ECB guide to German Court

Will there be a breakthrough in the conflict between Germany’s highest judges and the European Central Bank? In early May, the German Constitutional Court caused a minor earthquake in the euro zone. The Council judged that the ECB acts unlawfully by buying government bonds in bulk, without properly explaining why this is ‘proportional’. The ECB received a comprehensive response for the first time on Thursday.

The conflict is all about it public sector purchasing programme (PSPP) that the ECB initiated in early 2015 to push inflation towards the desired level of just below 2 percent. Within the PSPP, the ECB has meanwhile purchased just under 2,200 billion euros in government debt. According to the Court in Karlsruhe, the purchases have major economic effects that the ECB would not take sufficiently into account, such as the low interest rates on savings and the low borrowing costs of governments.

The Court issued an ultimatum: if the ECB did not respond to these securities within three months, the German central bank, the Bundesbank, would have to end its participation in the ECB’s buy-outs. The Court ordered the German government and the German parliament to put pressure on the ECB to come up with more explanations.

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The ECB’s initial reaction was dismissive: we are only accountable to the European Court of Justice and we are independent, it sounded firmly. This would be a matter for German politics and for the Bundesbank. However, the ECB is said to be ‘constructive’.

On Thursday it became clear what the latter means. In a regular report From a meeting on 3 and 4 June, the ECB Governing Council will discuss in detail the advantages and disadvantages of the buy-back program. Although the German Court is not mentioned once, it is perfectly clear that this is a response to the illustrious judgment of 5 May.

Usefulness and necessity

The ECB’s message: we do think carefully about the usefulness and necessity of the PSPP. And the program is “proportional” (a word that falls three times). Bond buying has proved “effective” in raising inflation, it says. Without buying up, the economy would do ‘much worse’. The ECB does not deny that there are negative side effects, but they are ‘clearly negated’ by the benefits.

The fact that the ECB does not mention the German Court at all in the minutes is very conscious: for example, the central bank need not publicly admit that it is controlled by Germany. That would run counter to the almost sacred status of the ECB as an independent, European institution.

Despite these sensitivities, the pressure on the ECB to reach out to the German Court was nevertheless great. The Bundesbank’s withdrawal from an essential element of ECB policy would drive a wedge within the European currency union of nineteen countries. At the center of the corona recession, that is a scenario that the ECB’s administration wants to avoid in any case, it now appears. Apart from the PSPP, which is still ongoing, the ECB also makes ‘pandemic purchases’ worth EUR 1,350 billion (pandemic emergency purchasing programme, PEPP). Although the judgment was not about that, the German Eurosceptic party Alternative für Deutschland has already announced that it will complain separately about the PEPP in Karlsruhe. It is clear that ECB President Christine Lagarde – herself a lawyer and diplomat – is not in the mood for an ongoing battle with German judges.

Whether the ECB’s trick will gain the approval of German judges remains to be seen. It is now up to the Bundesbank, the German government and the German parliament, the Bundestag. Under the German Constitution, they must (unlike the ECB) comply with every decision of the Constitutional Court, Germany’s supreme legal institution.

According to German media, this should be done through a carefully thought-out plan. In a performance in the German parliament, Bundesbank president Jens Weidmann should point to Thursday’s ECB report next week. In addition, Weidmann has received permission from his ECB colleagues to forward a stack of internal ECB documents on the PSPP to the German parliament. On the basis of all these documents, Parliament would then have to decide that the Court’s judgment has been satisfied. Parliament must then report to the Court.

The role of the Bundesbank is particularly spicy. Weidmann himself is a declared opponent of the PSPP, but must now defend this against the German parliament. The Bundestag has also ended up in a strange position. In German politics, central bank independence is an important principle, but the judge is now forcing German parliamentarians to rule on ECB policy.

Changing of the Guard

The question remains what will be the final verdict of the eight judges in Karlsruhe, the guardians of the German constitution. There are signs that a change of guard at the Court will be beneficial for the ECB and Bundesbank, although this is not certain. The term of office of the previous President of the Court, Andreas Voßkuhle, expired on the day of the ECB ruling. It is unclear whether the new chairman, Stephan Harbarth, will continue Voßkuhle’s hardline towards the ECB. Astrid Wallrabenstein has also just got to work. She was appointed on the recommendation of the pro-European Greens. Wallrabenstein recently alluded to an interview with the Frankfurter Allgemeine Zeitung on a pragmatic solution to the matter.