Carlo Clericetti – Germany could Destroy the Euro

As Germany always claims, EU and ECB rules ans laws must be upheld – except for the hegemon Germany.

Carlo Clericetti is an Italian journalist. In the past he has directed “Affari & Finanza”, a weekly supplement published by “La Repubblica”, and web portals. Currently he  blogs for “La Repubblica”, for his personal website “Blogging in the wind”, and writes for other websites on economy and politics.

Cross-posted from La Republica

Translated and edited by BRAVE NEW EUROPE

Just as North Korea launched nuclear warheads into the sea to force negotiations with the US, so the German Constitutional Court has launched its missile against the ECB to heavily influence negotiations in Europe. The long-awaited ruling on the appeal by some German citizens against ECB quantitative easing policy has arrived, and gives the central bank three months to justify its behaviour, which the German court considers to be in violation of European treaties. The term ultra-vires, “excess of power”, recurs several times in the ruling, which, even if it concerns the previous purchasing programme, inevitably is also relevant for the current one, initiated by the ECB to deal with the Covid crisis. And this despite the fact that the ruling immediately states that “the current financial aid measures of the European Union or the ECB in relation to the current crisis are not the subject of this judgement”.)

But the previous passage states that the ECB has “neither examined nor demonstrated in the decisions taken for the introduction and implementation of the PSPP that the measures taken are proportionate”. And if that is judged to be the case, then worse will be in store for the current one, where various limits have been removed, such as the 33% maximum limit on the purchase of sovereign bonds and, above all, that of purchases in proportion to the share of the bank’s capital held by each country (the “capital key”).

Following a previous appeal, the German Court of Justice referred the matter to the European Court of Justice, which, however, in its judgment in favour of the continuation of the ECB programme, insisted on the various limits decided on for its implementation. As the professor of law at the University of Ferrara, Andrea Guazzarotti, commented, “the European Court of Justice stated, following the ECB’s arguments, that the allocation of purchases between the national central banks is made in accordance with Article 29 of the Statute of the ECB, “and not according to other criteria, such as, in particular, the weight of the respective debts of each Member State”. The Court of Justice would also argue that the implementation of QE could ‘enable a member state to escape the consequences, in terms of financing, of the alteration in its budgetary development’. In addition, the Court notes that “the holding limits per issue and per issuer set out imply, in any event, that only a minority of the securities issued by a Member State may be purchased by the ECB under the purchasing programme, which requires that Member State have recourse primarily to the markets to finance its budget deficit”. In short, those very limits, according to the European Court, meant that it was not possible to speak of direct funding to States, which is prohibited by European Union rules.

The 33% limit had necessarily to be abolished for this new programme, because by now the ECB was close to that ceiling on many sovereign bonds from almost all member nations, and therefore it would have no longer been in the position of being able to make further purchases. And as for the capital key, if it had continued to be respected, purchases would have had no effect on reducing spreads between countries. It is worth remembering that when ECB President Christine Lagarde let it slip that the ECB would not take care of the spreads, the market immediately collapsed, so much so that the ECB was forced into a sudden reversal that shortly afterwards would be made official in an article by the chief economist, the Irishman Philip Lane.

In fact, the ECB did not say that the capital key would be abandoned, but only that it would not be applied at this stage, with a rather ambiguous phrase that leaves room for future decisions on the matter. What was necessary was not to contradict the aforementioned ECJ ruling, but to reserve the right to extend the suspension of the criterion for an indefinite period. Of course: if the proportions of the capital key were to be respected again, the spreads would skyrocket. In short, a major discrepancy between what needs to be done to avoid a financial crisis and the (wrong) rules that the German Court referred to instead.

What will happen now? The Germans’ behaviour is reminiscent of a famous scene in the film “Rebel without a cause”. The protagonist James Dean engages himself in a crazy race with a friend: they will race to a precipice in a car and whoever manages to stop closer to the edge will win. Dean manages to save himself at the last moment, but the friend cannot and goes over the precipice. The Germans have brought the European Union closer to the edge more than once. So far they have stopped in time, accepting what was necessary even if they didn’t like it (like Mario Draghi’s whatever it takes). But they continue to tempt fate, exposing the Union to the end of Dean’s friend.

But there is another aspect of great importance that the German judgment states, and this is underlined by Alessandro Somma, professor of comparative law at Sapienza: “The German Constitutional Court does not consider itself bound by the decision of the European Court of Justice because this, in its opinion, has moved outside the EU treaties. And the States remain the “Masters of the Treaties”, verifying their validity. In other words, the German Court does not consider itself subordinate to the European Court, at least as regards the interpretation of the Treaties. Initially it seemingly does so with a few logical turns of phrase, since it first writes that if each member state were to consider itself entitled to interpret the Treaties in its own way, the primacy of the Union would be undermined and so would the uniform application of the law. But immediately afterwards the German judges add that the member states cannot give up the right to rule whether the institutions of the Union have fallen into ultra-vires, the excess of power. “The member states of the European Union remain masters of the treaties even after the entry into force of the Lisbon Treaty, and the EU has not evolved into a federal state”. It says one thing and then its opposite, but the conclusion is very clear.

A conclusion that naturally did not please the Commission, which issued a statement that “the decisions of the EU Court are binding for all national courts”, while the ECB recalls that “the Court of Justice of the European Union ruled in December 2018 that the ECB is acting in its mandate for price stability”.

These reactions are rather obvious, but they are not the ones that can stop the car launched towards the precipice in time. At that precipice, in 1992, Germany precipitated the collapse of the European Monetary System, the exchange rate agreement between European currencies prior to the euro. The agreement provided that, if one or more currencies reached the limit set for their band width, all the central banks of the acceding countries had to intervene to defend that currency. But suddenly the Bundesbank declared that it would cease all interventions, because continuing it would endanger German stability. Immediately the European Monetary System imploded, with the exit of various currencies (first the pound, immediately followed by the lira). On that occasion an internal agreement between the Bundesbank and German government prevailed over the EU agreement that had been signed. If this behaviour were to be repeated, it could lead to the end of the euro.

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