The German Federal Constitutional Court ruling on May 5 struck eurozone institutions like bombs. The European Central Bank (ECB) has just begun to increase purchases of sovereign debt to counter the coming COVID-19 economic crisis when Germany’s highest court questions the legality of the ECB’s main asset purchase program – the Public Sector Purchasing Program (PSPP) which began in 2015.
In particular, the court asked the ECB to justify its program to the German government and parliament within three months. The ECB must demonstrate that the economic impact of the purchase of bonds is proportional to the objectives set out in the ECB founding agreement. If German political institutions believe that the ECB exceeds its prerogative, the Bundesbank (German central bank) must withdraw from the PSPP. All German government bonds bought under it must then be resold.
With their ultimatums, German judges not only questioned the ECB’s previous reasons for the bond buyback program. They also contradict the judgment of the European Court of Justice (ECJ), which found that the programs were in accordance with the European agreement. This raises two questions: Does the ECB exceed the scope of action stipulated by this agreement? And who has the authority to judge his actions? The answers to these questions will determine the ECB’s ability to deal with the impending economic crisis – and perhaps whether European integration even has a future.
Some very good analyzes has emerged in a long legal war between the German Court and the ECJ, as well as about the role of law in European economic integration. But receiving rather less attention, at least so far, is sociological and political context German court decision. Since the Maastricht Agreement was signed in 1992, a group of German political entrepreneurs from the right-wing elite have systematically mobilized the ECB bond purchase program. And many of them are from the environment where the far right Alternative Deutschland (AfD) was first created.
The implications of the May 5 ruling become clearer if we look at this decision not separately, but as a recent episode in a broader project – that is, the efforts of the right-wing German elite to make monetary policy an issue for the courts, as a means of applying political principles themselves.
The court ruling – and the challenges to the ECB program – results from an open gap between the ECB’s response to the crisis, and its initial model as an independent central bank, which is largely taken from the example of the German Bundesbank itself. This model itself is based on negative lessons drawn from interwar German history, from hyperinflation from the 1920s to the Bundesbank participation in financing the Nazi regime’s ammunition policy.
In fact, the hyperinflation of the 1920s especially injured the wealth of the richest savers and did not lead directly to the fall of the Weimar Republic. Instead, it was the austerity policy implemented under the conservative Catholic chancellor Heinrich Brüning which facilitated Nazi takeover and subsequent Bundesbank participation in arming the regime. However, in the postwar period, hyperinflation and loss of independence of the central bank occurred pictured by the dominant ordoliberal school as the cause of destabilization of the Weimar Republic and the rise of the Nazis.
After 1945, this ordoliberal school made it a principle that the central bank must be independent of political intervention, with price stability as its main objective. Given the dominance of the Bundesbank in the early phases of the European Monetary System, the ordoliberal perspective on monetary policy has crystallized during formation ECB on all continents. With the signing of the Maastricht Treaty in 1992, the high level of ECB independence was legally enshrined, and maintaining price stability was its main goal. The European Court will monitor the compliance of ECB actions with respect to the agreement.
The only explicit limitation for ECB monetary policy autonomy, again, is related to the German taboos of the 1920s. The central bank is prohibited from buying government debt directly (on the primary market). This is intended to prevent “debt monetization,” (e.g., Direct financing of the state by the central bank). But this was also linked to German fear of “moral danger.” It worries that other eurozone countries can use the fact that Germany is transferring its high credit worthiness to the ECB, both to take excessive financial risks and encourage fiscal transfers between eurozone countries.
The divergence of the ECB’s actions from the central banking ordoliberal conception actually emerged with the 2007 financial crisis and especially the worsening in the euro zone since 2010. An unstable and too large financial system is in danger of exploding. In line with other central banks, the ECB implements three asset purchase programs to deal with this risk, in which government bonds are purchased on a large scale (though on the financial market – the so-called secondary market). This irritated the elite of the conservative German elite, who regarded themselves as guardians of the architecture of the original ECB orbitals. They consider the repurchase of government bonds as a form of debt monetization, and thus represent a patent threat to the European legal and economic order.
This violent opposition between the conservative German elite was driven by both ideological beliefs and by perceived national interests. First, they are convinced of the solidity of the ordoliberal approach to monetary policy and are afraid that deviations from it will damage the credibility of the central bank, thereby disrupting economic stability. In particular, they are afraid that low interest rates will threatening pension funds and wise savings. Second, they are also upset because the ECB’s response to the crisis implies, to some extent, a collection of financial risks between European countries. For liberal orders, this unification triggers the “moral danger” mentioned above, which allows peripheral member states to refinance their public debt at lower costs, supposedly at the expense of German taxpayers.
This culture the crisis – blamed on careless Southerners – but stands poor for any kind of close economic analysis. Even mainstream macroeconomist recognizes that the roots of the crisis in the euro zone do not owe to spending that should be wasteful on the periphery, but rather to deep imbalances in the financial system and the lack of redistribution mechanisms (general fiscal instruments) in the euro area.
But protests against the ECB’s new crisis response policy within the Angela Merkel Christian Democratic Union (CDU) were ineffective – and the order could not express itself by calling for an end to ECB measures. On the contrary, in response to these defeats, the radical wing of German conservatives sought a strategy of punishing European monetary policy (eg, initiating “marches through the courts”). Each of the three ECB bond purchase programs has been systematically challenged before German Constitutional Court and European Court – and, while the first two have been legalized, German judges are now questioning the legality of the 2015 PSPP.
Plaintiffs at the core of this lawsuit form a homogeneous group of old capitalists and conservative intellectual elites. Claimants include former president of the German Industrial Federation (BDI) Heinrich Weiss, Christian Social Union (CSU) MP Peter Gauweiler, right-wing activists Beatrix and Sven von Storch, former Thyssen AG CEO Dieter Spethmann, and lawyers and lawyers and economics professors such as Johann Heinrich von Stein, Mark Kerber, Joachim Starbatty, Bernd Lucke, and Karl Albrecht Schachtschneider.
The plaintiff’s social trajectory corresponds to three elite categories: academics (university professors), right-wing politics (advisers or MPs for the CDU or Bavarian sister party, CSU – and later on AfD), and economic elites (corporate CEOs and relations with German Industrial Federation).
Individual biographies sometimes cover several of these areas – and all have important legal dimensions. While finding themselves in a minority position on European issues, at least as far as German rights are concerned, these figures pursue a specialization strategy to strengthen the recognition of their expertise and gain domestic political prestige. The career path of the lawyer involved in this case shows a similar logic. This is how complainants like Markus Kerber – in his own words – Using his legal activism to take part in the history of European law.
This judicial initiation of monetary policy is also directly related to the formation of the far-right Alternative für Deutschland party. The failure of the right-wing conservative opposition to the rescue policy of the euro within the CDU / CSU caused most of these groups to join the AfD at its founding in September 2012. After its launch, the AfD was known as Professorenpartei (Party of professors) due to the over-representation of conservative academics and universities in their ranks.
At that time, the AfD was a single issue party that organized itself around criticism of the euro and the danger of collecting state debt. We found many connections between AfD and the plaintiff. Before being overthrown by allied leader Frauke Petry in 2015, plaintiffs Joachim Starbatty and Bernd Lucke were considered to be AfD leaders. Karl Albrecht Schachtschneider was active in various radical right-wing anti-refugee campaigns and was a board member of the Desiderius Erasmus Foundation which was connected to AfD with Joachim Starbatty. In 2014, Joachim Starbatty, Bernd Lucke and Beatrix von Storch were elected to the European Parliament for AfD. Led by Sven and Beatrix von Storch, Zivile Coalition’s reactionary right-wing political association was also part of the lawsuit.
In their evaluation process, the judges of the Federal Constitutional Court basically justified the argument of the order defended by the plaintiff. In Gauweiler’s decision on June 16, 2015, they were of the view that ECB sovereign debt purchases blur the distinction between fiscal and monetary policy and thus could jeopardize its independence.
The Court also realizes that examining the legality of actions taken by the ECB is not only within its jurisdiction but also within the European Court. Since Gauweiler’s ruling, the German Court has submitted the cases to the European Court, but has the right to revise this final decision. Indeed, in 2016, when German judges accepted the European Court’s decision to reject Gauweiler’s complaint, they also expressed their dissatisfaction with the content and form of the decision by European authorities. The judgment of 5 May this year should be read as a continuation of the struggle for power between institutions.
At first glance, it is difficult to deny the judges’ emphasis on the lack of substantial legal control over ECB activities. In itself, this is hardly surprising – courts in the United States and Britain also do not control the substance of decisions made by central bankers. But in both countries, there are tighter controls on the actions of central banks carried out by parliaments and government institutions (the US Congress can change the laws of the Federal Reserve and the British government can change the goals of the Bank of England).
However, in the case of the Eurozone, the various interests and views of the national government prevented the council from commenting on monetary matters, while the European Parliament and the commission did not have legal power to exercise this control. Therefore, German judges are entitled to show the institutional and political vacuum in which the ECB finds itself and the problematic discretion granted.
But if the Constitutional Court can thus be seen as a kind of alarm that points to the danger of fire in the architecture of European democracy, the way that gives rise to this warning is the approach of an arsonist. If it is up to German and ECB judges forced to return to the principles of ordoliberal monetary policy, the eurozone will only explode.
Given the current structure of global financial markets, the separation between monetary and fiscal policy no longer applies feel. Because government debt plays the role of safe assets and determines other financial values, it is not possible today to fight the financial crisis without the central bank acting on government debt. In addition, requests for an assessment of the bond purchase program by the Bundestag and the German government undermine the credibility of the real European monetary policy. It bears the risk of further restrictions on decisions that are urgently needed for Europe’s mutual protection against financial risks. In any case, it is likely that right-wing ordoliberalism activists will continue their judicial guerrilla warfare, encouraged by this ruling. Their next target will be the ECB’s move to combat the COVID-19 crisis.
Finally, the willingness of German judges to prioritize national economic doctrines rather than European law also carries the risk of direct fragmentation of the European legal order, the main engine of European integration. Without wanting to misrepresent the virtues of European law as progressive, it must be remembered that indeed, it allows the most blatant forms of autocracy to be fought in countries such as Hungary and Poland – countries whose right-wing governments also soon was welcomed the decision of the Constitutional Court.
In short, the decision of 5 May 2020 was part of a long process of judicial processes of monetary policy – an approach that was driven by the radical core of the German right-wing elite to force the ECB to conform to ordoliberal principles. At the same time, this marks an ambivalent turning point: on the one hand, German judges rightly emphasize the problematic institutional and political vacuum in which the ECB operates. But the German Constitutional Court’s efforts to fill this vacuum will not solve the Eurozone’s democratic and macroeconomic problems, but only intensify it.
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