The European Union at Risk: The German High Court Undercuts the European Court of Justice on the Role of the European Central Bank

If a dispute between an E.U. state and the European Central Bank (ECB) on one of its programmes could come to challenge the European Court of Justice (ECJ) itself and the very sustainability of the E.U.’s federal system, then that system itself could be said to be severely impaired, and thus facing a high risk of being destroyed.  Yet in the Judgment of the Second Senate of May 5, 2020, the constitutional court of Germany did exactly that in throwing out an earlier ruling of the E.U.’s supreme court (ECJ) on the legality under E.U. law of an ECB programme.[1]

(Source: Politico)

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1. BVerfG, Judgment of the Second Senate of 05 May 2020 – 2 BvR 859/15-, paras. (1-237).

Monetary and Fiscal Policy and Structural Reform: Each Had a Role to Play after the Financial Crisis

With fiscal policy hamstrung by public debt in both the E.U. and U.S., monetary policy was a major beneficiary of the financial crisis of 2008 and the ensuing state-debt crisis that stammered on at least until 2013 in Europe. Lest it be concluded that central bank policy had reached an unassailable peak of salvation, the expanded role actually made its limitations transparent, at least in financial circles.

The full essay is at "Post Financial Crisis Coordinated Action."

Structural Reform and Economic Sustenance in European Austerity

Speaking at the World Economic Forum in Davos, Switzerland on January 25, 2013, Mario Draghi, president of the European Central Bank(ECB), said the bank’s program to buy the bonds of heavily indebted E.U. states had been “very helpful” in reducing the perception that the euro was on the verge of collapse. He also pointed to the structural reforms that heavily indebted states had enacted as “now bearing fruit.”[1] He urged those governments to continue to implement structural reforms so those states could take advantage of the ECB’s low interest rates and easy credit to banks. In short, the strategy of the ECB was to use monetary policy as leverage for long-term-oriented structural reforms at the state level. Political risk analysts listening to the central bank official likely came away with a more optimistic stance on the long term prospects for the E.U. economy.

The full essay is at "Structural Reform and Economic Sustenance."

 1. “Davos: ECB’s Draghi Says ‘Real’ Economy Still Stagnant,” Deutsche Welle, January 25, 2013.

                                                                                                       

The ECB as the E.U.'s Bank Supervisor: States in the Driver's Seat

Although the establishment of a federal regulator of major banks in the E.U. was as yet not approved by the European Parliament or ratified by the governments of states using the euro as well as any other states opting in, the European Council of Ministers signed off in December 2012 on an amendment that would give the European Central Bank authority over banks that have at least €30 billion in assets, make up more than 20% of their state’s economic output, or operate in at least two states (i.e., interstate banking). At the very least, three banks per state would come under the central bank’s oversight. Other banks would remain the responsibility of state regulators. This is an interesting “working out” of federalism, distinctively European-style.

German Finance Minister Wolfgang Schäuble at the E.U. Council of Ministers discussing the bank supervisor amendment.     WSJ

The full essay is at "The European Central Bank."

ECB Loans: A Backdoor Bailout?

On December 8, 2011, the ECB announced that it would loan 489.2 billion euros (c. $640 billion) at 1% interest to 523 E.U. banks for a three-year term. Carl Weinberg, chief economist at a consulting firm, said that by making the move, the ECB had “shown a path toward averting catastrophic collapse in Europe.” The move has been likened to that of the Federal Reserve after the collapse of Lehman Brothers in 2008. It was hoped that the E.U. banks would use the money to buy state bonds—particularly those of Spain and Italy, which were not able to “directly tap” ECB funds. According to Investor’s Business Daily, however, early signs pointed to bank declining to purchase the riskier debt. While understandable given Angela Merkel’s objections to the ECB serving as a backdoor bailout of profligate states over their heads in debt, the ECB’s refusal to put conditions on how the loans could be used may have undercut the central bank’s effort to relieve bank liquidity (and state debt) problems in the E.U.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Democracy Deficit in the E.U.’s State-Rights Federalism: The Debt Crisis

Holding back additional transfers of governmental sovereignty from the state legislatures to the E.U.’s legislative chambers not only inevitably pushes power to non-democratic E.U.-level  institutions, notably the ECB; the democratic basis even at the state level can be compromised.

The complete essay is at Essays on Two Federal Empires.

Essays on the E.U. Political Economy: Federalism and the Debt Crisis

The collection of essays comprising The E.U. Political Economy looks broadly at the E.U.'s federal system, with particular attention to the states, including the matter of "Brexit," which refers to the secession of Britain from the Union. The text then turns more narrowly to the government-debt and banking crisis that occurred in the wake of the financial crisis of 2008. The backdrop of federalism is meant to convey the point that weaknesses in that political system hampered the E.U.'s handing of its states and banks that were in trouble with debt. Lastly, several essays are presented on some more general aspects of the E.U.'s political economy. Rather than being heavily theory-oriented, the essays draw on contemporaneous news reports to quote from practitioners from business and government.

Essays on the E.U. Political Economy is available in print or as an ebook at Amazon.

ECB Poised to Approve Italian Bailout of Monte dei Paschi Bank: An Instance of Federal-State Collusion?

Under the E.U.’s banking law enacted after the 2008 financial crisis, the state governments “are not supposed to inject fresh taxpayer money into a bank if it is deemed insolvent. When a bank gets into financial trouble, shareholders and bondholders, assumed to be sophisticated investors aware of the risks, are supposed to take the hit and bear the losses.”[1] Much of the banking reforms were intended, moreover, “to prevent banks from becoming so big and so risky that they could hold the global economy hostage. Politicians and policy makers didn’t want taxpayers to be on the hook for the banks’ mistakes.”[2] What about a mid-sized bank whose financial plight puts a state’s economy and reigning political elite in jeopardy? Should the E.U.’s central bankers look the other way and allow the state’s government to finance a bail-out so stockholders and bondholders need not feel the brunt?

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

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1. Jack Ewing, Gaia Pianigiani, and Chad Bray, “Bailout for Italy’s Oldest Bank Tests Too-Big-to-Fail Rules,” The New York Times, June 1, 2017.

2. Ibid.

The E.U.’s Central Bank: Beholden to State-Level Politics

Faced with the rise of anti-euro candidates for state offices throughout the E.U., Mario Draghi, the president of the E.U.’s central bank deemed it politically prudent to depart from the light world of cool economic data to mount a spirited defense of the euro and even free trade in March, 2017. With the UK having voted to secede from the Union, he could not assume that the state of the Union would continue to be inherently viable. Indeed, some political candidates at the state level were “questioning the whole idea of a united Europe and the European Central Bank’s fundamental reason for being.”[1] 

The complete essay is at Essays on Two Federal Empires.

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[1] Jack Ewing, “As E.C.B. Charts Economic Course, Politics Complicate the Picture,” The New York Times, March 9, 2017.

Syriza Party Governing in Greece: Austerity and the E.U.

Clarion calls of confrontation roiled through the E.U. after the state election in Greece on January 25, 2015. Would the E.U., heavily dominated by its largest state, and the European Central Bank (ECB) accept a larger public deficit (i.e., more government spending to alleviate the austerity) and continue the cheap loans, or would Alexis Tsipras, the new Greek prime minister, have to choose between continued austerity and default? 

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

Deficiencies in the E.U. Capital Markets: A Silver Lining

Even six years after the financial crisis of 2008, the limited scale of the E.U.’s capital markets relative to their American counterparts exacerbated the E.U.’s problems with state debt. Most directly, the lack of diversification on the types of capital markets meant that the focus on the bonds issued by state governments would continue.[1] Having had years to develop alternative markets since the financial crisis, E.U. policy makers had no one to blame but themselves—it would seem. However, a bright spot in European culture may be responsible for the lack of development.

The full essay is at “Deficiencies in the E.U. Capital Markets.”

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1. Simon Nixon, “A Continent in Need of Greater Capital Markets,” The Wall Street Journal, January 20, 2015.

Should the ECB Buy State Bonds and Encourage State Deficits?

In remarks at Jackson Hole, Wyoming, European Central Bank president Mario Draghi urged greater fiscal and monetary coordination to boost the E.U.’s economy. A ship cannot move along at full speed if all the sails are not coordinated so that each is poised at its optimal angle to the prevailing winds. So too, various policies in a political economy must all sail in the same direction for a full-sail recovery to really take off. Just as a sailing ship must avoid jagged pitfalls lurking in rocky waters, so too must policy makers; for it is all too easy in focusing on one point on the horizon to ignore or dismiss baleful downsides to the dominant policies.

The entire essay is at "Should the ECB Buy State Bonds and Encourage State Deficits?"

Should the ECB Spend an Unlimited Amount on Bonds?

The European Central Bank did not place any limit on its program in which the bank purchases bonds of heavily indebted states so as to keep their borrowing costs (i.e., the bonds’ interest rates) from increasing. The program, called Outright Monetary Transactions, had already accomplished that even before spending a euro. Anticipation that the ECB would enter a state bond market if its interest rate rose high enough was enough to keep the rates from skyrocketing.  So, the announcement that the ECB would spend what “would be adequate to meet [the] objectives” is perhaps more important than how much the central bank actually spends.[1]  According to Joerg Asmussen, an executive board member of the ECB, the OMT was “economically necessary, legally permissible and effective.”[2]  He made the comment as a court in the state of Germany was preparing to consider whether the OMT “infringes on the constitution’s insistence on sovereign parliamentary control over budget matters.”[3]  Hence, a tension between “legally permissible” and “infringes on . . . sovereign parliamentary control” threatened to kill a program that had already succeeded before buying one bond. Fortunately, legal experts were saying that the German court might defer to the European Court of Justice, the E.U.’s supreme court.

The full essay is at Essays on the E.U. Political Economy, available at Amazon.

European Central Bank As Supervisor: Conflicts of Interest

Wolfgang Schäuble, the German finance minister, raised additional concerns in April 2013 about a proposal to create a single banking supervisor for the European Union. About 150 large banks would be under the direct supervision of the European Central Bank, which would also have the power to intervene to oversee smaller lenders. This proposal had been set as a precondition for states to draw on the E.U.’s bailout fund, the European Stability Mechanism, to recapitalize struggling lenders directly. To analyze Schäuble’s potential stumbling blocks, it is necessary to understand the conflicts of interest that are involved.

                                                                                 Wolfgang Schäuble, the German finance minister, active at the E.U. level. Source: The Telegraph.

The full essay is at "Essays on the E.U. Political Economy." Available at Amazon.

ECB’s Draghi Resists Pressure to Devalue Euro and Stimulate Growth

Despite pressures from the appreciation of the euro, which had hit a 15-month peak of $1.3711 on February 1, 2013, Mario Draghi of the European Central Bank announced four days later that the benchmark financing rate would be on hold at the record-low 0.75 percent. In making the announcement, he stressed that the worst was over for the Eurozone and that the uncertainties would be gone by midyear. “The economic weakness in the euro area is expected to prevail in the early part of this year. But later in 2013, economic activity should gradually recover, supported by our accommodative monetary policy stance and the improvement in financial market confidence.” Draghi was tacitly undercutting Francois Hollande’s earlier statement that the euro should depreciate so as not to hurt economic competitiveness. A higher euro means more expensive euro-based exports abroad. The relationships between monetary policy, a currency, and economic growth are complex. It would thus be worthwhile to unpack the scenario facing Draghi and Hollande in early 2013.

                         Mario Draghi addressing the World Economic Forum. In resisting pressure to lower the benchmark rate, he increased his financial stature abroad. 

The full essay is at Essays on the E.U. PoliticalEconomy, available at Amazon.

Bailouts, Bond-Buying: E.U. Plows Ahead!

On September 12, 2012, a psychological threshold was reached in the E.U. on the way toward “ever closer union.” That is to say, at the end of that day Europeans could feel an overdue sense that come what may, the euro would be protected. Moreover, the E.U. (at least for the states willing to sign up for greater E.U. enforcement of state deficit and debt limits) would proceed along with further incremental shifts of governmental sovereignty from the states to the union thereof. The sense of relief was palpable in Europe as state and federal officials as well as commentators and citizens breathed a collective sigh of relief.

Most pressingly, the constitutional court of the state of Germany announced that that state could in fact contribute to the fund to bailout indebted states. The court held that the state legislature would have to pass any increases because the further integration of the E.U. must not be allowed to proceed without commensurate democratic legitimacy and the rule of law. The President of the E.U. Parliament observed that this holds at the E.U. level as well.

The complete essay is at Essays on Two Federal Empires.

ECB Bond-Buying: Democracy Deficit

In September 2012, the European Central Bank unveiled the Outright Monetary Transactions program in which the central bank would purchase bonds from debt-laden E.U. states that use that euro and agree to “strict and effective” budget policy. The bank’s head, Mario Draghi, insisted that the program is within the bank’s mandate to protect the value of the euro. Indirectly, if a state government that uses the euro were to default, the currency itself would face downward pressure that could cascade into the collapse of the currency.

Will the ECB be the one to save the euro?     Estonian Free Times

The full essay is in Essays on the E.U. Political Economy, available in print and as an ebook at Amazon.

On the Role of the European Central Bank in Ending the Debt Contagion

“That the [ECB was being] forced [in 2011] to step into the power vacuum left by a fractious political class underscores the increasing centrifugal forces unleashed by the debt crisis.”[1] Yet that pressure was being applied to the central bank to issue Eurobonds and buy more state government bonds in spite of the objections of German officials suggests that there were also centripetal forces acting on the center at the expense of the state capitals, even Berlin. It is important to view the E.U.’s “management” of its debt crisis through the prism of the history of European integration since the Shuman Plan in 1951, which called for ever closer union so as to obviate war and give Europe a stronger economic and diplomatic power in the world. The history of the European project can be characterized as a series of fits and starts, punctuated by momentary crises—each proffering potential ruin to the union itself. For example, France’s veto of Britain’s accession as a state must surely have struck some people as portending the end of the EC—the forerunner to the E.U. Yet from the vantage point of 2011, the conduct of the accession seems a mere hiccup on a much longer road of hills and valleys. Regarding the extent of integration by 2011 (e.g., monetary union), the question is whether European efforts to come to grips with the contagion of over-burdened state debt signify merely another valley, or an inherent contradiction or fault-line in the E.U. itself. Whatever the answer, the outcome will no doubt come about incrementally, as one might expect from E.U. history.

The full essay is at "Essays on the E.U. Political Economy," available at Amazon.

1, Brian Blackstone and Matthew Karnitschnig, “Crisis Ensnares Central Bank in Desperate Bid to Save Euro,” The Wall Street Journal, November 18, 2011.