The euro area central bank, the ECB, said on Tuesday that it had taken note of the ruling of the German Constitutional Court - and that it would continue to conduct its monetary policy as before, fully committed to its tasks.
On the surface and fresh, it seems as if the ECB was hardly shocked, let alone frightened by the surprise judgment read by a German court on Tuesday, which called into question the legality of the ECB's actions.
However, it is likely that the ruling in the “Karlsruhe Red Robe” will immensely irritate the ECB’s central bankers, who can easily be imagined to find the ruling extremely rude and, moreover, dizzyingly silly.
Probably the transfer of the German court is at least a cause for concern, but perhaps also an irritation not only for the ECB but also for the EU Commission.
Read more: Court: The German central bank has made illegal purchases of securities
The verdict and its consequences may still give rise to a messy European political drama or thriller. For example, it could undermine the ECB's ability to tackle a severe economic interest rate crisis.
The ECB needs to better justify PSPP purchases
The Karlsruhe ruling and the court's suspicion concern the large-scale PSPP purchase program for government bonds launched by the ECB as early as 2015.
According to the judgment, the ECB has not been able to demonstrate and justify the necessity and proportionality of the bond purchases in relation to its powers and mandate.
In fact, the judgment concerns the Bundesbank, the German national central bank, and not the ECB directly, since the ECB operates under the EU Treaties and not under the German Constitution.
One of the surprises of the judgment is that it obliges the German Federal Government and Parliament to request an explanation from the ECB on the proportionality and monetary necessity of the PSPP bond purchases.
This is special and perhaps even politically sensitive because, under the EU Treaties, the ECB is completely independent vis-à-vis the Member States and cannot even seek or receive advice or guidance from individual Member States.
The German Constitutional Court met in Karlsruhe yesterday.
Photo: Sebastian Gollnow / AFP / Lehtikuva
And the opposite is true: the German Federal Government has no formal or other competence over the ECB.
Despite these legal-administrative challenges, there is only three months to request and receive a report.
Even in the usual twists and turns of the EU institutions, three months is quite a short time, and in this case it is an unprecedented administrative challenge. Then come fast.
The Bundesbank may have to withdraw
Another of the surprises of the judgment - and the potential bombings - is the provision that the German Bundesbank must withdraw from the implementation of the PSPP program unless the ECB has provided the required detailed and credible criteria of proportionality and necessity within the deadline.
Support purchases under this bond program have raised a total of around € 2.2 trillion in euro area central banks, mainly in euro area government bonds. In line with the principles of the program, each regional central bank has purchased mainly bonds of its own home country. Purchase volumes have roughly corresponded to the relative size of each euro area economy.
Germany is the largest economy in the eurozone and the largest central bank in the Bundesbank, so its withdrawal from bond purchases would be a big blow to the whole program and its credibility and impact.
Largely as a result of these subsidy purchases, market interest rates in the euro area have remained exceptionally low for years, and the German Federal Government, for example, has received fresh debt financing at a negative interest rate.
However, the impact on bond purchases has been even greater for eurozone countries more affected by the euro crisis than Germany, such as Italy and Spain, as central bank subsidies have pushed interest rates down the most where interest rates were highest before subsidies.
In principle, and I guess in practice, the ECB and other central banks in the region can continue to buy bonds under the PSPP program, even if the Bundesbank withdraws from the program.
But, to put it mildly, the market effects would be interesting if, in addition to withdrawing, the Bundesbank had to destroy the bonds it had already acquired from its balance sheet.
It would also be interesting, at the very least, for the ECB to consider it appropriate, in turn, to sue the Bundesbank for failure to fulfill its obligations.
The pandemic program may deteriorate
The third surprise in Karlsruhe is of an indirect nature and concerns the PEPP pandemic program recently launched by the ECB to tackle the interest rate crisis.
Admittedly, the Court specifically mentions in its judgment that it concerns the PSPP purchase program and not in any way a page or reference to the PEPP program.
Yet the connection - or at least the probable connection - is clear from the wording and reasoning of the judgment - and there can be no irritating more ECB central bankers.
The pain point is related to the question of the difference between monetary policy and fiscal policy. And the fact that the ECB's powers are limited by an absolute ban: it must not finance government deficits or otherwise interfere with the fiscal policies for which the Member States are responsible.
The German Constitutional Court's prima facie favorable decision confirms an earlier ruling by the European Court of Justice that PSPP bond purchases are not prohibited from financing government deficits.
However, this implies an indirect but wandering hook in the direction of the newly started PEPP program.
Like an invitation to new lawsuits
On several points, the Constitutional Judges emphasize and underline precisely the terms of the PSPP program that have been specifically excluded from the PEPP program. If the legality of purchases requires these conditions, the question arises as to whether purchases initiated without these conditions are illegal.
This uncertainty about the PEPP pandemic program may weaken the ECB's enthusiasm and prepare it to make full use of the program.
For example, Italian government market interest rates have risen due to the euro dispute and other uncertainties surrounding the interest rate crisis. This is probably the main reason why the ECB wanted to exclude from the terms of the PEPP program the country-specific purchasing restriction restricting the PSPP program. Now this method may be more difficult to use than intended.
Unless otherwise stated, the suspicion of the legality of the PEPP program at least encourages German economic hawks to bring an action against the ECB.
Ingredients of a major euro dispute
The fourth surprise of Karlsruhe is the very exceptional and rather outright attack on the European Court of Justice baked into the verdict.
The Constitutional Judges consider that the European Court of Justice has exceeded its own jurisdiction - that is, infringed the law of its jurisdiction - in assessing the legality of the actions of the German Bundesbank.
The issue concerns the ruling on the legality of the ECB's PSPP bond program requested by the German Constitutional Court itself from the European Court of Justice - and issued by the Court of Justice in 2018.
The German court agrees with the European Court of Justice that the ECB's PSPP program does not prohibit the financing of public finances, but is dissatisfied with the fact that the European Court of Justice has confined itself to assessing the legality of not only the ECB's activities but also those of the Bundesbank.
Looking at Karlsruhe, this was a serious mistake.
This interpretation - and judgment - may be the subject of considerable controversy and considerable mess.
There may be evidence of the extent of the controversy between the EU institutions and the power relations between the Member States and the EU institutions.
And in this controversy, it is not even necessary to stand for or oppose any interpretation in order to realize that this will hardly ease the euro economy's struggle against the interest rate crisis.
At the heart of this controversy is the only EU institution that at least needed to have the capacity and strength to do "everything necessary" to tackle the crisis.