Last month, the Karlsruhe-based German constitutional court deemed that some of the European Central Bank (ECB) asset purchases as unconstitutional according to German law. The news sent the Euro lower across the currency dashboard, with the EURUSD pair sliding over a big figure.
This ruling will undoubtedly open the door to more suits down the road and to other courts throughout Europe to challenge the ECB. Above all, it challenged the ECB independence – one of the main features of a functional central bank.
Ironically, it is the Bundesbank’s Governor, Jens Weidman, that tries to convince Berlin Parliament that what the ECB did benefited all Eurozone members, including Germany. The Karlsruhe court went so far as to forbid the Bundesbank from participating in future quantitative easing programs.
Weidman Explaining How the PSPP Program Meets the Proportionality Principle
Yesterday, Weidman appeared in front of a Berlin parliamentary committee to help to find a solution to the constitutional stumble. The problem with the German constitutional court ruling is that the implications go beyond Germany’s border – they threaten the very existence of the Euro, one of the pillars the European Union was built upon.
The two ECB meetings that followed the Karlsruhe decision were closely watched by market participants. At each of the press conferences that the ECB president held after the interest rate decision, press representatives questioned the ECB stance on the ruling. Previously, Christine Lagarde suggested that Karlsruhe judges should read the ECB accounts (i.e., the minutes that reveal the discussions taking place in the Governing Council before a decision on monetary policy is taken).
It is safe to assume that Europe has an interesting summer ahead. Aside from the coronavirus pandemic and the economic challenges each member state is facing, Europe needs to solve its legal issues. The irony of it is that Weidman has always rejected the Governing Council’s decision regarding the quantitative easing programs during the term of Lagarde’s predecessor – Mario Draghi.
Now, he is backing the very thing he opposed, making it difficult to gain credibility in front of the Berlin Parliament, and indeed, the German people. Some even consider bringing the ECB decision in front of the Bundestag – an incredible step that would deteriorate ECB’s image and credibility tremendously.
So far, there is no solution in sight. Even Karlsruhe’s judges warned the ECB that it is not easy to find a lawful solution surrounding their ruling.
Until one is found, the Euro as a common currency is poised to suffer from a lack of investor credibility.