By Prince Michael of Liechtenstein, courtesy of GIS
(Ed: revisiting in light of the fresh legal challenge in Germany to ECB bond-buying, filed October 8).
Two legal challenges to the EU central bank’s most controversial policies have been working their way through Germany’s Federal Court of Justice, the country’s supreme court equivalent. In one of the cases, the justices in Karlsruhe already ruled that the authority of the EU Banking Union ought to be limited. A verdict on the legality of the EU’s “quantitative easing” policy, under German law, is expected soon. This could prove to be the moment of truth not only for Germany.
Two cases have been filed with the Bundesgerichtshof, the highest court in Germany’s judicial system. One of them questioned the constitutionality of the Banking Union, initiated in 2012 as a response to the eurozone crisis, which transfers some of the responsibility for banking policy from the national level to that of the European Union. Europolis, a Berlin-based think tank created by lawyer and public finance Professor Marcus C. Kerber, was behind that suit. The other case, submitted by a former Bavarian politician and lawyer Peter Gauweiler, challenges the legality of the European Central Bank’s quantitative easing (QE) policy.
The Banking Union, institutionally attached to the ECB, is tasked with supervising the largest European banks – those which have been dubbed “system-relevant” (insolvency of a “system-relevant” institution may threaten a financial system’s stability). The union also supervises the liquidation of such banks when they fail.
The main argument for the transfer of the responsibility for these banks to the ECB level has been that the biggest banks typically operate in more than one eurozone country.
Power grab and ‘easy money’
The plaintiffs in the federal court argued that too much power was shifted from the national supervision to the ECB, which violates the Lisbon Treaty (the constitutional framework of the European Union) and, particularly, the German constitution. They also pointed out that the German authorities and parliament had lost control of the use of the “Bankensonderabgabe” bank levy (the German banks’ mandatory contributions to a deposit protection fund) to a supranational, technocratic and democratically unaccountable authority controlled by the ECB.
German columnist Gabor Steingart pointed out that supervision of banks by an agency depending on the ECB puts them at the mercy of an entity that destroys the bank’s business model – through its policy of low-to-negative interest rates. He is correct, as the ECB’s “easy money” fixation denies lenders a chance to build up equity.
In the past, Germany’s Federal Court of Justice has allowed political considerations to influence its verdicts, a dubious practice in any rule-of-law system. Not surprisingly, the Banking Union case was rejected under the guise of shielding eurozone policies. However, the court issued an important warning. The supervision of most banks, other than the “system-relevant” giants, must stay with national authorities, as they can better judge local market conditions.
The second, QE-related case, politically and constitutionally crucial and financially more critical, is still being reviewed by the court. Verdicts will not be rendered before September 2019.
The Federal Republic of Germany is the largest shareholder of the ECB. The ECB’s decision to come to the rescue of the financially distressed governments through the purchases of sovereign debt and to “enhance” the region’s economy with injections of liquidity by buying financial instruments, expands its liability and also that of its shareholders.
When ECB President Mario Draghi initiated this program on July 26, 2012, he uttered these memorable words: “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.”
The QE program can bring massive liability to the Federal Republic
Mr. Draghi kept his promise, but the policy has enabled governments in various member countries to continue excessive spending. Another logical result was inflation in asset prices, especially real estate, company shares and, most strikingly, the equity markets. Even “helicopter money” (the phrase coined by the economist Milton Friedman in 1969, when the Nobel Prize winner described the effects of monetary expansion as similar to dropping money from a helicopter) is considered an option by President Draghi and his appointed successor Christine Lagarde.
In 2017, Germany’s constitutional court asked the European Court of Justice in Luxembourg about the legality of the ECB’s bond purchasing program. In a decision that was probably more politically than legally inspired, the justices found in favor of the ECB.
In all constitutions, including Germany’s, budget control is the primary duty of the parliament. The QE program can bring massive liability to the Federal Republic (the German share of more than 2 trillion euros) outside its political control. The Federal Court of Justice in Karlsruhe will first decide whether the QE case is within its jurisdiction (the answer to this seems rather obvious, as a large potential liability for the country is in play) and whether Mr. Draghi’s program is compatible with Germany’s constitutional law.
This is a delicate situation now, and could prove to be the moment of truth. The court may rule politically that the activities of the ECB are sound and helpful to the eurozone. Such a verdict might help stabilize things in the short term, but at the steep price of bending the principle of the rule of law and infringing on the independence of the court. In the longer term, a ruling confirming the shortsighted, disastrous policies will lead to a collapse of financial stability in Europe and reduce the great EU project to a farce.
If the court decides the other way, Germany, under the scenario of a continuing QE, could be forced to leave the eurozone.
Personally, I am a friend of the principle of the common European currency, the euro. However, I support it only as long as the ECB concentrates on its proper mission and does not become politicized. The common currency must not serve as a pretext for an introduction of common policies – financial and economic – that go beyond the EU’s four fundamental freedoms. It is a true tragedy that we have come to the point that the ECB’s and EU governments’ disrespect for the rules has led us to a choice between violating the principles of the rule of law and maintaining a weak euro.
The policy of “whatever it takes to preserve the euro” may undermine the system of an independent judiciary in Europe, but it is nearly certain to destroy the euro as a stable currency. It will be, therefore, extremely interesting to see if legal principles are going to be adapted to fit “whatever it takes.”
Prince Michael of Liechtenstein completed his trainings at the Faculty of Economics with the University of Vienna (Austria) with a Magister der Sozial- und Wirtschaftswissenschaften (M.A. in Business Administration). During his studies he took various practical training periods / work with banks and manufacturing companies in Canada, the US and Belgium (Brussels). From 1978 to 1987 he worked for Nestlé SA in the fields of controlling, management and marketing on various markets in Europe and Africa. In 1987 he returned to Liechtenstein where he took over the position of a Managing Director with Industrie- und Finanzkontor Ets. Vaduz, which today is a leading trust company with tradition and expertise in the long-term and trans-generational preservation of wealth, especially family wealth. Today, Prince Michael of Liechtenstein is Chairman of Industrie- und Finanzkontor Ets. as well as Founder and Chairman of Geopolitical Intelligence Services AG Vaduz.