The EU’s Nullification Crisis

BERKELEY – A recent ruling by Germany’s Federal Constitutional Court (GCC) has opened a deep rift in the eurozone. In three months, the Bundesbank will be prohibited from participating in the European Central Bank’s Public Sector Purchase Program (PSPP) unless the GCC receives a satisfactory explanation that the ECB’s bond buying constitutes a “proportionate” measure for maintaining price stability.

Never mind that the ECB has already explained itself in countless publications, speeches by its Governing Council’s members, and in academic publications by its staff. That apparently is not enough for the German justices, who have long wrung their hands over the arcane question of whether central-bank bond buying constitutes a form of fiscal policy. As any economist knows, all monetary policies have fiscal implications; and insofar as central banks have deployed “unconventional” instruments, they may indeed be operating in a gray zone between monetary and fiscal policy.

The problem is that lawyers abhor gray zones. The Treaty on the Functioning of the European Union stipulates that while the ECB has sole authority over EU monetary policy, fiscal policy is the exclusive preserve of member states. This division of labor implies that the Court of Justice of the European Union (CJEU) should decide on any legal issue concerning monetary policy, whereas national courts should rule on matters of fiscal and other economic policies. The question, of course, is who should judge whether the ECB has exceeded its legal monetary-policy remit.