What exactly happened in the Eurozone this week? Something about a German court & the ECB?
It's complicated, but has implications for the Eurozone's #COVID19
recovery & the EU itself.
What follows is my attempt to help me (& my students) understand what happened
Let's start with some background.
As is now well know, European countries have been hit hard by #COVID19
(graph from @FT
The European countries responding with quarantines, with the subsequent economic hardships (as @javilopezEU
wrote about back in March) https://www.socialeurope.eu/europe-under-quarantine
But the economic pain was not shared equally. As is well known, hardest hit by the virus was Italy, which was already one of the weaker economies in the eurozone. Same for Spain
This matters because it reinforced what is known as the "North-South" divide in Europe: the relatively wealthier northern countries v the relatively poorer southern countries. https://www.europeaninstitute.org/index.php/ei-blog/155-european-affairs/ea-august-2012/1614-europes-north-south-dividea-stubborn-chasm
Debate over crafting a European response to the economic consequences of #COVID19
-- rather than just leaving it in the hands of individual countries -- basically broke along those lines, as @adam_tooze
Most notably, this divide hung over a late April meeting of European leaders to craft a joint economic response. As @ProfKMcNamara
wrote (in @monkeycageblog
) the hope of the meeting was to issue joint bonds ("coronabonds") to fund recovery https://www.washingtonpost.com/politics/2020/04/21/europes-leaders-meet-this-week-confront-coronavirus/
But a deal wasn't reached, largely due to the north-south fissure. As @SeanDEhrlich
wrote at @duckofminerva
, this echoed earlier failures at a joint european economic response (such as during the 2008 eurocrisis) https://duckofminerva.com/2020/04/deja-vu-all-over-again-the-eu-coronavirus-and-the-eurozone-crisis.html
The lack of a "fiscal" response means the only means of responding is with monetary policy. In the Eurozone, that means the European Central Bank
So what has the ECB done? Well, it's been doing a lot for quite some time.
Without getting into the various acronyms, it's been involved in "quantitative easy" (i.e. pump money by purchasing a wider arrange of financial assets from banks) since 2015 https://www.ecb.europa.eu/explainers/show-me/html/app_infographic.en.html
In light of the economic crisis created by #COVID19
, the ECB has expanded its role, effectively determining economic policy for the member states https://www.cnbc.com/2020/03/19/ecb-launches-new-820-billion-coronavirus-package.html
And ECB President @Lagarde
acknowledged the unprecedented nature of the ECB actions https://twitter.com/Lagarde/status/1240414918966480896
But this was apparantly the last straw for the German High Court, which finally ruled a a long term legal challenge to ECB actions by German politicians and economists
With that background, let's turn to the ruling itself.
In a nutshell, the German High Court said that the ECB needed to backoff of "quantitative easing" https://www.politico.eu/article/german-high-court-warns-ecb-that-bond-buying-could-be-illegal/
This decision goes against an earlier decision by the European Court of Justice had issued a separate ruling on the ECB's expanded monetary actions, saying they are "OK" https://www.bloomberg.com/news/articles/2018-12-11/ecb-wins-eu-top-court-fight-over-legality-of-qe-program
offers a helpful and detailed thread of the decision's legal aspects. The key point is this: the German court is claiming superiority over the ECJ to interpret European Law. It's striking down a ECJ ruling. https://twitter.com/syrpis/status/1258018951843450880
That's controversial because it essentially flips the script: EU Law is subordinate to Member state law. It's not supposed to work that way.
But as @rdanielkelemen
& Federico Fabbrini wrote in yesterday's @monkeycageblog
, this shouldn't be shocking: "Germany’s Federal Constitutional Court has been barking at the European Union’s high court...for years. This week, it finally bit." https://www.washingtonpost.com/politics/2020/05/07/germany-may-be-plunging-europe-into-constitutional-crisis/
says that the historical context is all important. If you take that into account, the German court decision is not surprising https://twitter.com/HelenHet20/status/1257987288908382208
is pointing to the deeper historical context: that Germany & France were the key players in creating the Maastricht Treaty (which officially established the EU & the Euro) https://twitter.com/ProfPaulPoast/status/1192838454121553920
So what does this mean?
At a broad level, this event illustrates why the euro is simply not ready to be a full competitor to the dollar. The "shared sovereignty" of the eurozone is too fragile of a foundation on which to place a reserve currency https://academic.oup.com/isp/article-abstract/21/2/109/5762967?redirectedFrom=fulltext
Benjamin Haddad points to this more fundamental issue: a lack of common European fiscal policy (or, more precisely, fiscal coordination on the part of the European states) https://twitter.com/benjaminhaddad/status/1258069994316931072
But it also points to the fragility in the EU itself. Keep in mind that #Brexit
just took place on Jan 31. https://www.bbc.com/news/uk-politics-32810887
And while @BVerfG
's decision is not #Gerxit
, it is the latest instance of a EU member state asserting its sovereignty over the EU.
Germany's critical role in creating both the EU and the Euro makes this particular "assertion of sovereignty" highly impactful.
So while complex, exploring this event teaches one a lot about the EU, the Euro, sovereignty, and the future of global monetary politics.
Oh, and it also could impact Europe's ability to economically recover from #COVID19
, which might be its most important implication.
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