How German Courts Can Destroy Euros | Instant News


G.The highest court of Germany issued a decision that could threaten the existence of the euro with a constitutional court ruling that said the operation of European Central Bank bond purchases exceeded the ECB’s legal authority, and violated German constitutional law. This US equivalent is the state Supreme Court that limits the ability of the US Federal Reserve to buy or sell Treasury securities.

Even more extraordinary, the court ruled that it could “ignore the decisions of the previous European Court in favor of the ECB,” which, in the words of Martin Wolf Financial Times, the same as “the act of legal separation.” To expand the U.S. analogy, it would be similar to the state Supreme Court which states that it would not be bound by the U.S. Supreme Court precedent.

Will Germany again transcend borders and waste its historic position of influence in the EU? Or will it finally consolidate its position and save the euro?

However, “judicial separation” may be too strong a characterization. The European Union has been a developing structure from the start and does not have an explicit federal constitutional framework as a backstop that can quickly eliminate any ambiguity and resolve problems from the start.

Here is the problem: the euro is the official currency of 19 of the 27 EU member states, and its users are governed by the federal monetary system which is roughly analogous to the U.S. Federal Reserve system. On the other hand, the euro and the ECB are part of an intergovernmental union, not a real federal state. Europhiles hopes that the EU will only develop to the last organically. The German court had just uncomfortable reminding everyone of the real situation. The absence of an appropriate federal political structure is what forms the long-standing Achilles heel of the entire single currency union. It cannot just be there, or made through judicial improvisation.

However understandable, this legalistic approach poses a big risk for Berlin. As the largest creditor country in the eurozone and its largest economy, Germany has a lot to lose if it ends up being responsible for the split of the single currency union. After all, if the creditor does not respect the rules of the organization (or family) that is part of it and where he holds the claim, why is the debtor bound to the arrangement?

A brief comparison of the two systems helps to illuminate the challenges ahead for the eurozone. The US Federal Reserve consists of a network of 12 Federal Reserve Banks and 24 branches which together form a system that operates under the general supervision of the US Federal Reserve based in Washington. U.S. Fed (through the Federal Open Market Committee – FOMC) establishes an interest rate policy. The New York Federal Reserve branch was then authorized to buy and sell Treasury securities to the extent necessary to carry out the latest FOMC monetary policy directives. If the New York-based court tried to limit the ability of the New York Fed to conduct bond purchase operations on behalf of the US Federal Reserve, this would soon be shot down by the US Supreme Court on the grounds ultra vires, i.e., a state court will be said to act outside its legal authority or authority. These rules are clearly established, regulated, and supported by decades of legal precedent and the existence of clear suitable federal structures (which are replicated in the court system). So, of course, this hypothesis will never appear in the U.S. (short for other acts of separation).

The eurozone seems to be governed by a similar monetary structure: Just as the US Fed uses the New York Fed to make purchases / sales of US Treasury, the ECB uses various national central banks (for example, the Bundesbank for German bonds, Banque de France for French paper, etc.) to buy European government bonds. As the pressure on the system has increased, so has the scope of ECB purchases, along with related questions about the growing legality of its operations. So, for example, though Maastricht Treaty– international agreements responsible for the formation of the European Union (EU) – contain explicitly “‘ There is no bailout “clause” Regarding the activities of purchasing government bonds, the ECB has removed this specific legal obstacle in the past, showing that this purchase is not a bailout, but only steps to help improve the ECB’s ability to conduct legally mandated monetary policies.

Both the European Court (ECJ) and the previous German court decisions were in line with the ECB’s justification. But that all seems to have changed in light of the recent concise decision of the German constitutional court summarized in the Financial Times:

“The court in Karlsruhe ordered the German government and parliament to ensure the ECB provides a proportional assessment assessment of the purchase of bonds to check that the ‘economic and fiscal policy impact’ does not exceed other policy objectives.

“Finally, he told the Bundesbank, the German central bank, to stop buying bonds and draw up plans to sell more than € 500 billion that had been purchased if the ECB failed to comply within three months.”

The principle of proportionality in this example means that the content and form of actions taken by the ECB will not exceed what is needed to achieve the objectives of the EU agreement. If the ECB fails to satisfy a German court that its actions are consistent with this principle, then further asset purchases (eg, Government bond purchase operations) are not permitted. And ownership of existing ECB bonds must be sold, which is likely to create a massacre on the European bond market.

This problem has urgency today, given the background of the COVID-19 virus. In March, the ECB formed the € 750 billion Pandemic Emergency Purchasing Program (PEPP) in response to the increasing economic challenges caused by the pandemic. While it is very likely that the ECJ will soon move to rebuild its legal superiority against the German court ruling, Ana Bobic and Mark Dawson, two of Berlin’s leading legal experts, have questioned whether the new PEPP really meets the legal criteria set out in the ECJ court’s previous court ruling, given the absence of obstacles that the ECB previously imposed on the purchase of state bonds (such as limiting future government spending in return for ECB assistance). Given the dire economic conditions like Italy, any violation of the law that disrupts ECB bond purchase activities creates potential for Italian or Spanish bankruptcy.

Therefore, the ECB will make new purchases against a background of maximum legal ambiguity. To maintain bond purchase operations under the new program, it is necessary to secure Bundesbank cooperation. But the German central bank itself will be faced with two competing claims, bearing in mind that the nation’s leading constitutional court specifically mandates that the Bundesbank cannot continue to participate in the ECB asset purchase program, until the ECB fulfills the requested request. “Proportionality assessment” from this program. Against that, as Wolf notedThe Maastricht Treaty “states that the ECB, nor the national central bank … will not seek or receive instructions … from any member state government or from any other body. ’

Imagine the next time the ECB starts purchasing bonds under PEPP, and the German Bundesbank hypothetically refuses to make this purchase on behalf of the ECB, citing the decision of the national constitutional court. Then what happen?

The ECB can start the program well without the cooperation of the Bundesbank, but the lack of the latter cooperation will be tantamount to starting a divorce process with the entire eurozone. You will have free money for all. And without a “United States of Europe” Treasury standing behind the ECB, Germany, as the largest creditor country, might be burdened with a large amount of the obligations of the eurozone debtor countries. The latter (Italy, Spain, Portugal, Greece) will with very strong reasons for refusing payment if the violator of the European Monetary Union is Germany itself. So in that case, Italy’s bankruptcy largely created problems for Berlin, not Rome. One could argue that the German court decision actually gave debtor countries a “get out of prison free” card.

Maybe it won’t come to that. If nothing else, the European Union as a whole has proven itself to be very good at kicking cans on the road and resolving difficulties only at the last possible moment. One possible solution is that something I have suggested before, i.e. “the annual distribution of funds to the national government (credited to their accounts at the national central bank) on a per capita basis … [, which would] giving national governments fiscal freedom to overcome a pandemic and bring about long-term economic recovery. “Because funds will be distributed on a per capita basis, the court may consider the action consistent with the principle of proportionality, especially if Bundesbank officials will sign such a program.

However, these legal challenges will not disappear in the near future. Each legal clarification is clearly designed to determine the limits of ECB action, and provide a smaller scope for the type of ambiguity that allows member states to delay difficult long-term decisions that will actually make or break a union. Germany, in particular, constantly condemns other countries that have become violators of the EU rule book. But it is very similar to Shakespeare, Shylock, who really insisted “one pound of meat“As collateral for his loan to Antonio, harsh German legalism can ultimately backfire if and when the tables are changed.

L.Today’s centers of economic power such as New York and California understand the value of being part of greater political unity and have voluntarily subsidized the entire US for decades, even patriotically. Will Germany again transcend borders and waste its historic position of influence in the EU? Or will it accept a form of fiscal transfer union that ultimately consolidates its position and saves the euro, but possibly puts Germany in the position of a perpetual net contributor to a broader, but more sustainable European Union? This has a recent domestic parallel to consider, when absorbing and developing East Germany after the Cold War. It all depends on what the Germans imagine their role in the region, builders or violators.

Marshall Auerback
Independent Media Institute

Marshall Auerback is a market analyst and commentator.

This article was produced by Economy for All, a project of the Independent Media Institute.

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