June 24, 2020
How not to fob off Karlsruhe
The big misunderstanding in many discussions on the German constitutional court is this: the court rules, but it does not manage the aftermath. In particular, the court does not have a policy to make sure that its rulings are implemented properly. Nobody from the Bundesbank will go to Karlsruhe and ask whether a particular response to the QE ruling is acceptable. If the court is unhappy, it can always accept a new case, and then rule again. This is how we expect this whole thing to be pushed forward.
The most concrete part of the ruling was the mandate of a proportionality assessment, but we think this is a red herring. It won't have any immediate impact on the ECB's asset purchase programmes. There are more important, albeit less immediate, aspects of the ruling.
As FAZ reports, there is now a hideously complex solution to the proportionality problem: the ECB internally compiles documents to justify the purchases. The Bundesbank then hands this information over to the German government and parliament. The Bundesbank president then answers any questions by the parliament.
Frankly, we could not care less who pushes what kinds of papers in which direction. This exercise is obviously a farce. There is no way any central bank could, or should, ever fulfil a German constitutional proportionality assessment in any meaningful way. It is in the nature of rules-based monetary policymaking that decisions are not always proportionate.
The two lingering issues from the ruling are the conflicts between German and EU law, and the stipulation that the Bundesbank must advocate exit strategies from asset purchases. We think the latter in particular will affect ECB policy in the long term, because it will legally enshrine the Bundesbank president's vote in the governing council. If the purpose of an asset-purchase programme is to secure Italy's solvency, the stipulation of an exit strategy will be self-defeating. The big conflict therefore remains unresolved. It will erupt when the eurozone economy has recovered enough to justify a policy reversal, if that situation coincides with a recovery in inflation rates.
Perhaps a more important development than the fake compromise on proportionality is the appointment of a new justice to the court's second senate. This is the part of the court responsible for rulings relating to the monetary union. Court appointments are political. Astrid Wallrabenstein, the new justice, was nominated by the Greens. Andreas Vosskuhle, the previous president of the court, retired on the day of the controversial ruling. Wallrabenstein is more pro-European. We suspect the ruling would have been 6-2, not 7-1, if she had been on the bench. Before the ruling, some commentators had tried to guesstimate the various justices' views on the EU. The concluded that there were 5 eurosceptics and 3 pro-Europeans. Wallrabenstein could therefore shift the balance to some extent, but we think the court's eurosceptic majority is solid for the time being.