29.08.2017
Column

The decision lies with the highest authority

The ECB’s extreme monetary policy is raising doubts in Germany’s Federal Constitutional Court. Now, the European Court of Justice is set to rule on it, too. We would hope the central bankers will signal their intent before the ruling. The column of Jörg von Fürstenwerth, Chairman of the GDV Management Board.

It’s not every day that Germany’s highest court presents its doubts regarding the business practice of a European institution to the EU’s supreme court. Nonetheless, that is precisely what happened last week when the Federal Constitutional Court called on the European Court of Justice to investigate the European Central Bank’s practice. The constitutional judges are more than slightly uneasy about Mario Draghi’s bond-purchasing programme. Having been escalated to the highest legal authority, the time has come to rule on what the ECB can and cannot do.

I am not going to look at the motives of those who launched this constitutional challenge. Suffice to say that there is obviously a political agenda involved. However, I and indeed all of us as insurers, are more interested in the fundamental question of whether the ECB is exceeding its mandate through its purchasing programme and making a material contribution to state financing.

This is not the first time the Federal Constitutional Court has applied to the European Court of Justice (ECJ) to address the question of whether the ECB is entitled to engage in the large-scale purchase of government bonds. A little over two years ago, the European judges ruled that the ECB’s outright monetary transactions (OMT) programme was lawful. Nonetheless, it would be wrong to jump to conclusions on the basis of that ruling. There is a different rationale behind OMT: it is designed to prevent individual states experiencing an acute financial crisis. Moreover, no bond purchases have actually taken place through the OMT programme. More importantly still, in my view, the OMT programme comes with stringent requirements, and bond purchases are only permitted in conjunction with strict structural reforms in the affected countries.

This contrasts with the current bond purchasing programme where over EUR 2 trillion have been invested without any commitment to reform in return. On the contrary, critics rightly point out that the programme is undermining any incentive to undergo structural reforms. It will therefore be interesting to see how the ECJ will rule in this instance.

Just a few days ago Wolfgang Schäuble, Germany’s Finance Minister, distanced himself from the constitutional judges’ involvement in the ECB’s monetary policy. At a dinner event hosted by the German business newspaper Handelsblatt, he went on record as saying he believed the ECB was acting within its mandate. At the same time, it is clear that the Finance Minister must choose his words carefully. He also said the ECB was exhausting all the avenues open to it in resolving a hellishly difficult task. So he’s walking the proverbial tightrope.

I’m happy that the judges are about to embark on an accelerated process to define the extent of the central bankers’ mandate. We share the Karlsruhe constitutional judges’ reservations that the ECB may have gone too far this time, and not just because of the extreme bond market distortions it has induced. The central bank is by far the biggest creditor of the EU member states with an incredibly inflated balance sheet total in excess of EUR 4 000 000 000 000, or four trillion euros to put it in words. That is a big burden to bear in the future: it will take years, if not decades, to return the central bank’s balance sheet to normal.

Now is not the time for us to speculate about what could happen if the European judges were to rein in the ECB. In fact, I hope it won’t come to that: maybe the ECB will pre-empt the legal challenge on 7 September by announcing its intent to start winding up the bond purchasing programme. That would be a signal for Europe and the ECJ. It would also be an opportunity for the ECB to do what needs to be done under its own steam before the judges weigh in with their ruling.

Sincerely yours
Jörg von Fürstenwerth
 

Jörg von Fürstenwerth