Hoover Daily Report

An Up-and-Sideways German Move Against Europe's Central Bank

via Wall Street Journal
Tuesday, February 18, 2014

Mario Draghi, chief of the European Central Bank, stands accused of usurpation and crimes against national sovereignty. Beyond the legalisms, that is effectively the charge brought against Mr. Draghi's ECB before the German Constitutional Court. But Mr. Draghi need not look for another job. This is how it goes in Germany when the euro grates—again and again.

Germans have been dragging the euro union and its various rescue mechanisms before the Constitutional Court in Karlsruhe for years. The complaint is always the same, as is the verdict of the red-robed judges: No, propping up wobbly countries with European cash, much of it German, does not violate democracy's holiest of holies—the Bundestag's power of the purse. But, the judges warn, euro policy makers must not take such a ruling as a "blank check" for rescue packages to come. Naturally, these sibylline rulings lead straight to the next constitutional challenge.

So the docket of the German high court in Karlsruhe never clears, and the battle cry never stops: "It's our sovereignty, stupid!"

Now, a new twist: same thrust, different outcome. The fresh culprit is Mr. Draghi's ECB. Mind you, the bank hasn't committed any alleged crime against the nation-state, yet. But on Sept. 6, 2012, the bank assembled the crowbars and cutting torches, so to speak, by granting itself the right to engage in unlimited "Outright Monetary Transactions" (OMTs), over the protest of its German board member Jens Weidmann. Translated, the bank's OMT declaration read: We will soak up as much of the sovereign debt of tottering countries as we deem necessary, for as long as we deem necessary.

And lo, the mere pledge worked wonders. Bond yields of the "Club Med" euro countries plunged immediately, and the ECB hadn't even bought a single piece of paper. The euro was saved by legerdemain. But no good deed goes unpunished; hence the suit against the bank's still-unused OMT program.

The bizarre surprise is that, instead of mumbling as it has in the past, the German Constitutional Court has now dropped the hot potato into the lap of the European Court of Justice in Luxembourg. Karlsruhe's ploy is either cowardly or crafty, take your pick.

The German plaintiffs' key complaint against the ECB comes in Latin—ultra vires. They argue that it would go "beyond the power" of the ECB to buy sovereign debt. Merely claiming such a right, as the bank's governing council did in 2012, was allegedly tantamount to a breach of monetary-union law—ultimately, of the "no bailout" clause in the euro treaty forbidding member states from assuming the debts of others.

The plaintiffs contend that scooping up down-and-out sovereign bonds through the ECB's OMT program would serve as the "functional equivalent" of a bailout. By taking risky high-yield paper off the market, the ECB could lower punitive interest rates, hence cut the costs of debt service, hence fork over a hidden transfer to wayward countries—a bailout in all but name.

Their core grievance is about the arrogation of power. In carrying out the OMT program, the ECB would effectively be engaging in fiscal policy by monetary means, which is also verboten under euro rules. If the bank reduced a euro nation's public deficit with cheapened credit, it would usurp the sacred power of national parliaments to decide on fiscal ways, means and appropriations. That would go beyond the modest ECB mandate that allows only monetary policy. If Mario Draghi's plot actually kicked in, say goodbye to another chunk of German sovereignty.

"If," "could," "would." The convoluted reasoning sounds Talmudic, but the Rabbis of Karlsruhe still found it persuasive. So why did they lob the ball to the European Court of Justice this time? Go to the intricate ruling. On the one hand, the German court "tends to accept the presumption of ultra vires." On the other, it expects "a restrictive interpretation of the OMT decision" by the Luxembourg bench, which would soften the blow to German parliamentary sovereignty.

The German court's up-and-sideways maneuver reflects hope laced with slyness. The hope is that Luxembourg will indeed render a "restrictive interpretation," and so curb Mario Draghi's ambitions for the ECB program. And if not? Luxembourg will take the slings and arrows, not Karlsruhe.

My bet is that the Luxembourg umpires will not be too miserly. Even judges trained in the rigors and rigidities of Roman and Napoleonic law don't argue with success. What ECB President Jean-Claude Trichet began in the dark days of 2008-09, and what Mario Draghi continued with a vengeance ("we'll do whatever it takes"), did grant the euro zone a breather.

Between 2010 and 2012, the ECB already took some €200 billion of "Club Med" paper off the market as part of a separate, limited bond-buying program. The bank flooded the euro zone with hundreds of billions in liquidity while governments fought over how to keep defaults at bay. Bond yields have now come down in Greece, Ireland, Italy, Portugal and Spain. Negative economic growth has risen to plus-minus zero. The euro is doing fine against the dollar, and even better against minor currencies.

Yes, Mr. Draghi has "widened" his bank's mandate. He has cleverly fudged the line between monetary policy and bailouts. But who will hold a man to account for having acted while Europe's politicos dithered? If truth be told, European politicians—including German ones—are secretly delighted that Mr. Draghi finagled ultra vires. Thank God for Signore Draghi, runs the political moral of this weird judicial tale.

The larger story proclaims: Europe is still far from the United States, a real union. The EU has neither a real Federal Reserve, nor a common fiscal policy, nor commonly elected leaders to define the common good. The logic of a "more perfect union" demands these commonalities, but it collides with the logic of nation-states rooted in 2,000 years of history.

The nice thing about Mario Draghi is that he has bought Europe time by subterfuge, thus sparing large euro countries the pain of sacrificing yet more sovereignty on the altar of Europe. Alas, the European Union has not used the time to regain its breathtaking dynamism of the 1960s and 1970s. But that's another story. It won't be written by the courts or by Mario Draghi.

Mr. Joffe is editor of Die Zeit and fellow at the Institute for International Studies and the Hoover Institution, both at Stanford. He is the author, most recently, of "The Myth of America's Decline" (Norton, 2014).