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October 19, 2017

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German constitutional court caves in on quantitative easing

There was a time when conversations in Germany about European integration would always end with someone invoking the ultimate argument, the one that ends all debate: the constitutional court will not allow this. The truth is that the constitutional court has never stopped anything. 

And yesterday, it refused to fast-track a case brought by the usual suspects against the ECB's QE programme. The decision by Karlsruhe is linked to last week's decision by the ECJ not to fast-track the constitutional court's own request for a legal clarification on related matters of European law. We see no reason to believe that the ECJ would deviate from the overall drift of its ruling on the OMT - it may give more clarity on the demarcation between legal monetary policies and illegal monetary financing of national debt. But there can be no doubt that the ECJ will end up supporting the ECB whenever the case is heard. We now think it will probably be in late 2018 or in 2019. The German court may then take another year to deliberate, so the whole legal procedure will take us beyond the presidency of Mario Draghi - and presumably also beyond the end of the current QE programme. That said, there may still be a legal significance to the final ruling, for future asset purchase programmes, and this is almost certainly not the last one. We would think, however, that the final ruling may achieve the very opposite of what the plaintiffs had hoped - by clarifying that the ECB has the powers to do whatever it takes to achieve its monetary policy goals. 

The application for a fast-track procedure in Germany, brought by Peter Gaulweiler of the CSU and Bernd Lucke, the founder of the AfD, was intended to produce an injunction against the asset purchases. In its coverage of the ruling, FAZ noted yesterday that the decision by Karlsruhe was formal in the sense that it is not a pre-judgement of its final ruling. But the court did not want to risk causing a situation where the ECB fails to meet its policy targets, and it concluded that the plaintiffs would not suffer irreparable damage if the ruling came later. 

The eurosceptics were dumbfounded by the argument - a consequence of their serial legal misjudgements, but also of Karlsruhe's argumentative duplicity in the entire EU/euro case history. Alice Weidel, the AfD leader in the Bundestag, said the arguments were incomprehensible to her, especially considering that the court declared only in July that the asset purchases constituted illegal monetary financing - a statement that had given the plaintiffs some hope. FAZ was particularly appalled by the ECB's "cool" reaction yesterday, concluding that the asset programme would continue as planned. 

The bitterness of the German eurosceptics was best expressed by Holger Steltzner of FAZ, one of the anti-Europeans' main cheerleaders in the media, who concluded that ten years after the financial crisis there is no return to normality in monetary policy despite the strong economy. A €5tr central-bank balance sheet and negative interest rates are the new normal.

Our other stories

We also have stories on Germany softening over Brexit; on another deadline for Catalonia expiring today; on Matteo Renzi’s drive to remove Ignazio Visco as head of the Banca d’Italia; on the wealth tax quarrels in the French budget debate; on Slovenia’s presidential election; and on Portugal’s government challenge over the forest fires.

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