The two central bankers, both 40-somethings and friends since university days, pointedly sat next to each other in the courtroom on June 11th. Jens Weidmann has risen through the office of Chancellor Angela Merkel to become president of the Bundesbank. Jörg Asmussen has moved via the finance ministry to the executive board of the European Central Bank. But however amicable, they came to the constitutional court in Karlsruhe on opposing sides of the argument.
At issue was, once again, efforts to end the euro crisis. In September the court gave a preliminary nod to the European Stability Mechanism, a fund that can lend to struggling euro-zone countries on certain conditions. But out of that judgment grew a possibly more perilous case over the role of the ECB. The ECB’s president, Mario Draghi, promised last summer to do “whatever it takes” to save the euro. His tool was a programme to buy, without limits, the bonds of troubled euro-zone countries. These purchases would only be in the secondary markets, but would clearly keep yields low. The ECB has not so far bought a single bond under this programme. But its readiness to do so has calmed markets.
The German plaintiffs in Karlsruhe argue that this programme violates the ECB’s mandate. It fell to Mr Weidmann to argue their case. The central bank is supposed to make only monetary policy. Buying government bonds, he said, amounts to financing states and is thus a fiscal matter. That the ECB would buy from banks, not governments, makes little difference because it would still affect yields and thus the conditions for primary bond issues.
Moreover, if debtor countries defaulted, the ECB would make losses and would call on its 17 shareholders, the central banks of euro-zone countries, to pay. The Bundesbank is the largest shareholder. Ultimately, German taxpayers would foot the bill, yet Germany’s parliament never voted for the expense. This, goes the argument, is unconstitutional.
Mr Asmussen presented the ECB’s version. (Mr Draghi decided not to testify, perhaps feeling that an Italian would be less persuasive.) The ECB does not intend to finance governments, he said. But last summer, amid fears of a possible euro break-up, the ECB’s interest-rate signals were no longer being transmitted to markets. It needed the new programme to regain its ability to make monetary policy, he said. It thus remains within its monetary-policy mandate.
The case will set precedents. For the first time, a European institution is in the dock before a national court. Indeed, Germany’s finance minister, Wolfgang Schäuble, questioned in his testimony whether Karlsruhe has the power to judge the ECB. In theory, the court could rule (probably not until after the German election in September) that, since European treaties have been breached, the Bundesbank must withdraw from euro rescue efforts, or even that Germany must quit the euro. In practice, Karlsruhe is more likely to send the case to the European Court of Justice in Luxembourg.
That court is most unlikely to jeopardise the euro. But if it is seen as too lax in Germany, the public mood in the euro zone’s largest country might turn even more sceptical. Almost half of Germans are against the ECB’s programme, according to one poll. Whatever the final verdict, this case is causing uncertainty and making the task of saving the euro harder.