German policy-makers see a way out of the challenge posed by their top court to the European Central Bank’s flagship policy program that could even make the euro zone more robust – but they need the ECB to play along.
The German Constitutional Court last week gave the ECB three months to explain the proportionality of its bond purchases or risk losing Germany’s Bundesbank – one of 19 national central banks that are members of the ECB – as a participant. It also called on the German parliament and government to challenge the ECB on the matter.
The ruling poses a conundrum for Berlin, which is bound to respect the Karlsruhe court but at the same time does not want to erode the independence of the ECB, whose unprecedented stimulus has kept the euro zone intact.
Stressing the need for a “wise” response, Chancellor Angela Merkel told senior party officials on Monday that the situation was “solvable” if the ECB explains the plan, two participants at the meeting said.
Detlef Seif, deputy EU spokesman for Merkel’s conservative parliamentary bloc and himself a lawyer, said the Karlsruhe court had not questioned the primacy of the EU’s top court in deciding whether EU bodies are breaching the bloc’s rules.
The Court of Justice of the European Union (CJEU) gave the green light in 2018 to the ECB bond-buying scheme.
Rather, Seif said the German court had ruled that the justification for the ECB’s unprecedented 2-trillion-euro purchase scheme was “too sketchy and not substantiated.”
“You have to look at it positively,” Seif, whose view is significant as Karlsruhe wants German lawmakers to challenge the ECB on the stimulus issue, said of last week’s ruling.
The verdict “is not the end for such bond purchase programmes,” he said. “Rather, it is a stipulation: if the ECB does such a thing in this form in this volume, then it must be transparent, and the proportionality must be demonstrated.”
The Karlsruhe court said the Bundesbank could no longer be part of the plan unless the ECB can show its bond purchases “are not disproportionate to the economic and fiscal policy effects,” the judges said.
The bond-buying program kept the euro zone in one piece during the sovereign debt crisis but critics argue it has flooded markets with cheap money and encouraged overspending by some governments.
For Merkel’s idea to fly, the ECB would have to engage with the Karlsruhe court. Last Thursday, the ECB said it was “more determined than ever” to pull the 19-country euro zone out of its worst economic crisis in nearly a century.
Directly engaging with the German court decision would imply that the ECB accepts its jurisdiction, so the ECB will rely on the Bundesbank to address the case, sources close to the Governing Council have told Reuters.
Reacting to the court ruling, former German Finance Minister Wolfgang Schaeuble told German RND media group last week: “It may well be that the existence of the euro is now also questioned in other EU member states – because every national constitutional court can judge for itself.”
Seif rejected that view and said the ruling could strengthen the euro zone.
“If you take decisions that are not transparent – we are dealing with many member states – and that leads to dissatisfaction, and people say ‘that’s not the way it works’, then the euro could break apart,” he said.
“But if you establish the rule of law, I don’t see any risk.”
Reflecting the balancing act Berlin faces, a finance ministry spokesman said Berlin would “meet the requirements” of the ruling but Merkel’s spokesman told the same news conference the EU’s top court remained the guardian of European treaties.
Sassan Ghahramani, CEO of U.S.-based SGH Macro Advisors, which advises hedge funds, expected Merkel’s pragmatism would prevail.
He expected the German government and parliament would “acknowledge (the court verdict) respectfully, so as not to antagonize unnecessarily, and then quietly sweep it under the table after the ECB explains why they did what they did.”
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