Will the German Constitutional Court decide the fate of the Eurozone?

With a much-discussed judgment by the German constitutional court and a €500 billion Covid-19 recovery fund that has been proposed by Angela Merkel and Emmanuel Macron, this month has seen two important events that may shape the future of the EU in the years to come. Although the amount of the recovery fund is modest, commentators have noted that it may be a turning point for the EU in that it may be a decisive step in the direction of European fiscal capacity, and monetary- and fiscal-policy coordination – in other words give the EU one of the key powers of a state, namely the right to tax. Apart from the fund’s specific purpose, analysts note that its “more fundamental contribution may be to shift the ground in the debate, removing … some of the red lines surrounding risk mutualization and the benefits of transfers”.

Others have compared this potential move in the direction of a fiscal federation as Europe’s “Hamiltonian moment”, referring to the decision in the United States to have the US federal government assume all the debt incurred by the US states during the War of Independence, thereby laying the foundation of the strong central federal government in the US. The key to understanding the potential of the fund is the way it is financed, according to Anatole Kaletsky: “if the EU borrows €500 billion this year for a European recovery fund, then it could easily borrow another €1 trillion next year for a digital inclusion fund, and then maybe €2 trillion for a vehicle electrification fund or €3 trillion for a comprehensive climate-change fund”. This would bring the EU’s Green Deal objective within reach.

It is here that a discussion of the German Constitutional Court’s ruling is essential. It ruled that the ECB has operated outside its mandate in recent years by pursuing its Quantitative Easing policy. At the core of the judgment is the distinction between monetary policy and economic policy. Thus, the ECB is accused of ignoring the economic effects of its monetary policy, leading for example to lower pensions and savings and higher real estate prices. As economic fiscal policy remains within the domain of the national states, the ECB is said to have overstepped its competence.

In analyzing the judgment, Adam Tooze stresses its institutional implications: “It is a spectacular challenge to European court hierarchy. Instead of merely assessing the conformity of the ECB’s policies with the German Constitution, the German court arrogated to itself the right to evaluate the conformity of the ECB actions with European treaty law, an area explicitly left to the ECJ”. In turn, European institutions such as the European Commission closed ranks around the ECJ, and the ECB itself has declared that it intends to ignore the German ruling since it answers to the European parliament and ECJ, not to the German Constitutional Court.

The coming months will be crucial. Concretely, the German Constitutional Court has given the ECB a three-month grace period to explain why its Public Sector Purchase Programme (PSPP) is proportional with its mandate. As Willem Buiter has pointed out, “if Germany were suddenly to say “nein” to the PSPP, one or more Eurozone countries could be forced to crash out of the monetary union”. It is also clear that when the ECB fails for this test, justifying the proportionality of more recent Covid-inspired initiatives such as the Pandemic Emergency Purchase Programme (PEPP) will be even more difficult.

Edited by: Dr. Olivier Vonk