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A Conflict of Laws

Outside the European Commission headquarters in Brussels, Belgium (Yves Herman/Reuters)

That the editorial-writers of the Financial Times — long (with some notable exceptions) the home of eurofundamentalist reaction — are outraged by the attack by the German Constitutional Court (BVG) on both the management of the European Central Bank’s quantitative easing and on the way that the European Court of Justice signed off on it is no surprise. Nevertheless, they would do well to remember that jaw, jaw is better than war, war.

First, some background.

Financial Times:

The court in Karlsruhe in effect declared null and void a 2018 judgment by the European Court of Justice, the EU’s highest legal instance, that ECB asset purchases were lawful. The German judges said the ECJ had not considered the proportionality of the central bank’s policy and so had acted ultra vires, or beyond its authority.

The German judges chose to disregard treaty obligations, which state that only the ECJ can adjudicate on whether an EU body has broken EU law. Their judgment amounts to a unilateral declaration of constitutional independence from the EU legal order. Some have already compared it to South Carolina’s nullification of federal law in pre-civil war America.

Some have already lost their minds.

Back to the Financial Times (my emphasis added):

The EU is a community of law. It is a formidable achievement. Integration has created European rights and obligations that can be enforced in national and European courts. The ECJ exists to ensure the law is applied uniformly. The German court has been spoiling for a fight for almost three decades, gradually building an argument that it has the right to police the boundaries between EU and national competences. Its explosive judgment in the ECB case puts the entire EU legal order in jeopardy. For this reason alone infringement proceedings by the European Commission are merited.

In other words, the Commission (the EU’s bureaucracy) should take legal action against Germany.

We could argue about the extent to which the EU is a community of law, not least when it comes to the birth and the preservation of the euro. When the single currency was being put together in the late 1990s, it was on the understanding that the economies of the countries that signed up for it should have “converged” (a dubious concept, but let that pass), by meeting certain objective standards, set out in Article 121 of the Maastricht treaty, but what happened?

Writing in 2009, the Belgian economist Paul De Grauwe, an excellent analyst of the euro zone (and the reverse of a euroskeptic) explained:

The criteria were massively relaxed when the current member states faced their entrance exams in 1998. Without that relaxation, more than half of the present member states would have been denied Eurozone membership.

Among the highlights:

The real problem with the budget deficit numbers is that they were manipulated. In the case of Greece, as it turned out later, there was fraud involved. In other cases (Belgium, France, Italy), “creative accounting” permitted these countries to hide the true level of the budget deficits. For example, these countries took over pension funds of state companies and booked the assets of these funds as current revenues while failing to book the future additional pension liabilities. As a result, the budget deficits were artificially and temporarily lowered. All this occurred while the European Commission gave its stamp of approval. It is no exaggeration to conclude that the budget deficit numbers were falsified, thereby allowing countries like Belgium, France, Italy and Greece to obtain free passage into the Eurozone.

To suggest that this was not widely known at the time these countries were admitted is nonsense.

Or scroll forward to 2003. Here’s the BBC (explaining in 2012 what happened):

There was, from the beginning, a way for the EU to police the economies of member states by following the rules that had been laid down for the single currency in the Maastricht Treaty. It was called the Stability and Growth Pact, and it was not Italy or Greece that torpedoed it – it was Germany.

In 2003, France and Germany had both overspent, and their budget deficits had exceeded the 3% of GDP limit to which they were legally bound.

The Commission – then led by the former Italian Prime Minister Romano Prodi – had the power to fine them. But the finance ministers of what was then the 15 eurozone member countries gathered in Brussels and voted the Commission down. They voted to let France and Germany off.  They voted not to enforce the rules they had signed-up to and which were designed to protect the stability of the single currency.

Or move forward to 2010.

Reuters:

The Greek and Irish bailouts and the creation of a temporary European rescue fund had been “major transgressions” of the treaty.

“We violated all the rules because we wanted to close ranks and really rescue the euro zone,” Lagarde was quoted as saying.

“The Treaty of Lisbon was very straight-forward. No bailout.”

And the Financial Times’s argument that “the German court has been spoiling for a fight for almost three decades, gradually building an argument that it has the right to police the boundaries between EU and national competences” has, I’m afraid, just been pulled out of a hat.

The underlying point made by the BVG dates back to what became known as Solange I, a case from 1970, although it has been refined over the years. To oversimplify: As the constitutional court of a Germany that has not been subsumed within a larger federation, the BVG has to defend Germany’s constitution and, as a matter of German law, neither the core rights contained within that constitution nor the BVG’s broader obligation to defend them and it can be signed away by any government.

Far from spoiling for a fight, the BVG has done its best (up to now) to do the opposite. It knows that the issues involved in a conflict of laws between the EU and Germany’s legal regimes are complex and (potentially) immensely destabilizing. As I noted in an article the other day:

Ever since the BVG’s judgment in Solange I (1970), the ECJ and the BVG have engaged in an intricate legal dance in which the two courts have maintained incompatible positions without matters ever being allowed to come to a head. The German court is a pillar of the establishment, not a euro-skeptic bunker. It is no coincidence that its theoretical reservations over the supremacy of EU law have never made much obvious practical difference, if any.

This time it’s different, and, possibly provoked by the dubious way in which the euro zone has been run, the BVG has made a more inescapably direct challenge than in the past, but, typically, left open, as (to be fair) the FT notes, a way to resolve this impasse:

The best outcome would be for Germany’s central bank to satisfy the [BVG] with a detailed justification of the ECB’s pre-pandemic bond-buying.

Indeed.

But that’s not enough for the FT. In essence, it wants the EU to take legal action against Germany in order, one way or another, to force its government to ignore or rein in its constitutional court. So far as sending the message that the EU is a community of laws or, for that matter, an institution that has learned from history, that is not the way to go.

More practically, Italy is sliding inexorably towards a crunch — a crunch that, if markets start to panic could come very quickly — that is going to force those who lead the euro zone to make some very hard decisions. To suggest that they should do so against the backdrop of a constitutional crisis in Germany — the euro zone’s richest, most important and most powerful member — seems unwise.

One crisis at a time, please.

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