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A Farce in Karlsruhe

It is possible that this very serious farce in Karlsruhe in the end will also produce some good. For example, the German Constitutional Court may require more transparency in dispensing aid to countries in need. Specifically, it may require the adoption of a criterion that determines when the European Central Bank (ECB) must cease purchasing the government bonds of a country that does not respect agreements. It would be a good and advisable thing for the ECB’s independence and would determine the limits for the countries receiving assistance. Moreover it would give transparency to the growing mutual fiscal—and political—responsibilities between EU countries. Finally it would probably be the right step to expanding—rather than restricting—the ECB’s tools for solving the credit crunch in countries such as Italy.

The recommendations coming from the first day of the hearing held yesterday in Karlsruhe point toward this result. But before getting there we must make a pledge to the false rhetoric behind which hides the defense of German money. Historians tell us that paradoxical and ridiculous moments also accompanied the signing of the Treaty of Westphalia and of the Maastricht Treaty. Yesterday, in the usual sad circus climate that in Karlsruhe characterizes all anti-European cases, in the midst of economists seized by sudden notoriety who were selling their books in front of the cameras, we saw two central bankers, both from the German government—Jens Weidmann and Joerg Asmussen—defend the independence of central bank leaders from politics; dozens of protesters calling for “more democracy,” while meaning “less solidarity”; Constitutional Court judges, strictly affiliated with political parties, admitting they cannot judge the ECB, since it is a European institution, while not being willing to leave the task up to the Luxembourg court. And finally one of the judges revealed the ridiculous aspect of the whole matter, wondering if perhaps it is expected that the court will order the Bundestag to torture Mario Draghi. 

The most important moment came, however, before of the hearing, when the president of the court recognized that the ECB cannot be judged from Karlsruhe, since it is governed by European law. What the German courts can, however, judge is the adequacy of the ECB’s policies with European law, interpreted by the judges themselves and the Berlin Parliament in order to be compatible with German Basic Law. The issues that the judges will tackle will therefore essentially be twofold: first, determining whether the new ECB measures in favor of struggling countries—the Outright Monetary Transactions (OMTs)—represent such a big financial risk for Germany’s finances as to prevent other parliamentary spending, thereby preventing the exercise of democracy. Second is whether the main condition placed by the German Parliament for the signing of the Maastricht Treaty—namely, that the euro be as stable a currency as the mark was—is respected in light of the inflation risks resulting from large injections of liquidity. 

The first issue appears to have a rather simple solution. Essentially, the OMT concern a limited volume of government bonds: bonds that have already been issued for some time and that have a maturity between one and three years. It does not even provide the possibility for a country to change its debt issuance strategy and use only short-term bonds. Regardless of the volumes of these government bond issuances and the range of countries involved, Germany’s share of the potential losses (should a country that is receiving assistance be declared insolvent) remains below the maximum threshold that the court has already estimated at 50 percent of the annual federal budget. The second criterion is more interesting. Ensuring the survival of the euro, OMTs help stabilize the currency, not make it more fragile. Moreover, the liquidity issued with the purchase of the government bonds is notoriously neutralized and therefore should not produce inflation—i.e., it should not lead to a further deterioration of the monetary value of the euro.  

However, once it commits to assisting an ailing country, it is highly unlikely the ECB will withdraw or terminate its help. When it has done so, in March of 2011, for example, it contributed to the following summer’s landslide, which threatened the euro’s existence. Under these conditions, monetary policy can therefore be “dominated” by fiscal targets. This is especially wrong if assistance is given to countries that do not comply with prior arrangements undertaken with the European institutions. To prevent this from happening, it is necessary to establish criteria to ensure that the ECB is obliged to suspend aid. This request would be helpful for the independence of the ECB, would strengthen the delegation of sovereignty from the countries in crisis to their partners and would help the Bundesbank—the key actor in the Karlruhe circus, embarrassed for having chosen to criticize the ECB on the basis of very fragile technical grounds—save face. The Bundesbank’s line represents a risk for the central bank itself, exposing it to the danger of populist resentment. Yesterday, the bank was in fact publicly criticizedb y the German government.

A constructive decision by the Karlsruhe court on the OMTs would also strengthen an unconventional monetary policy that, up till now, has been merely announced by the ECB and would pave the way for the launch of more unconventional instruments, starting with some kind of quantitative easing able to reactivate credit in the countries no longer reached by the effects of the ECB’s monetary policy.