The German Constitutional Court has made a ruling questioning the ECB, here's why that's important.
I’ve written about monetary policy a fair deal on the blog, it’s an area which has really captured my interest. Lately the European Central Bank (ECB) and their bond buying Quantitative Easing (QE) program has been in the news due to a ruling by the German Constitutional Court which questioned whether the ECB’s QE program was proportional or not. So far, the court in Karlsruhe has required that the ECB show that their measures were proportional, and has been given three months to do so. There are a few interesting topics I’d like to touch on in this post, the relative lack of debate on monetary policy, the inter-EU disputes that the ECB’s policies are symbolic of, and how this is horrible for the EU from an optics point of view.
First though, I think it’s worth to give some more context to the discussion for those who have not read the ruling, you can read it here if you’re interested. In short, the ruling argues that the ECB isn’t transparent enough about their bond-buying programmes for the legal system to be able to make sure the programme isn’t a form of monetary financing, the practice of printing money to bridge a gap in the government budget. Monetary financing is generally regarded as poor policy due to being inflationary; after all a larger money supply dilutes the purchasing power of each unit of currency. The ruling also it argues, persuasively, that the European Court of Justice has drawn up loose rules which allows the ECB to increase its scope over time.
I think a wider discussion on the merits and drawbacks of QE is overdue and hopefully this ruling can start such a discussion. Discussions about QE and central banks have largely been confined to economists and the finance sector but have some far-reaching consequences which should be interesting to a wider audience. It is striking the way what would have been seen as radical monetary policies a few decades ago have quickly become mainstream without being a major issue outside of the finance and economics world. I doubt monetary policy will ever be a major political issue but I do think it deserves more scrutiny, especially from people with other competencies than economics.
The second interesting angle is how this will affect inter-EU politics. The Eurozone is divided along several fault lines but the north-south divide over economic issues is one of the most important in my view. The ruling explicitly mentions how the ECB’s policies can act as a form of subsidy to economically weaker member states which are able to raise money through issuing bonds at better terms than they otherwise would because of the ECB’s QE programme; “The PSPP improves the refinancing conditions of the Member States as it allows them to obtain financing on the capital markets at considerably better conditions than would otherwise be the case; it thus has a significant impact on the fiscal policy terms under which the Member States operate”. The ruling could be read as another manifestation of Berlin’s scepticism of programmes designed to help weaker Eurozone member states; such policies are often by Germans as their taxpayers having to pay for poor choices made by less responsible governments. I wonder if we’ll see southern member states joining the debate on the side of the EU, I wouldn’t be surprised if Italy or Spain were to take the ECB’s side and make what is mostly a national issue an issue for the entire Union.
Finally, the ruling is interesting in the context of the European Union’s recent failures to coordinate a response to the Covid-19 outbreak. The EU has had it rough for a long time now, with the Eurocrisis and the migration crisis leading into Brexit and Hungary and Poland’s provocative behaviour and most recently the pandemic. Having a member state questioning a key EU institution and using quite harsh language, for example “In the decisions at issue, the ECB fails to conduct the necessary balancing of the monetary policy objective against the economic policy effects arising from the programme. Therefore, the decisions at issue violate Art. 5(1) second sentence and Art. 5(4) TEU and, in consequence, exceed the monetary policy mandate of the ECB” is rather humiliating, add to that the fact that the member state in question is arguably the most important and you have a PR disaster. I don’t think the battle over whether QE was proportional or not is going to be what decides the EU’s fate, but it is certainly a symptom of the EU’s internal divisions.
What do you think? Is this a monumental ruling which will change the EU forever or will it turn out to not have any real impact? I'd love to hear your thoughts! If you liked my writing you can read more of my writing on QE here. You can come back next week for a new post, and please share this post with friend or coworker who would find it interesting!
Written by Karl Johansson
Sources:
Cover Photo by Guillaume Meurice from Pexels
Comments