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Germany and the Euro Zone: ‘Everyone’ Blinked

An illustration of Euro coins in front of a flag and map of the European Union, May 28 2015 (Dado Ruvic/Reuters)

When Germany’s constitutional court (the BVG) ruled (a) that the European Central Bank (ECB) had not properly weighed the “proportionality” of its first, now renewed QE program and (b) that the European Court of Justice (ECJ) had not properly analyzed whether the ECB had done its job, there were plenty of predictions of catastrophe. The BVG’s ruling, worried some, not only represented an existential threat to the supremacy of EU law, but, if it was followed, the Bundesbank (Germany’s central bank) would be obliged to pull out of the first of the euro zone’s QE programs.

Precedent suggested, however, that this was not what was going to happen, despite the heightened rhetoric that followed the ruling, and despite a deeper crisis within the euro zone that can neither be wished nor spent away. The BVG has been making the same fundamental point about its responsibility to protect the German constitution for half a century or so now. It is well aware that its stance is incompatible with the way that EU law is generally understood, but it has always found ways of avoiding this clash moving from the theoretical to (in any material sense) the real.

In this case, the BVG left open the route to a solution that could both keep the QE going and, once again, leave the fundamental conflict of laws unresolved.

And, judging by this Financial Times report, that’s (more or less) what has happened:

Germany’s central bank is set to keep buying sovereign bonds from next month, defusing an explosive ruling by the country’s constitutional court that had threatened to destabilise the European Central Bank’s flagship asset-purchase scheme.

The Bundesbank is facing a deadline of August 5, when the constitutional court ruled it would have to stop buying bonds unless the country’s government and parliament showed they had fully scrutinised the economic and fiscal impact of the ECB’s asset purchases.

Two officials briefed on the matter told the Financial Times that the Bundesbank will later this month formally decide to take its lead from the finance minister and parliament in Berlin, which both declared last week that the ECB had satisfied the court’s requirements. The ECB and Bundesbank declined to comment….

While the [BVG] stopped short of ruling that the ECB had been illegally financing governments, it gave the German government and parliament three months to ensure that the ECB provided a “proportionality assessment” of its €2.2tn sovereign bond-buying scheme. Otherwise, it said, the Bundesbank would have to stop buying bonds on behalf of the ECB and draw up plans to sell the more than €500bn it owned.

Peter Huber, one of the judges who drafted the court’s ruling, told the Frankfurter Allgemeine Zeitung newspaper it would not sit again to determine whether its conditions had been satisfied and instead it would leave it to the Bundesbank to decide.

“The Bundesbank is bound by our decision, but it must determine on its own responsibility whether the ECB’s statement of reasons fulfils our requirements or not,” Mr Huber said. “The federal constitutional court is no longer involved.”

In the end, the Bundesbank played a vital role in helping to resolve the legal stand-off by acting as an intermediary between politicians in Berlin and the ECB, which refused to respond directly to national institutions out of concern over its independence.

As well as debating the “proportionality” of its bond-buying at its last monetary policy meeting a month ago, the ECB provided the Bundesbank with unpublished minutes of previous meetings where it analysed the pros and cons of its flagship policy.

Meanwhile, in Italy, the most likely flashpoint for a euro zone crisis later this year, pawnshops are, the New York Times reports, doing good business:

The economic picture for Italy, and for Italians in need of cash, does not look good. Banks, laden with debt and wary of taking on toxic loans, are unlikely to extend credit. The government’s aid packages and job security measures that have delivered billions of euros to struggling Italians are set to expire at the end of the summer, though the government is considering extending benefits. The Italian economy is estimated to contract by nearly 13 percent this year….

But the managers of the collateral loan sector — the institutional name for pawnshops — aren’t complaining. Activity increased from 20 to 30 percent immediately after the lockdown, as clients wanted to make sure they met their interest payments but also sought new loans. And with emergency benefits about to wind down, they expect business to surge.

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