As the largest creditor nation in the eurozone and its largest economy, Germany has much to lose if it ends up being the party responsible for the breakup of the single-currency union.
By Marshall Auerback, a market analyst and commentator. Produced by Economy for All, a project of the Independent Media Institute.
Germany’s highest court issued a ruling that could threaten the existence of the euro with a constitutional court decision that said the European Central Bank’s bond-buying operations exceeded the ECB’s legal remit, and violated German constitutional law. The U.S. equivalent of this would be a state Supreme Court limiting the ability of the U.S. Federal Reserve to conduct purchases or sales of Treasury securities.
Even more extraordinary, the court decreed that it could “ignore an earlier ruling of the European Court of Justice in favour of the ECB,” which, in the words of Martin Wolf of the Financial Times, is tantamount to “an act of judicial secession.” To extend the U.S. analogy, that would be akin to a state Supreme Court holding that it would not be bound by U.S. Supreme Court precedent.
Still, “judicial secession” might be too strong a characterization. The European Union has been an evolving structure since its inception and does not have an explicitly federal constitutional framework as a backstop that could quickly eradicate any ambiguity and nip the problem in the bud.
Here’s the problem: the euro is the official currency of 19 out of 27 EU member countries, and its users are governed by a federal monetary system roughly analogous to the U.S. Federal Reserve system. On the other hand, the euro and the ECB are parts of an intergovernmental union, not a real federal state. Europhiles have been hoping that the EU would just develop into the latter organically. The German court has just inconveniently reminded everybody what the true state of affairs is. The very absence of a corresponding federal political structure is what constitutes the longstanding Achilles heel of the entire single-currency union. It can’t just be wished into existence, or created via judicial improvisation.
However understandable, this legalistic approach poses considerable risks for Berlin. As the largest creditor nation in the eurozone and its largest economy, Germany has much to lose if it ends up being the party responsible for the breakup of the single-currency union. After all, if the creditor does not respect the rules of the organization (or family) of which it is part and on which it holds claims, why would the debtor be beholden to that arrangement?…