Hyperventilating about the German court
We note an interesting shift from complacency to panic among some economists. As a group, EU economists and economic commentators were by-and-large complacent about the need to reform the eurozone during the eurozone crisis years. That complacency was reflected in a focus on small-change technical proposals like synthetic eurobonds, and a lack of gumption to speak truth to power on austerity. Books on the eurozone crisis tended to underplay the persistence of those failures, which are now becoming only too evident. We noted a generalised lack of interest in a joint fiscal capacity or mutualised debt instruments, and an exaggerated belief in the powers of the ECB even as it became obvious that the monetary policy was hitting legal and technical limits.
The German court ruling has caused panic among some of those economists. We also worry about it, not in terms of its impact on the ECB but its impact on the legal cohesion of the EU. But, for those who placed excessive weight on the ECB as the eurozone's deus-ex-machina, this ruling is an unpleasant wake-up call.
In the last few days there have been several articles from economists and commentators about the economic illiteracy of German lawyers. We agree that German justices are no economic experts, but their economic illiteracy is matched, if not exceeded, by the illiteracy of economists about the laws underpinning the monetary union, and the political nature of the social contract behind the Maastricht Treaty. Our sense of alarm during the crisis was based on a realisation that the Germans and the Dutch would never buy into the North Atlantic economic policy consensus, and a parallel realisation that imbalances will not adjust without a fiscal union.
As a representative example of those economic commentators, we pick out Holger Schmieding in FAZ this morning. He started his piece, you might have guessed it, with the court's alleged illiteracy in matters of monetary economics. He also argues that the conflict is unnecessary from an economic point of view, a statement that is simultaneously true and pointless. The court is not in the business of economic optimisation.
We also think that the court misjudges the nature of monetary policy in one crucial respect. It cannot be subjected to the German constitutional requirement of proportionality. This is not about explaining policy but about due process, of the kind which a central bank can in practice not commit to. This is why we disagree with Schmieding's conclusion that the way out of this dilemma would be a report by the Bundesbank to the German parliament that claims that the policy is indeed proportional. That is not what the justices have asked. They asked among other things for an explicit strategy for programmes to end. The court has given a binding ruling that now forms part of constitutional law. If the Bundesbank treats constitutional law with an obvious attempt to circumvent the ruling, there will be another case which will result in ever more explicit requirements.
We think the better response to this ruling is to stop hyperventilating, and focus on a eurobond instead. There is an unprecedented crisis, symmetric in nature, asymmetric in its effects, and a German court ruling that narrows the boundaries of what the ECB can do. What else do you need?