German Court Fires At ECB Bond-Buying Plan
Ah, the Euro. Remember when Jay-Z was flashing them around in the American Gangster trailer and everyone thought the dollar was coming to an end? Those were the days. The upstart currency had a sky high cool factor to go with its seemingly invincible domination of the dollar. Today, not so much. The Euro has been lurching from crisis to crises since the global economic meltdown in 2008. The grinding after-effects of the collapse have taken a brutal toll on the Eurozone, especially on its southern perimeter.
The economies of Spain and Greece, in particular, are in the toilet. Unemployment is punishingly high in both countries. The unemployment rate for those under 25 in Spain is a dismal 55.6%, in Greece it’s even worse at 59%. The housing markets in both countries are still in free-fall. Overall, the Spanish economy is drifting slowly higher but Greece is still on a razor’s edge, locked in an existential struggle with its creditors. While the Italian economy escaped the worst ravages visited on Spain and Greece, it is stuck in the doldrums, and the countries’ government bonds have downgraded. (Greece’s went deep into junk bond territory in 2012.)
The difficulty these economic basket cases pose for the rest of Europe is that they share a common currency with their northern neighbors. While Germany’s exports, on which it relies, have taken a hit from slumping demand in the south, its economy continues to thunder along. Likewise, the Netherlands, Sweden, Denmark, and France are doing comparatively well. But juggling debt, banking crises, plummeting growth, and disparate competitive postures between the various nations in the Euro Zone have proven to be the greatest challenge the entity has faced since France and Germany first proposed a common market. The Euro, as a common currency, is a natural culmination of a profoundly idealistic enterprise put into place by clear-eyed realists in response to the grinding horrors of the two world wars. But as the Common Market morphed into the European Union, and then the EU metastasized beyond its original industrial giant members, the difficulty of incorporating economies as diverse as Germany and Bulgaria outside a federal system became apparent. Maintaining a trade zone composed of 18 sovereign nations with a single currency was always going to be a challenge at the best of times. These last few years haven’t been the best of times.
The task of dealing with the various sovereign debt crises inside the Euro zone has fallen to the European Central Bank. In an attempt to prop up the teetering economies on the Union’s southern perimeter, the ECB announced what was essentially a vow to buy up a virtually limitless amount of sovereign debt bonds. So far, the bank hasn’t had to follow through on its promise to any substantial degree. But the prospect of its doing so did manage to stabilize the Euro and helped calm markets spooked at the prospect of cascading national defaults across the continent. The calm was short-lived.
Last month the ECB’s ability to prop up the common currency was thrown into grave doubt when the German Constitutional Court in Karlsruhe declared the bank’s bond-buying authority contrary to German law. The Court held that the German constitution constrains the reach of the ECB’s market stabilization strategy. The Bank, the Court held, had overstepped its mandate by vowing to vacuum up sovereign debt at German taxpayers’ expense. According to the Court, if an agency of the European Union acts ultra vires, as it found the ECB had, German constitutional authorities and courts may neither participate in the decision-making process nor in the implementation of the act. “Moreover,” the Court held, ‘the German Bundestag and the Federal Government may not simply let a manifest or structurally significant usurpation of sovereign powers by European Union organs take place.” Theoretically at least, the Court could prevent Berlin from contributing to efforts to prop up the Euro. And without Germany’s money in the pot, the ECB program would collapse. Conceivably, the Court could even rule that Germany must leave the currency zone altogether.
One German parliamentarian greeted the news by exclaiming (delightedly) “Karlsruhe has shown ECB President Mario Draghi what a bazooka really is.” Indeed. The ruling has caused consternation across Europe and a good deal of second-guessing within Germany itself. Is the Court an anti-European institution bent on undermining continental monetary policy? Or is it acting as the last redoubt defending taxpayers and the democratic process in the face of overweening bureaucracy? The president of the Constitutional Court, Andreas Vosskuhle, has implicitly questioned whether politicians and the continent’s banking regulators aren’t more interested in their own power than the wishes of the continent’s citizens and voters. “The court is helping to ensure that the European house is being built in a way that is stable and is as close to its citizens as possible,” Vosskuhle insists. Democracy, in other words, is more important than the Euro, according to Court insiders.
This is not necessarily the last word from the Court. In an historical first, it has referred the case to the European Court of Justice in Luxembourg for a preliminary ruling. The Luxembourg court is much friendlier to the entire Euro project than the Constitutional Court has shown itself to be. But if the German court is ultimately displeased with the Luxembourg court’s decision, there is no guarantee it won’t step back into the fray. Karlsruhe, Vosskuhle has warned, will have the final say.
The European Union is itself very much a work in progress, and so far its currency has shown itself to be as resilient as it is volatile. The ECB bond program aims to neutralize market spreads on government bonds of member states of the euro currency area and which adversely affect the refinancing of those states. Those spreads, in the view of the Court, are based on investors’ irrational fear of a reversibility of the euro. Given the size of the howitzer the Court has trained on the ECB, such fears may not be as irrational as it makes them out to be.