The long dance between the EU’s European Court of Justice (ECJ) and Germany’s constitutional court (BVG) over the two ‘supreme courts’’ radically different views of who has the last word on the interpretation of EU law and on the legality of the actions of EU institutions has, for the most part, been at the theoretical level or politely ignored. As a practical matter, it has not mattered much (or at all). That has now changed. The German court has not only taken aim at the operation of the PSPP (the European Central Bank’s principal quantitative easing program), but has also said that the ECJ got it wrong when giving the PSPP the all-clear, and thus (effectively) had exceeded its powers.

This is, to put it mildly, a complicated issue, which, FWIW, I look at here. My conclusion:

To have any chance of flourishing, the currency union needs to be supplemented by a fiscal union, but a fiscal union continues to be opposed by the euro zone’s “north,” which rightly fears that it would be stuck subsidizing a profligate “south” in perpetuity. At the same time, the “north” is unwilling to run the risks that breaking up the euro zone would involve, so much so that it continues to ignore even the least bad option, splitting the euro into northern and southern units.

Until last week, that unwillingness meant that the “north” would, however reluctantly, eventually have to agree to the issuance of euro bonds backed by the euro zone as a whole (perhaps labeled as coronabonds in an effort to pretend that it was a one-off). The question now is whether that is still an option after the BVG’s ruling. My guess continues to be that it is, although the bonds will probably have to be structured rather differently from what might have been envisaged just a few weeks ago.

It was always going to take a crisis to force the “north” to give in, and a crisis is coming. What has changed is that the BVG may have ensured that that crisis will be more profound, and trigger even deeper questions about the future of the euro, and about the EU too, than once seemed possible.

Over at the Financial Times, Martin Wolf takes a look at what’s going on. He’s less sympathetic than I am to the underlying legal point that the BVG is making — although there’s plenty of room to argue about some of the specifics of its judgment — but then he looks at what might happen next:

You Might Like

If the German court is ultimately satisfied that the ECB adequately assessed the economic impact of its purchases, the PSPP might continue. But the court has reduced the ECB’s future flexibility by limiting its holdings of any member country’s debt to 33 per cent of the outstanding total and insisting that asset purchases be allocated according to member states’ shares in the ECB.

It’s worth noting that the ECB had dropped the 33 percent cap for the ECB’s PEPP, the €750 billion ‘mini’ (I’m amazed as I use that adjective) quantitative-easing program designed to provide relief from the effects of the pandemic and the efforts to fight it, but will it still be prepared to ignore that limit? There’s general agreement that PEPP was already not going to be enough to pull Italy out of the abyss into which it is clearly now tumbling (and keep an eye on Spain too). Italy, I should add, is the third-largest economy in the euro zone. It’s not Greece.

Back to Wolf:

The ECB cannot be accountable to a national court [the BVG would disagree, albeit under very limited circumstances]. But the Bundesbank could provide the court with the proportionality analysis [to oversimplify wildly, the BVG has said that if this analysis can be shown to be reasonable, it will give its OK to the PSPP]. Maybe that would be enough, albeit also a bad precedent. Or, the decision could be ignored. If a German court can ignore the ECJ, maybe the Bundesbank can ignore that court.

That won’t happen. For Germany’s central bank to ignore Germany’s constitutional court, even if under EU, if not German, law (conflict of laws is a fiendishly complex topic), it is entitled to, will trigger a constitutional crisis in Germany that no one should want to see. For obvious reasons, Germany has a very strong constitutional court.

Or, suggests, Wolf, “alternatively, the ECB could just abandon efforts to rescue the eurozone and accept whatever outcome emerges.” I don’t think that will happen either. One of the reasons that the euro is still around is the immense political capital that has been sunk into it. The ECB will not just sit by.

Wolf:

More radically, the EU could act to create the needed degree of fiscal solidarity. But the obstacles to this are large. A new treaty looks out of the question in today’s environment of intense mutual distrust. Finally, Germany could boldly secede from the eurozone. Yet, before it makes such a decision, one hopes it, too, will be required to do a full analysis of whether that would be “proportionate”.

In fact, the least bad option would be if Germany did secede from the eurozone, although it would be better if it had done so a decade ago or more, and taken a number of other ‘northern’ countries with it, perhaps via the division of the euro that I refer to above. Again, as mentioned above, there are no signs that Germany’s political class are prepared to go down this route.

Wolf concludes that “one point is clear: The constitutional court has decreed that Germany, too, can take back control. As a result it has created a possibly insoluble crisis.”

And this is not something that the BVG, which is far from being a euroskeptic redoubt (it just takes its constitutional duties seriously) will want to see.

Meanwhile, (as the Financial Times reports), Peter M Huber, who drafted last week’s BVG opinion, was in the Frankfurter Allgemeine Zeitung, a remarkable development, as some commentators have observed: Judges don’t normally discuss a case so shortly after a ruling.

In his interview, Mr Huber said he had expected criticism but was “amazed at how one-sided and impassioned” it was. He said that the issue had been brewing for years: for the past 50 years “nearly all national constitutional and supreme courts had been taking issue” with the ECJ’s assertion of the primacy of European over national law, he told FAZ.

As long as there was no European state, each member state must comply with its own constitutional law, he said. States “must be open to the primacy of application of European law, but [they] can also stipulate limits”, he said, noting that senior judges in other EU countries, such as Denmark and the Czech Republic, had also declared rulings of the ECJ “ultra vires” — that is, they had concluded that the court had acted outside its mandate.he issue had been brewing for years: for the past 50 years “nearly all national constitutional and supreme court

Possibly the most interesting item in the story (but read the whole thing) is this:

One option the ECB executive board is weighing up is the publication of the private documents that it had transmitted to the ECJ in 2018 and underpinned the court’s 2018 judgment that the sovereign bond-buying programme was legal, according to people briefed on the discussions.

Earlier reports had suggested that the ECB’s governing council was unwilling to do this because of the precedent that would be set, but the clock is ticking (the BVG has set a three-month deadline for the Proportionality Assessment on the PSPP) and my guess is that anything that looks remotely reasonable will be enough to satisfy the BVG.

It might be a messy, intellectually and legally incoherent solution, but, if so, it will not be the first time that messy, intellectually and legally incoherent solutions have been deployed to save the euro.

Meanwhile, the question of how to rescue Italy remains unanswered.