This week took a nasty turn following the German Constitutional court decision that questions the legality of the ECB’s Asset Purchase Programs (APP). To some extent, it threatens the ECB independence and brings back legal nationalism.
The ruling is nothing short of a disaster from a European integration perspective. It reflects the lack of European solidarity during its’ most challenging crisis since World War II.
Moreover, it comes weeks after the European Council failed to agree on how to share the financial burden posed by the coronavirus pandemic. Countries like Italy and Spain have seen their credit risk surge, and the ECB is rightly viewed as the one institution to close the spreads.
However the ECB cannot put up the fire if there is no solidarity within the European members. Economic nationalism is the death of any monetary and political union, and the market knows that.
The ECB Independence at Stake
For the ECB, this week’s decision threatens its independence with irreversible consequences if left as is. For instance, it can implement its recently announced PEPP program, but only if certain conditions are met. In other words, a different institution imposes a conditionality clause to the ECB’s actions. That is no longer independence – one of the pillars of every central bank in the developed world.
The German court went one step further. It gave an ultimatum to key German institutions – a three-months’ notice to comply with the ruling. The Bundesbank, in particular, is one such an institution that might be banned from participating in the ECB APP programs in the future.
In the end, it all comes down to how the Bundesbank reacts. Together with the ECB’s independence, Bundesbank’s independence is at risk too.
The European Union was built on the Franco-German pillars. The two economic powerhouses led European economic growth ever since, with the ECB and other newly-born institutions contributing to the success of the common economic and monetary project. Decisions like these undermine both common economic and monetary policies while threatening the central bank’s independence.
It may be that the ECB failed to clearly explain how the APP programs respect the proportionality principle touted by this week’s ruling. But that is no reason to question the bank’s independence and create market turmoil in times when the focus should be on alleviating the economic pain created by the coronavirus crisis.