On March 19 Christine Lagarde, the European Central Bank president, stated: “There are no limits to our commitment to the euro. We are determined to use the full potential of our tools, within our mandate.” Her unequivocal language was necessary to quash any doubts in financial markets that the ECB would pull out all the stops during the coronavirus pandemic to safeguard the eurozone’s future. In the light of Tuesday’s unhelpful ruling from Germany’s constitutional court on the central bank’s pre-pandemic asset purchases, it is more vital than ever that the ECB, supported by all 19 eurozone governments, should defend the scope for emergency action set out by Ms Lagarde.
From its 2009 judgment on the EU’s Lisbon treaty to its latest ruling on the ECB’s unconventional monetary policy measures, the German court has surpassed all its eurozone peers in claiming the right to interpret European law as it sees fit. In Tuesday’s ruling, the judges in Karlsruhe went so far as to assert that the European Court of Justice, the EU’s highest court, had made such gross mistakes in a 2018 judgment on the ECB’s asset purchases that the German court does not regard itself as bound by the ECJ’s decision. Well might other countries ask what would be left of the EU’s prized legal order, if each national high court were to arrogate to itself such extensive powers to dispute ECJ judgments.
The German court’s ruling does not apply to the ECB’s €750bn pandemic emergency purchase programme (PEPP), which started on March 26 and may continue beyond this year, should the central bank determine that the eurozone’s financial and economic health requires it. However, by ruling that the ECB’s earlier public sector purchase programme (PSPP) partly violates the German constitution, the court has made it all but inevitable that German critics of the ECB will challenge bond purchases made under the new pandemic initiative. Successful challenges would risk imposing serious constraints on the efforts of the ECB and eurozone governments to manage the recovery phase of the crisis.
Tuesday’s ruling rests on shaky ground in its argument that the ECB has taken insufficient account of the economic effects of its PSPP measures. The court mentions “considerable losses for private savings” and the propping up of “unviable companies” as two such effects, attributable to the ECB’s decision to drive down interest rates to all-time lows. In fact, the ECB’s governing council has gone to great lengths to assess the overall impact of its measures. Time and again ECB policymakers, including Isabel Schnabel, a German appointed in December to the bank’s executive board, have pointed out that the extraordinary actions preserve price stability and have created financing conditions favourable to investment and job creation.
Nonetheless, the court ruling shines a light on one of the eurozone’s chief vulnerabilities as it has battled crisis after crisis over the past decade — namely that the ECB has proved itself to be the only EU institution able to act swiftly and resolutely to protect Europe’s currency union. National governments, divided among themselves and beset by domestic political strife, have shied away from collective fiscal action on the scale needed to buttress the ECB in tackling the eurozone’s troubles. By placing a disproportionate burden on the central bank to act as saviour of the eurozone, the region’s political leaders are shirking their responsibilities. In doing so, they are turning the ECB into a hostage to misguided but relentless legal pressure from Germany, and potentially elsewhere.
