Political expediency dilutes the rule of law in the monetary and fiscal policy of the European Union. This may help financial markets in the short term, but the long term consequences – including the negative reactions of the kind we saw with Britain leaving the EU – will be grim.
As a centerpiece of monetary policy, Article 123 of the Treaty on the Functioning of the European Union prohibits the European Central Bank from directly acquiring debt securities of euro area member states. The ECB can trade government bonds in the secondary market for monetary policy purposes. But the purchases are not legitimate if they are used to finance public borrowing. However, in the context of the surge in asset purchases over the past 18 months, this is exactly what the ECB is doing. By signaling to bond traders that it will buy newly issued government bonds in the secondary market as part of its buying programs, the ECB is effectively circumventing the ban on direct purchases in the primary market.
Last year, according to its own statistics, the ECB bought 95.5% of new bonds issued by eurozone member states and promised to keep them in its portfolio for long periods. As part of the public sector purchasing program launched in 2015, it distributed the purchases among the different states according to their shares in the ECB’s own funds (the “capital key”). But as part of the emergency pandemic purchasing program decided in March 2020, it is buying bonds with the aim of creating favorable financing conditions for less creditworthy states – although the proportions of bonds held are designed to return to the key to capital over time.
In 2020, ECB purchases exceeded new government bond issuance by 17% in Italy and 13% in Spain. The ECB has not given an answer on how it will be able to reduce these huge bond holdings – for example, by not reinvesting when the bonds mature – without putting pressure on the market.
Several lawsuits against the purchases of ECB bonds are pending before the German Constitutional Court. A group of plaintiffs led by Markus Kerber, a Berlin-based lawyer and professor of public finance, argues that the ECB, along with the PEPP, is deviating from conditions that the court, in a ruling on the PSPP in May 2020, has considered essential to comply with the ban on monetary financing. These features include the need to fight deflation as well as the allocation of purchases according to the capital key. It is difficult to deny the complainants’ thesis that the PEPP circumvents these conditions. German judges will have to resort to considerable legal contortions to acquit the ECB of the charge of monetary financing.
Regarding fiscal policy, Article 310 of the European Treaty requires the EU to balance its budget. It cannot adopt any legislative act without guaranteeing that the related expenditure can be financed from its own resources within the multiannual financial framework. Section 311 strengthens the ban. Nevertheless, the European Council of July 2020 decided to borrow 750 billion euros to finance the European Next Generation fund set up as a central element of the EU’s response to Covid-19.
Common sense says it is illegal. But article 311 decrees that the Union can introduce new categories of “own resources”. So far, own resources include customs revenue and contributions from EU Member States. As Roland Vaubel, professor at the University of Mannheim, wrote, the EU now wants to add debt financing to the own resources system as another category, on the grounds that debt is supposed to be repaid later with resources. clean. This reading of the law can only be understood by applying George Orwell’s concept of “ double thinking ” 1984.
Another group of plaintiffs, led by Bernd Lucke, professor of economics and founder of the original Alternative for Germany party, argues that the EU debt financing violates Parliament’s right to decide the finances of the German government, enshrined in the Basic Law or the German Constitution. The plaintiffs wanted an injunction to prevent President Frank-Walter Steinmeier from signing the ratification bill. The court rejected it on April 21. But, in a masterpiece of linguistic ambiguity worthy of Orwell, the judges declared that the constitutional complaint “ is neither out of order nor manifestly unfounded … it is at least possible that ratification national law could encroach on the constitutional identity of the Basic Law … or that the decision to be ratified could go beyond the EU’s integration program … in a manifest and structurally significant way ”. The court warned that the government and both houses of the German parliament would have to restore respect for the constitution if the final ruling found the complaint justified.
Almost no German government politician assumes that the court will dare to deny EU debt financing to the NGEU. They take comfort from past court decisions. These suggest that instead of launching attacks to counter the eviction from European law and the dilution of German sovereignty enshrined in the constitution, the court prefers to fight against rearguard actions against measures already adopted.
The court may eventually decide that the NGEU should not be repeated. Judges are public servants, after all. All they can do is remind parliament that it must either act within the law or change it – which in this case would require a change to the German constitution, universally seen as politically impossible.
More generally, the problem is that pro-European German politicians want to go beyond the legal framework set by their predecessors, but do not dare to change it for fear of their electorates. This will provoke negative reactions from parts of the population who oppose a violation of the rule of law. A Brexit-like movement taking over in Germany is unlikely. But, as the NGEU plan unfolds, a form of German retreat towards closer European integration cannot be ruled out.
Thomas Mayer is Managing Director and Founder of the Flossbach von Storch Research Institute.