LONDON – European Union officials are refusing to comment on a German Constitutional Court ruling that the European Central Bank overstepped its powers when it decided to buy the debt of EU member states in order to help with their finances.
And at least for the moment, Europe’s financial markets remain largely calm.
Still, the ruling is a severe blow to European integration. And if the objections of Germany’s top judges are not addressed within the next few months, they have the potential of undermining the very foundation of the euro, Europe’s single currency.
The European Central Bank (ECB), which issues and guarantees the euro, is not answerable to any court of an EU member state.
Nevertheless, the ECB sits at the centre of a financial network formed by the 19 national banks of the EU countries which operate the euro and each one of these central banks is bound by its own national legislation.
The ruling of the German Constitutional Court, therefore, formally applies only to the Bundesbank, Germany’s central bank. However, Germany is the EU’s biggest member state and lender of last resort.
Furthermore, the German ruling also raises grave questions not only about the economic management of the continent, but also about Europe’s governance.
The dispute centres around a programme that started in 2015 under which the ECB undertook to buy the public debt of member states to the tune of €2.6 trillion (S$4 trillion).
The programme was always hotly disputed in Germany, largely because it appeared to contravene European treaties, which forbid the ECB from lending money to individual governments in order to cover their borrowing.
But also because it implied that individual European countries did not have to worry too much about their reputation and borrow at cheap rates as they knew that ultimately the ECB would buy their debt, precisely what the Germans always sought to avoid.
“The longer it lasts, the more the side effects and financial stability risks of the very expansive monetary policy will grow,” warned Bundesbank president Jens Weidmann at the end of last year.
Germany’s Constitutional Court has now ruled that at least part of this bond purchasing programme could be considered as indirect financing of government budgets and ECB involvement in economic policy, both of which are prohibited by EU treaties.More seriously still, a 2018 judgment by the European Court of Justice which deemed the ECB programme legal was dismissed in harsh terms by the German court, which branded the ruling as “incomprehensible” and “ultra vires”, a Latin legal term which implies that the European court went beyond the powers the law gave it.
“For the first time in history, the constitutional court has found that the actions and decisions of European bodies overstep their legitimate competence, and therefore have no validity in Germany,” said the court’s president, Mr Andreas Vosskuhle.
An immediate crisis has been averted because Germany’s top judges have given the European central bank three months to come back with an explanation of how its bond purchasing programme may still fit existing treaties. Financial markets around the world, therefore, assume that a compromise could be found.
Furthermore, Mr Vosskuhle was also at pains to point out that his court’s decision does not prevent EU member states from helping each other with the coronavirus crisis by transferring money through other means, including increased contributions to the central EU budget.
Still, the German ruling is revolutionary and bound to have a serious impact on the future of Europe.
In effect, the German court has given itself exclusive powers to decide how EU treaties are to be interpreted. And it has fired a warning shot in the direction of German politicians by reminding them that it would be virtually impossible to put together a European-wide system of sharing public debt unless they are prepared to change existing treaties.
German Chancellor Angela Merkel has refused to be drawn into discussing the court ruling. But she knows only too well that the judgment puts an end to any hope of issuing the so-called “Coronabonds”, which would have allowed EU states to borrow jointly in order to help their economies recover from the pandemic.
So while Europe may have avoided an immediate crisis, the battle over the continent’s financial arrangements is only likely to intensify.