On Tuesday, the @BVerfG, the 🇩🇪 Constitutional Court in Karlsruhe, will issue its final verdict on the ECB‘s QE programme (PSPP).
Here is why that (unfortunately) could matter a great deal:
Here is why that (unfortunately) could matter a great deal:
1/ Of course it’s not the role of national courts to determine the legality of the actions of 🇪🇺institutions. This is for the Court of Justice in Luxembourg. But Karlsruhe reserves the right to intervene if it deems an action outside the EU‘s competences. That’s what looms here.
2/ Karlsruhe had two main issues with PSPP: It could violate the monetary financing prohibition and it could fall outside the remit of monetary policy altogether. KA asked the CJEU, who ruled that PSPP did not constitute monetary financing and was a monetary policy measure.
3/ Case closed, we should assume. And there is still a high likelihood that Karlsruhe will again grudgingly follow Luxembourg as provided for in the Treaty. But there is a non-zero probability that this time is different and the BVerfG will diverge from the Luxembourg ruling.
4/In the furthest-reaching scenario, the BVerfG could set limits for the Bundesbank’s participation in PSPP in a way that either directly prohibits a further BuBa participation or by turning PSPP rules into red lines that would call into question the BuBa‘s participation in PEPP.
5/ This would have two direct effects: First, it would put the Bundesbank in an untenable position as it is legally obliged to follow ECB decisions and at the same time as a German institution it cannot ignore decisions by the most important court of the land.
6/ This will likely lead to further court cases. But in the meantime, it’s hard to see the Bundesbank not complying. Now, technically the BuBa not buying German Bunds for a while is not really an issue. But politically it is: It would be the end of the Eurosystem as we know it.
7/ This leads us to the second, political effect: Such a ruling would put also the ECB itself in a politically untenable position. If the most important court in the largest member state rules its actions out of bounds, the ECB cannot simply ignore that.
8/ Ignoring it would mean accepting that its actions would have the stamp of illegality in Germany - and even the most pro-European voices in Germany would have a hard time defending the ECB against a negative Karlsruhe verdict. The role of the BVerfG in 🇩🇪 is just too important.
9/ Markets presumably know that - and hence a negative judgment will immediately call into question the ECB’s capacity to act. (Rightfully) arguing that it is unacceptable for a national court to act in this way will be necessary but will not help much.
10/ Instead two actions will have to happen: First, member states have to make clear that they are ready to live up to their responsibility to keep the euro together with bold fiscal action. Like, really bold.
11/Second, depending on the details of the judgment, primary law will urgently need adaptation to safeguard the ECB’s capacity to act as a real central bank. If that means changing the Treaties in a limited way e.g. by clarifying the monetary financing prohibition, then so be it.
12/ It is massively problematic that we have to bother with this at all. But we cannot ignore it either.
As said, it’s still likely that the Eurozone will dodge this bullet. But as with everything in this pandemic: Hope for the best - but prepare for the worst.
As said, it’s still likely that the Eurozone will dodge this bullet. But as with everything in this pandemic: Hope for the best - but prepare for the worst.
