The EU – already struggling to agree on a common approach to tackling the financial consequences of coronavirus – now has another headache to deal with.
Germany’s constitutional court has thrown a potential spanner in the works, one that could restrict the actions of the one institution currently capable of holding the eurozone together even in the face of pressure from wider markets – the European Central Bank (ECB).
To cut a very long story short, the quantitative easing (QE) scheme launched by the ECB under former ECB boss Mario Draghi has always been controversial in Germany.
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Under the scheme, the ECB buys government bonds from around the eurozone to keep interest rates low, to weaken the currency, and generally to keep the banks from exploding or imploding. Oh yes, and to do something to do with inflation targeting, which is of course the fig leaf that covers up all the other stuff.
In other words, the ECB does what most of the other central banks around the world do for their own nations, except the ECB does it for several nations – all the members of the eurozone.
Germany's problem with money printing
Now, for a range of reasons – the memory of Weimar hyperinflation being the most obvious – Germany is among the few nations globally that still actively worries about central banks printing money to finance government spending by buying government debt (which is basically what QE is if you ditch all the economist-speak pedantry around it).
This fondness for fiscal and monetary rectitude wouldn’t matter if Germany still used the deutschemark – after all, the German government could then tell the Bundesbank (the German central bank) to do whatever it liked.
But of course, under the euro, Germany shares a central bank with every other eurozone member. And the majority of those nations – most prominently, Italy – either want or need money printing to keep their own borrowing costs down.
So if Germany gets its way on monetary policy, then the likes of Italy (and before Italy, Greece) get hung out to dry.
Now, German voters could argue: “why should we put up with ridiculously profligate Italian monetary policy when we’d like to have sensible German monetary policy?” And that’s fair enough.
Trouble is, it’s also fair enough for Italian voters to argue: “why should we have to put up with ridiculously miserly German monetary policy when we’d like to have sensible Italian monetary policy?"
And of course, during the eurozone sovereign debt crisis, it was the economically weaker members who needed to be bailed out using QE to avoid defaulting on their debt (Greece’s situation ended up being more complicated than this, but QE was put in place to prevent the eurozone from drifting to that point again). Otherwise the euro itself would most likely have been shattered (try keeping the euro together if Italy defaults on its debt, never mind the implications for the global financial system).
However, QE itself has long been subject to legal action in Germany. The issue is that central banks are meant to stick to monetary policy. They aren’t meant to dabble in fiscal policy, which is the purview of governments who have been democratically elected by the taxpayers who pay for said fiscal policy.
Now, as we all are increasingly aware, there isn’t so much a thin grey line between monetary and fiscal policy as a massively overlapping Venn diagram.
Your opinion on exactly at which point printing money to buy government bonds morphs from run-of-the-mill monetary policy into full-blown deficit financing boils down to a) your politics and b) whether or not you are a central banker who can’t quite work out a good answer to the tricky question: “why exactly is this different to what Zimbabwe did?”
In any case, while the British government is quite happy for the Bank of England to extend its overdraft, and Donald Trump has positively exhorted Jerome Powell over at the US Federal Reserve to become a one-man monetary Gutenberg, Germany isn’t happy to just let central bankers wave their hands and tell everyone not to worry.
Germany demands answers
So on Tuesday, Germany’s constitutional court effectively told the ECB to justify itself. It has to demonstrate that it isn’t going beyond its mandate with its QE scheme. If not, then Germany will prevent the Bundesbank from buying Bunds (the ECB does the purchases via each country’s own national central bank).
To be a little more precise (I’m not going to get into the legalese, so apologies if I don’t get technical enough), as the FT reports, the German government and parliament have been asked to ensure that the ECB has carried out a “proportionality assessment” of its QE purchases, to make sure that the “economic and fiscal policy effects” don’t outweigh its policy objectives.
In other words: get back in your box.
Meanwhile, this judgement in itself involved knocking back an earlier ruling (from 2018) by the European Court of Justice, which had said that the ECB was operating within its mandate.
The German court described that ruling as “untenable from a methodological perspective.” Which is a nice way of saying: “nonsense”.
Meanwhile a European Commission spokesman shot back with: “… we reaffirm the primacy of EU law and the fact that the rulings of the European Court of Justice are binding on all national courts.”
Which if I recall correctly, is a strategy straight out of chapter two of How to Win Friends and Influence People, though I may of course be mistaken.
Does any of this really matter?
Now the question is: what does this all mean in practice and does it really matter?
First things first, it probably doesn’t mean anything imminent. It’s not like the ECB will stop doing QE, and it’s unlikely that the Bundesbank will have to stop buying Bunds. However, in the longer term, it’s a problem.
Henrik Enderlein, a professor of political economy at the Hertie School in Berlin, sums it up nicely on Twitter. Germany’s national courts are saying that the ECB has to justify itself to them before it does anything. As Enderlein puts it: “The ECB approach to do ‘whatever it takes’ will no longer work – unless ECB accepts a conflict with [the German constitutional court] and parts of the German public.”
Now, I mean this is hardly new – the idea that a fair few Germans might not be happy with the ECB’s actions. But it’s just another step towards the toughest conversation, one that much of the EU and eurozone has been built on avoiding, finally being brought to a head – how much sovereignty are you willing to give up to be a member of the single currency?
We found out the answer for Greece back during that crisis. The Greeks voted (just) to put up with a lot of economic pain and a loss of sovereignty to avoid returning to the drachma. But what happens the next time someone asks the same question of German voters?
From this point of view, the German constitutional court is simply asking a very reasonable question: who runs Germany? And this disagreement gets to the heart of the problem with the euro: if you share a currency with another country, it means you share sovereignty too, whether you like it – or whether anyone wants to admit it – or not.
John is the executive editor of MoneyWeek and writes our daily investment email, Money Morning. John graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news. John joined MoneyWeek in 2005.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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