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Countering Karlsruhe

by Frank Schnittger Thu May 28th, 2020 at 11:43:51 AM EST


Perhaps my greatest concern is that the Karlsruhe ruling will lend credibility to brexiteer claims that the EU is too dominated by Germany. For a long time the deal has been that while Germany dominated the ECB in Frankfurt, France had greater sway with the Parliament in Strasbourg and the Commission in Brussels. That ended with Draghi as ECB President and now the roles are reversed with Ursula Von Der Leyen President of the Commission and Christine Lagarde President of the ECB.

The role of the ECB's Chief Economist, Philip Lane, could be crucial in deciding how the future unfolds:

"The whole point of having flexibility is that you can deviate from the capital key," Prof Lane told an online interview with the Institute of International Finance.


That would potentially allow Germany's central bank to stop buying German bonds under PSPP and buy more of its own and other countries' bonds under the PEPP scheme. Other member states could shift their purchases in the opposite direction, buying German bonds under PSPP to maintain overall spending.

Although infringement proceedings against the Bundesbank if it fails to participate in future rounds of QE are possible, Lane's instinct is probably to avoid confrontation with the German court and thereby placing the Bundesbank in a difficult position.

Reuters reported on Tuesday the ECB is drafting contingency plans to carry on with QE if Germany is forced to quit the scheme, citing four sources.

In this worst-case scenario, the ECB would launch an unprecedented legal action against the German central bank, its biggest shareholder, to bring it back into the programme, said the sources, who spoke on condition of anonymity.

That case would be heard by the European Court of Justice in Luxembourg - whose views on the issue the original German court rubbished. The case would potentially test Germany's political commitment to the euro institutions.

Most of the sources cited by Reuters expect the legal challenge from the court in Karlsruhe to be resolved by the Bundesbank itself demonstrating that the ECB had considered the proportionality of its policy .

But staff at the ECB and the eurozone's national central banks are preparing for what one source described as the "unbelievable" scenario in which the court bans the Bundesbank from taking part in the purchases.

In that case, the ECB, or less likely the other eurozone central banks, would take up the Bundesbank's quota in the PSPP and buy German bonds, the sources said.

At the heart of the dispute is the GCC's economic illiteracy, never mind ignorance of how central banks the world over operate. Perhaps a briefing from the Bundesbank can help to resolve that. But in the longer term if the Bundesbank starts to diverge from the collectively agreed decisions of the ECB board there can be only one outcome: Infringement proceedings against Germany up to and including the possible expulsion of Germany from the Eurozone. That should concentrate minds wonderfully. Weimar here we go again.

The reality is that the ECB and Central banks the World over aren't really democratic institutions, being composed of bankers and economists appointed by governments but not really answerable to them. Trump has sought to brow-beat the Fed into reducing interest rates before it was ready to do so, but the Pandemic has now rendered that conversation moot. Everyone recognises the need to reflate after the greatest financial shock in almost a century.

Everyone but, perhaps, the GCC. Perhaps even they are embarrassed by the way in which the Pandemic has now exposed the vacuousness of their arguments. Interest rate and money supply decisions are left to central banks for a reason: they require great monetary and economic judgement and expertise. Amateur ordoliberal economists acting as judges need not apply.

I don't really expect my letter to the Editor to have much impact beyond raising the awareness of some Irish people to a potentially serious economic and political issue. The Irish government may have a quiet word with its German and EU counterparts, but everyone will be keen to avoid another crisis. The arrogance of the GCCs dismissal of the CJEU and 60 years of case law has shocked and embarrassed many. Let us hope that Hungary and Poland are not similarly emboldened to reject CJEU findings against their undermining of judicial independence, because then we will have a real and immediate crisis on our hands.

And the irony is that the GCC is supposed to protect German democracy against totalitarian takeover. It would be a tragedy if such well intentioned independence led to Germany helping to undermine democracy in Hungary and Poland and the democratic legitimacy of the EU as a whole. Maybe the Brexiteers were right after all: without a stronger Demos and Logos the EU is destined to fail.

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I'm thinking of taking a challenge in the Irish High Court to the failure of the ECB, for many years now, to reach it's only mandatory target - inflation at or just below 2%.

The effect of this failure is to increase the real cost of borrowing as as real interest rates (nominal interest minus inflation) ends up higher. The failure thus systematically favours lenders over creditors, or net lender countries like Germany over net borrower countries like Italy (or Ireland).

What would be the point of doing so?

The High Court, if it agrees to hear the action, would probably remit the case to the CJEU as it concerns a matter of European law. The CJEU could order the ECB to do "whatever it takes" to increase inflation to 2%, and indeed beyond it, to make up for past under-achievement of its target.

"Whatever it takes" is code for even more bond buying or negative interest rates, as the one thing all conservative economic theorists agree on is that these cause inflation.

The effect of my action, if successful, would therefore be to force the ECB to do precisely the opposite of what the GCC has attempted to force it to do - to reduce its bond buying activities.

It would also nicely underline the fact that it is the CJEU which calls the shots in the EU and not the GCC, and do so without being prescriptive as to precisely what policies the ECB should pursue - unlike the GCC who sought to substitute their judgement of what is a proportionate policy for that of the ECB Board.

Any takers?

Index of Frank's Diaries

by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sat May 30th, 2020 at 09:46:56 PM EST
As Ireland struggles to recover form the Covid-19 pandemic, it is essential that we will be able to borrow at very low interest rates to pay for the costs of the pandemic and fund a revival of the economy.

The continuance of very low interest rates within the Eurozone has been put at risk by the decision of the the German Constitutional Court (GCC) to overturn a ruling by the European Court (CJEU) that the European Central Bank (ECB) bond buying programme is legal and proportionate.

The GCC has ordered the Bundesbank to cease its participation in that programme unless it can satisfy the Court that the programme is "proportionate" in its effects.

The effect of any such action by the Bundesbank would be to limit the ability of the ECB to reflate the Eurozone economy, post pandemic, and achieve its only mandatory target of an inflation rate of at or just below 2% .

The ECB has, for many years now, already failed to reach that target.

The effect of this failure is to increase the real cost of borrowing, as real interest rates (nominal interest minus inflation) end up being higher. This failure thus systematically favours lenders over debtors, or net lender countries like Germany over net debtor countries like Ireland, Greece or Italy .

I plan to take a challenge in the Irish High Court to the failure of of the ECB to achieve its mandatory target.

The High Court, if it agrees to hear the action, will probably remit the case to the CJEU as it concerns a matter of European law.

The CJEU could order the ECB to do "whatever it takes" to increase inflation to 2%, and indeed beyond it, to make up for past under-achievement of its target. "Whatever it takes" is code for even more bond buying or negative interest rates, as these are the main tools the ECB has to generate inflation.

The effect of my action, if successful, would therefore be to force the ECB to do precisely the opposite of what the German Constitutional Court has attempted to force the ECB to do.

However my action would not be prescriptive as to precisely what policies the ECB should pursue - unlike the GCC which sought to substitute their judgement on monetary policy for that of the ECB Board - the body with the legal responsibility for managing monetary policy.

It is important that we restore the legal order of the EU by reinforcing the role of the CJEU as final arbiter of European law, and also reinforce the capability and responsibility of the ECB to reflate the Eurozone economy post pandemic.

Meeting its mandatory inflation target is an essential part of any such reflationary policy, and will also help to restore a sense of the balance and fairness to the relationship between net lenders and borrowers within the Eurozone.

I would welcome the support of your readers in bringing this High Court action.




Index of Frank's Diaries
by Frank Schnittger (mail Frankschnittger at hot male dotty communists) on Sun May 31st, 2020 at 12:10:38 AM EST
German court ruling could tear EU apart, warns senior judge
A senior EU judge has expressed his "deep concern" about a recent landmark ruling by the German Constitutional Court and warned that it risks dismantling rule of law in the EU and potentially even the bloc itself.

In an unusual public statement, shared with POLITICO, Marc van der Woude, president of the General Court of the EU, the bloc's second-highest court, described last month's ruling by the German Constitutional Court as "direct interference in the functioning of the European legal order," and warned that it could encourage some countries to leave this legal order and thereby perform a "disguised exit" from the EU.

by Bernard on Sun Jun 7th, 2020 at 06:29:42 PM EST


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