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The German constitutional court is about to rule on the legality of the European Central Bank’s quantitative easing program. The ECB is not subject to German law, but the Bundesbank is. Germany’s central bank is the largest shareholder of the ECB. Therefore, a court “No” ruling on Tuesday would take the eurozone to legally unknown territory.
The ruling was expected in March, but the court postponed the decision to consider the ECB’s pandemic emergency purchase program. We do not know if the court also wants to rule on the PEPP. If it does, we might have an unpleasant surprise. As explained by Ana Bobić and Mark Dawson, two Berlin-based legal experts, the PEPP obviously does not meet the legal criteria established in previous court decisions.
The European Court of Justice has four criteria for the purchase of assets. First, the program must leave investors in the dark about the real assets to be purchased. This is why the ECB normally limits the amount of debt it can buy. It relaxed restrictions on PEPP, so a large portion of newly issued Italian bonds could end up on the ECB’s balance sheet. Second, purchases should not discourage Member States from pursuing sound fiscal policies. Third, the ECB should not hold bonds until maturity. Finally, you should try to discharge the risks to the European Stability Mechanism, the rescue fund.
There is no point in trying to predict what the German constitutional court will do. It has been full of surprises. In the past, it roared against the euro, but never went to kill. In 1993 and 1998, German Eurosceptics waited in vain for the court to stop the monetary union. The judges often expressed sympathy for the plaintiffs, but always ended up ruling against them. The court also considers emergencies. The Covid-19 crash clearly qualifies. If you want to shake it, you will find a way.
But with each ruling, the German court also narrowed the legal scope of what is allowed. When he asked the ECJ for an opinion on the legality of the ECB’s support from 2012, the ECJ came out in support of the ECB. But the ECJ also produced many small print. Eurosceptic German academics may have lost every time they went to trial before. But they may still have the last laugh. They have already managed to get the courts to produce annoying legal clarity where previously comforting gray areas existed.
Many think that German judges are obstacles to modern monetary policy. I do not agree. In general, it is not a good idea to consider legal systems as obstacles. The laws underpinning the eurozone reflect the complex social contract between EU member states when they established monetary union in the 1990s. Perpetual legal conflicts only reflect accumulated political and economic divisions since 2008.
When we disagree with a law, we should try to change it. In the case of the eurozone, we direct our anger at the judges because the EU treaties are difficult to change. There may not be a majority among the EU members for a substantive reform of how the eurozone works. But we cannot expect the judges to do the work for us. If they end up declaring asset purchases illegal, they will simply have adopted a stricter interpretation of the law than we might find convenient. There may be strong technical reasons for disagreeing with such a decision, but the underlying problem is the law itself.
Everyone involved in eurozone politics knows that the monetary union owes its survival to the success of regulation. It was a masterpiece of legal engineering in the latest crisis setting fire to a non-rescue clause in European treaties, and then creating a rescue umbrella in its ashes.
The continued survival of the eurozone depends on such legal tricks. But in a world of independent judicial powers, this is not a stable base. No matter what happens Tuesday, this monetary union needs a new treaty.
