Major Court Fight Between Germany and EU Looms

Mish

The German Constitutional court ruled against the ECB in a case regarding QE and bond purchases. The EU threatens Germany in response.

The heart of this battle goes to the Maastricht Treaty which formed the Eurozone. The Treaty says there will be no commingling of debts. And the German court ruled the ECB's QE program overstepped its bounds and did just that.

However, the European Commission, led by Ursula von der Leyen, claims that EU law holds precedence over national regulations. 

The European Court of Justice’s rulings are  binding for courts in the 27 member states of the block says the EC.

Thus, a major fight looms as the European Commission Threatens Germany with Legal Action.

“The recent ruling of the German Constitutional Court put under the spotlight two issues of the European Union: the euro system and the European legal system,” Leyen said in a statement. 

 “We are now analysing the ruling of the German Constitutional Court in detail. And we will look into possible next steps, which may include the option of infringement proceedings,” she said.

Infringements are legal cases the Commission can bring before the Luxembourg-based Court of Justice of the EU, if the Brussels-based executive deems a member state is violating EU law. The court can order a nation to make amends, or face hefty fines.

Landmark Court Ruling

Eurointelligence explains What it Means for the Future of the EU.

The ruling raises complex and potentially troubling issues for the EU as a whole. The German constitutional court has accused the ECB and the CJEU, the court of Justice of the European Union, of abusing their power, and of acting beyond their assigned competences. That concept is known in German constitutional law as acting ultra vires. In the German legal interpretation of European integration, all sovereignty still rests with the member states. The EU is clearly not a federal state, but a deferred power. Member states have transferred certain rights to the EU. The German court said it accepts that it is bound by CJEU rulings, but only those that occur within the EU's agreed competences. All bets are off it the CJEU goes ultra vires. And, crucially, the German court decides if and when that happens.

This is the most serious challenge to the EU's legal framework we have yet come across. In the UK, the courts operated under the assumption that conflicts between EU and UK law would always be settled on the basis that EU law is supreme.

The ruling is unusually explicit about the breach of competences on the part of the CJEU. It criticised the CJEU's positive ruling on the asset purchases as implausible, and objectively arbitrary. It accused the EU court of an evident neglect to investigate the wider consequences of the ECB's programme. The word evident crops up many times in the ruling. It is a legally more loaded word than it appears at first sight. Moreover, the ruling accuses the CJEU of a breach of EU treaty law.

The German court's interpretation will have important consequences if other national courts follow suit, which we think is very likely. Poland's deputy justice minister already declared that member states have regained their position as the masters of the EU treaties. We expect the ruling to strengthen the determination by the Polish government to press ahead with judicial reform, and to resist interference by the EU into what they consider domestic legal affairs.

Debt Mutualization 

What Germany fears now and has from the outset is "debt mutualization" in which Germany would bailout Greece, Spain, Portugal, and Italy.  

That is why Germany insisted the Maastricht Treaty, which founded the Eurozone, prohibit debt mutualization. 

Germany Has Had Enough

Time and time again, politicians and the ECB found ways to chip away at the treaty.

And despite the German court ruling, Pablo Iglesias, Spain's Deputy PM. says a “certain [level of] debt mutualisation is a [necessary] condition of the [continued] existence of the EU”.

Eurozone Breakup Risk at New High

Of course, the ECJ would rule that it is the high law of the land.

But then what? Fines against Germany?

Precisely who will enforce them? How?

This setup prompted my May 8 post: Eurozone Breakup Risk at New High

Bluff? Does it Matter?

I suspect the court case is a bluff and will never see the light of day. The EC will instead hope this all goes away, but it won't.

Things will keep simmering until they boil over. 

Meanwhile the number of boil-over points has just risen. Add Germany to the stew.

Mish

Comments (64)
No. 1-23
Sechel
Sechel

yep was just reading about this in the f.t.

In the end, the German constitutional court has done us a favour. Its ruling last week highlighted the toxic idea that the eurozone can forever rely for its survival on its central bankers, and their enthusiasm in pushing EU laws to the limits. Or maybe beyond — as the German court wrote in a case last week on the European Central Bank’s public sector purchasing programme

The German constitutional court cannot stop the European Commission from raising €1tn in debt in the form of a perpetual bond. But it is important this debt is guaranteed by the EU rather than member states, because national courts might raise their head.

Arguments over the future of the euro are only just starting. To win them, supporters of political and monetary integration must let go of the ECB as their comfort blanket, and the idea that it can always do whatever it takes. That battle was lost last week.

Sechel
Sechel

We have the Fed engaging in similar abuses but because the states don't have standing and the fed is linked to the u.s. treasury there's no recourse. Fed's been abusing its power for decades more egregiously since 2008 and it goes unchallenged. Because the central bank and E.U. isn't as strong versus its member states they got an unexpected challenge.

Sechel
Sechel

sounds like the german challenged was based on the cost not being borne proportionately which of course was the point since countries like spain and italy (what i call the olive oil economies) were already strained. i have to think they come up with a creative work-around and kick the can down the road once more. not sure what that means. the situation sounds serious but i can't imagine now is the time that member states truly want to push this issue

Captain Ahab
Captain Ahab

Maybe if people in Italy and Spain worked a full day, and not 2/3 of a day, they would have the income to pay for their welfare systems.

caradoc-again
caradoc-again
  1. Germany will fall into line as they are so "grateful" to Europe post WW2.

  2. Fekix Zulauf noted Germans were fooled into the Euro - too late now. Was in WirkshaftWoche recently.

  3. Its all BS. If they ran Euro entry requirements now very few of the countries in the Euro currently would qualify to join - I think it was 2 only.

Nothing to see here, Germans sold down the river by its political class. Now on the hook for French, Italian, Spanish........fill in blanks........social costs.

EU uber alles.

BrainDamagedBiden
BrainDamagedBiden

It would be just desserts to see the German Courts run over roughshod. This is the same court that throws it's own citizens in jail for thought crimes, including an 87 year old grandmother.

Anda
Anda

So...it is German president of the EU comission telling the German constitutional court that EU/ECJ law/ruling has higher jurisdiction , and that EU law is spoken only in Luxembourg... while the ECB is seated in Frankfurt ... what are we to make of that ? I don't find it intriguing or anything, just something towards stupid or pathetic.

caradoc-again
caradoc-again

The ECJ is like a political arm, a tool to help force compliance and integration. It's not unbiased. It won't find against the EU in such a case.

Bam_Man
Bam_Man

And then to top it all off, there is the "elephant in the room" - the Target2 liabilities. In the Trillions that will never be paid back (at least not in Euros).

tokidoki
tokidoki

We were here at the same spot i.e. the supposed disintegration of the Euro 10 years ago, and yet here we are, the Eurozone intact.

caradoc-again
caradoc-again

How very convenient Germans will be taught to kow-tow to EU laws just when there is a German at the head of the EU?

Almost as if it was supposed to happen that way.

bluestone
bluestone

Although Germany is a wealthy country, the average Italian is much wealthier than the average German. The Germans know this.

They also know about the immense gold reserves of the Italians at 2450 tonnes (per capita almost twice as much as the US).

They also know Italians are casual about tax evasion.

Or Italian pensions.. almost the most generous in the world.

The Italians have money!! The Italians can reform! They don't.

The reason the EU is involved is because the Italian threats are existential and commingling of debt advances EU integration. As a German there is -NO WAY- I would want to take any part of Italian debt its clearly just a fleecing.

Fadiman
Fadiman

Now that Germany has taken advantage of the EU and is big creditor nation and industrial powerhouse, might be a good time for them to do that “conquer Europe” thing again. No floating currency in EU was to German advantage.

TimeToTest
TimeToTest

The next logical step is to start printing Deutsche Marks again.

The Germans know this at this point. The QE ruling was movement in political positioning. The ruling class realizes this is the only way. The Germans will start loading up on EU debt before hand though to get at least some of the money back before devaluing the Euro with the Mark and paying back devalued Euros with marks. Looks like the plan at this point.

Imagine if the US politicians gave Canada a bailout to 3 times the size of the American bailout. The Germans are not quite as polarized as Americans. Most Germans understand they are funding the EU. It’s do or die time for the current political class.

caradoc-again
caradoc-again

Question - if ECB intervention becomes limited by law etc, what next?
What are the 2nd and 3rd order impacts in the EU and wider?

BLUEWIN
BLUEWIN

Only a matter of time until the failed Politicians in Brussels realize that the E.U. as a political and financial Union is DOA !

Montana33
Montana33

Germany is transferring its wealth to Italy and Spain through ECB purchases of bankrupt bonds (as you noted in your earlier article). If I were Italy and Spain, I’d increase my bond issuance as much as possible now. The ECB will buy those bonds so go for it Italy and Spain! Germany can’t protect themselves which is sad and kind of funny. How would you feel if someone lent out all your savings to bankrupt borrowers? Would you ever be so dumb that you’d agree to that? Germany is defenseless. Kind of ironic. Southern Europe pensions paid for by Germans.

Anda
Anda

The more I read on the ruling, the more decided it seems. That is to say some sort of document dump on the government by the Bundesbank of ECB practice is not going to come close to meeting requirements, even if the ruling could be lifted within three months

"German constitutional organs, administrative authorities and courts may participate neither in the development nor in the implementation, execution or operationalisation of ultra vires acts. Following a transitional period of no more than three months allowing for the necessary coordination with the Eurosystem, the Bundesbank may thus no longer participate in the implementation and execution of the ECB decisions at issue, unless the ECB Governing Council adopts a new decision that demonstrates in a comprehensible and substantiated manner that the monetary policy objectives pursued by the PSPP are not disproportionate to the economic and fiscal policy effects resulting from the programme. On the same condition, the Bundesbank must ensure that the bonds already purchased and held in its portfolio are sold based on a – possibly long-term – strategy coordinated with the Eurosystem."

Bundesverfassungsgericht - Press - ECB decisions on the Public Sector Purchase Programme exceed EU competences
Bundesverfassungsgericht - Press - ECB decisions on the Public Sector Purchase Programme exceed EU competences

In its judgment pronounced today, the Second Senate of the Federal Constitutional Court granted several constitutional complaints directed against the Public Sector Purchase Programme (PSPP) of the European Central Bank (ECB). The Court found that the Federal Government and the German Bundestag violated the complainants’ rights under Art. 38(1) first sentence in conjunction with Art. 20(1) and (2), and Art. 79(3) of the Basic Law (Grundgesetz – GG) by failing to take steps challenging that the ECB, in its decisions on the adoption and implementation of the PSPP, neither assessed nor substantiated that the measures provided for in these decisions satisfy the principle of proportionality. In its Judgment of 11 December 2018, the Court of Justice of the European Union (CJEU) has taken a different stance in response to the request for a preliminary ruling from the Federal Constitutional Court; however, this does not merit a different conclusion in the present proceedings. The review undertaken by the CJEU with regard to whether the ECB’s decisions on the PSPP satisfy the principle of proportionality is not comprehensible; to this extent, the judgment was thus rendered ultra vires. As regards the complainants’ challenge that the PSPP effectively circumvents Art. 123 TFEU, the Federal Constitutional Court did not find a violation of the prohibition of monetary financing of Member State budgets. The decision published today does not concern any financial assistance measures taken by the European Union or the ECB in the context of the current coronavirus crisis.

Worth reading through the whole interview below to understand the sort of direction the ECB is likely approaching from

George Phillies
George Phillies

An amusing side outcome is that the English, in response to Barnier, will point at the German constitutional court position.

Six000mileyear
Six000mileyear

Everyone in Europe is trying to conquer Europe through law and finance.


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