A ruling by German judges that frays the ties that bind the European Union

The ruling by the German constitutional court on the European Central Bank’s bond-buying programme might not have shocked the financial markets but, says Ben Chu, it nevertheless casts an ominous shadow over the future of the eurozone and possibly even the EU

The decision muddies the waters regarding quantitative easing (EPA)

The latest ruling by the red-robed judges of the Bundesverfassungsgericht, Germany’s constitutional court in Karlsruhe, does not, on the face of it, seem like the most significant economic story of this coronavirus pandemic.

Not even close.

The ruling concerns a five-year-old sovereign bond-purchasing programme by the European Central Bank (ECB) that’s long past its peak in activity.

And the court didn’t rule that the programme was illegal, but rather quibbled with the processes by which it was established.

Moreover, the central bank’s new €750bn (£653bn) sovereign bond-buying bazooka – designed to calm debt markets amid this unprecedented economic disaster – was not criticised by the court.

The response of the financial markets to the central ruling – nothing more than a ripple – seemed to sum it up.

Yet it nevertheless casts an ominous shadow – it’s something that makes the long-term future of the single currency, perhaps even the wider European Union, less secure than it was before the judges of Karlsruhe handed down their verdict.

From a practical monetary policy perspective, it matters not for today but for tomorrow.

When the social lockdowns are phased out, the European economic recovery looks likely to be weak and stuttering, as nervous consumers stay at home and shell-shocked business defer investment. The spectre of price deflation may once more haunt the eurozone, just as it did five years ago.

Perhaps the ECB would seek in those circumstances to restart its pre-crisis bond-buying programme (commonly known as Quantitative Easing, or QE) to help lift prices and prevent the economy lapsing back into contraction.

But now European monetary policymakers will have this unexpected ruling of German judges on their minds. They will feel pressure to show that further stimulus is “proportionate” and that they have “balanced” the benefits of avoiding deflation against various costs such as lower returns on Germans’ savings accounts. Most economists regard this as a nonsensical demand, borne of a misunderstanding by the judges of the nature of QE.

Yet misunderstanding or no, it could still matter. Would the ECB now have the confidence to push the button on more QE? Would the Bundesbank, the German linchpin of the eurozone monetary system, be permitted to take part in it? The chances must be lower now than they were before this Karlsruhe decision.

But perhaps the most concerning aspect of this surprise verdict is the brazen challenge from the most senior German judges to the authority of the European Court of Justice (ECJ).

The Luxembourg-based ECJ had ruled, unequivocally, in December 2018, that QE was entirely justified under the rules of the eurozone.

The German judges, says the economist Cartsen Brzeski, “basically told the European Court of Justice that it didn’t have a clue when coming up with its verdict.”

This matters for the same reason that it matters referees are obeyed by footballers. “Europe cannot work if national constitutional courts decide unilaterally when the Luxembourg court has primacy,” as the Spanish MEP, Luis Garicano puts it.

This decision is likely to feed chronic German angst about the role of the European Central Bank. That’s damaging enough. But it also risks undermining confidence in the European Court of Justice, something potentially even more destructive for the broader European project.

Other member states are likely to note the decision of the German court to describe the ECJ as acting “ultra vires”, or “beyond its authority”. Think of the increasingly authoritarian regimes in in Hungary and Poland, already trampling on long respected European political and legal norms.

Squabbling last month by eurozone finance ministers over the form and scale of the economic support measures sent an unfortunate message about EU solidarity in the face of the Covid-19 disaster.

And now comes the Karlsruhe shock. It did not upend the markets but the decision by German judges might well have further frayed the European ties that bind.