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Karlsruhe’s underappreciated threat to the euro
The euro area once again faces a potentially existential threat, following Friday’s decision by the German Constitutional Court in Karlsruhe. The funny thing is, hardly anyone seems to realise it.
To see why this is the case it is helpful to separate the procedural from the substantive issues, before bringing them together again.
The procedure: court vs. court
The GCC has taken the view – on a 6-2 majority verdict – that a key element of the monetary policy of the ECB, the Outright Monetary Transactions (OMT) programme, is incompatible with European treaty and other legal provisions. It has sought clarification of a number of issues from the European Court of Justice (ECJ). The GCC does not have jurisdiction over the ECB, of course. But it can rule that actions by German institutions (notably the Bundesbank but also the German government) in support of acts by the ECB that it has deemed illegal are themselves unconstitutional under German law and thus verboten. This is because the German constitution only permits the transfer of national powers to the European level under specific conditions, and this includes that European institutions play by the rules, as interpreted by a majority among Karlsruhe judges.
Commentators and the financial markets seem relatively unperturbed by this news. This seems to be because they believe that the GCC, by apparently passing over the matter to the ECJ, has agreed to defer to a higher court. And it is widely believed that the ECB’s policies will receive a far more favourable hearing from the judges in Luxembourg than those in Karlsruhe. While the latter supposition is almost certainly true, the basic presumption is incorrect. The GCC is not asking for a higher court’s opinion in order to stand corrected by the ECJ. Unlike a lower-level court in a national system, it is not saying: “our verdict is A, but if you say it is B, then B it is”.