policy, the eurozone is a confederation, though one bound by rules. But these rules are often observed only in the breach, and sometimes for good reason. No one would want the Stability and Growth Pact’s deficit strictures to be mechanically enforced in a response to the unprecedented shock of the COVID-19 pandemic.

As a result of this institutional lacuna, the ECB is, by default, first in the firing line when things go awry. And fiscal policymakers at the national level benefit from and seem to appreciate this unequal burden sharing.

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Against this backdrop, Karlsruhe is demanding that the ECB Governing Council apply a “proportionality assessment,” and that the German government and Bundestag request such an evaluation. If not conducted (according to an ambiguous, open list of criteria) within three months and explained in a “comprehensible” way to the court, the Bundesbank would be barred from further participation in the ECB’s public-sector bond-purchase program.

Here’s the Catch-22: In acceding to the GCC’s ruling, the Bundesbank would waive its independence, exposing itself to a judicialization of monetary policy. But if it disregards the GCC’s demand, it would incite a constitutional crisis.

To complicate matters further, Karlsruhe also demands that the government and parliament take active steps to monitor monetary-policy decisions. For the ECB, however, there’s no question as to whether it should respond to the request of a national constitutional court. Of course not.

The GCC’s request seems to be based on a fundamental misunderstanding of the arguments for central-bank independence. The delegation of authority to unelected technocrats can be justified when they are given a narrow, binding mandate. In the case of the ECB, the job description boils down to underwriting price stability as the first and foremost priority. Thus, notwithstanding regular allusions in the press to output stabilization, the ECB justifies its policy measures exclusively in terms of their consequences for this objective.

The GCC, however, now calls for the ECB to justify the “proportionality” of its monetary policies in view of their impact on economic and social objectives and agents, including their inevitable side effects. The details of their effects (such as consequences for savers) are analytically rather contentious. For example, only a minority of economists view central banks as the main determiners of real, inflation-corrected interest rates. More important, “proportionality” assessments would cover highly politically charged issues, on which monetary technocrats have no legitimacy to deliberate at all.

It is true that any monetary policy inevitably has distributive consequences. Even in calm economic conditions, monetary and fiscal policy cannot be neatly distinguished and cleanly separated. Both affect the economy through a “common funnel,” as the Nobel laureate economist James Tobin never tired of explaining. In a time of crisis, the supposedly clear-cut boundary inevitably becomes indistinct.

Still, to call upon the ECB to assess its policies’ potential distributive effects is asking it to judge trade-offs which it is simply not entitled – and should not be enabled – to assess. ECB Governing Council members are not Plato’s philosopher kings.

Two decades ago, Tommaso Padoa-Schioppa, then an ECB board member, spoke of the ECB’s “institutional solitude,” owing to the absence of a fiscal counterpart at the eurozone level. After the 2008 financial crisis, ECB President Jean-Claude Trichet called for a European Finance Minister. And former ECB President Mario Draghi continuously criticized national governments for taking the path of least resistance: always shifting the burden to the ECB, instead of fulfilling their responsibility as fiscal policymakers for addressing the eurozone’s lingering vulnerability. Current ECB President Christine Lagarde has, on a number of occasions, already taken a similar position.

At the risk of sounding Panglossian, the recent ruling, viewed from this perspective, might actually prove to be constructive, if inadvertently. True, it could limit the ECB’s room for maneuver in flexibly implementing its current pandemic emergency program. While this is not the best possible solution, it would shift more of the burden on to fiscal policymakers. And the seemingly strong member states would hurt themselves massively if they proved incapable of coordinated and cooperative action.

Is this now Europe’s “Hamiltonian moment,” in which it is forced to adopt a more federal – and of course democratically legitimized – fiscal policy? Given the general inclination to retreat behind national borders and not give up sovereign prerogatives, one is entitled to be skeptical. But the GCC has left it little wiggle room for muddling through. The eurozone’s stateless money needs a constitution to render the ruling moot.