German High Court Challenges the European Central Bank Pledge to Defend the Euro
This article originally appeared on GlobalPost.com on March 6, 2014.
By Karen Alter
Germans have a love-hate relationship with the Euro and its protector, the European Central Bank (ECB). The latest challenge to the Euro comes from Germany’s Constitutional Court, whose recent split decision questioned the legality of President Mario Draghi’s pledge that the European Central Bank would do “whatever it takes” to defend the Euro.
The Court’s majority suggested that the ECB lacks the legal authority to help out lagging Euro members such as Italy and Spain by buying en masse member state bonds.
President Draghi’s pledge, issued at the height of the Eurozone crisis, is widely seen as having helped to stabilized the Euro, so much so that the ECB never engaged in a bond buying spree. Germany’s Constitutional Court ruled, nonetheless, that any bond buying program would have to be limited.
An obvious question: why is the German Constitutional Court ruling on a hypothetical violation of the European Central Bank’s charter. The simple answer may be that European politicians were cowards, so the Constitutional Court stepped in to give voice to the concerns of the German Euro-skeptics.
The German Constitutional Court was playing its traditional role of defender of Germany from the encroachments of the European Union. In the past, Germany’s Constitutional Court insisted that it would review the constitutionality of European law until the European Union had “a catalogue of fundamental rights decided on by a parliament of settled validity.”
Later, it required the German government to do everything in its power to defend the rights of German states, and it brandished the threat of overrule if the Europe’s Court of Justice did not hew to the limits of the power states were delegated in the Maastricht Treaty. The Constitutional Court is yet to carry out these threats, perhaps because the desired changes occurred in their wake.
Supreme Courts provide accountability for international law and international courts, which many people worry are accountable to no one. But it matters how Supreme Courts—whether in the US or Europe—send signals.
It is a good thing when Supreme Courts protect individual rights and check and bolster the constitutionality of international law. But courts usually do not get involved in financial crises, for good reasons.
John Maynard Keynes once likened the stock market to a beauty pageant where the rational actor wins not by picking the most beautiful and talented contestant, but rather by picking the contestant that “average opinion” is likely to see as beautiful.
Judges have no idea what the market will find beautiful, and the slow nature of the legal process does not allow judges to helpfully send confidence building signals.
Luckily the German Constitutional Court’s ruling is so vague that there is little real concern. The proponents of tight monetary policies are suggesting that the Court’s ruling is a real threat to worry about. As long as the Court of Justice suggests but does not define limits, Germans can reassure themselves that someone is drawing the line somewhere. This is the most likely outcome, if only because Draghi’s actions were so successful in stabilizing the Euro.
The partisans supporting a tight monetary policy are looking for political allies wherever they can find them. The real risk concerns the spector of ongoing litigation. Litigants are likely to continually return to the German Court to challenge ECB policies they dislike. The court invited these appeals by inserting itself in the Euro debate, something the minority opinion wisely noted would be unwise.
How to best defend the Euro is a complex issue on which bankers, politicians and businessmen disagree. Judges are not economists, and they are fundamentally unable to make snap decisions and do what is needed to keep the world’s economy afloat.
When it comes to monetary policy, a line in the sand can easily become a constitutional sand trap. The German Constitutional Court has pulled back before in its European interventions, and because judicial review of monetary policy is untenable, odds are that the Constitutional Court will do so again.
- Karen Alter is a professor of law and political science at Northwestern University.