Is the European Central Bank Constitutional?

Today (Tuesday) and tomorrow, Germany’s Federal Constitutional Court (FCC) will hear argument in yet another case over yet another innovation adopted by the EU in the wake of the continuing sovereign debt crisis. Cases of this sort have become annual events. In 2011, the FCC dealt with the Greece bailout; in 2012, with the European Stability Mechanism (ESM). The key issue this time around is the European Central Bank (ECB) and more precisely, the permissible scope of its “outright monetary transactions” (OMT)—that is, bond purchases or sales in secondary markets, or what we call “Open Market” transactions. No dramatic decision is to be expected—certainly not before September, when Germany goes to the polls. (By uniform consensus among the European elites, the EU project is too important to be injected into national electoral politics.) Still, the case is worth watching, both because the financial markets have the usual jitters and because the case highlights, yet again, increasingly disturbing features of the European project.

As in the earlier FCC cases, two questions run together. One question is whether the European Treaties permit the institutions or practices at issue, or whether they lack a legal basis in the treaties Germany signed. The other question is whether the German Constitution permits Germany’s participation in this, that, or the other EU scheme. The Constitution, as understood by the FCC, is pro-EU integration, but it does not permit a wholesale transfer, willy-nilly, of popular sovereignty to EU institutions. A step of that nature would require a constitutional amendment by the sovereign itself—the German people, speaking directly by referendum. (The Second Reich was cobbled together by princes purporting to act on behalf of the people. The EU can’t be created that way, so far as the FCC is concerned.) Moreover, steps that threaten to erode basic principles of parliamentary democracy and the Rechtsstaat are permissible only under certain conditions. Foremost, the FCC has ruled, Germany cannot agree to open-ended debt guarantees and obligations; the Bundestag has to maintain its full budgetary authority.

Apply those basic guidelines to an ECB whose president, Mario Draghi, famously promised that the ECB would do “whatever it takes” to prop up markets for Spanish, Greek, Italian, etc. debt: you see the problem. Under the EU system, much of the garbage purchased by the ECB will wind up with the German Bundesbank, and the German legislature will have to take the hit if and when the debts go bad. That looks suspiciously like the kind of open-ended, no-one-voted-for-it system that has in the past raised eyebrows at the FCC.

The argument before the FCC brings an unusual spectacle: two of Chancellor Merkel’s closest economic advisers will appear on opposite sides. Bundesbank President Jens Weidmann is expected to highlight the risks of the ECB’s “whatever it takes” commitment. He has a lot of ammunition. For example, he might note that between the ESM and the interbank transfer system (the so-called “Target 2” balances), the Bundesbank has already racked up 530 billion Euros worth of obligations, much and perhaps most owed by folks whose ability to pay is open to serious doubt. How much is too much?

Appearing for the ECB will be Joerg Asmussen, Germany’s representative on the ECB. He’ll have to make enough reassuring noises to assuage the justices’ concerns, by saying things like: “These aren’t bailouts, just short-term measures to stabilize the Euro.” Or: “We’re lending only to countries that fall under the ESM, and therefore under strict commands to shape up.” Or: “Don’t worry, it’s only short-term paper.”  Say too much in that vein, though, and the markets may come to think that Mr. Asmussen and his institution actually mean it—in which event “whatever it takes” will be called into doubt and the markets might freak out. It’s like an FOMC meeting in real time, in a courtroom.

While the EU’s long-running opera has a certain entertainment value, it also has a deeply corrupting effect. In the entire theater, it’s hard to find an institution with an ounce of integrity and legitimacy. By design, central banks and courts lack democratic legitimacy: we make them “independent” to tie ourselves to the mast, so to speak. That enterprise, however, is plausible only so long as those institutions remain true to their masts: price stability and the law, respectively.

And yet, and alas: regardless of the ECB’s assurances that “whatever it takes” is consistent with and conducive to price stability and the integrity of the Euro, everyone knows that monetary policy is being subordinated to political demands. Everyone also knows that those political demands entail draconian austerity programs for debtor countries that might fare much better with a rip-roaring devaluation. And so the ECB becomes part of a political game in which multiple actors “network” to align fiscal, monetary, and social policy in some fashion. Good luck with that.

Former FCC justice Udo Di Fabio has forcefully described the dilemma and its legal implications in a recent, much-noted essay. (Warning to those inclined to follow the link: it’s in German, and not “May I have a bratwurst” German.) What he does not say explicitly is that the FCC now confronts the same dilemma between institutional commitment and political demands. The Court could pull the trigger and hold that Germany must either leave the Eurozone or else, change its Constitution. But that is not going to happen: it’s too convulsive for a court to contemplate. So the justices will punt.

They could say, one, that the ECB’s authority is really a question for the European Court of Justice. The justices have made noises to that effect in past decisions. But they have never referred a case to the ECJ, for the excellent reason that they know the outcome: whatever furthers EU integration, the ECJ would rule, is therefore legal. The justices could say, two, that the politicians and especially the Bundestag must be mindful of their constitutional obligations, and that there is a red line of self-abdication that they must not cross. The FCC’s problem is that its red lines, drawn in previous cases, look like President Obama’s make-believe red lines across Syria.

In real life, the lines are haggled out in calls between the Chancellor and the Court: let’s find a ruling that saves the Court’s face, gives Mrs. Merkel some leverage for more austerity elsewhere, allows Europe to carry on, and doesn’t spook the bond markets. In short, the FCC, too, has been politically networked.

That may tide over the EU and the bankers in London and New York. As for the rule of law, yikes.