Monday, June 10, 2013

German Courts Can Overrule ECB Monetary Stimulus?

It looks like that can happen:
Germany's constitutional court in the south-western city of Karlsruhe is set to hold a public hearing on Tuesday and Wednesday on the legality of the European Central Bank's bond buying plan after receiving complaints that the ECB was over-stepping its remit from, among others, the country's own central bank, the Bundesbank.
So can Ireland or Spain or Portugal take the ECB to court for engaging in excessively tight monetary policy? I really don't understand how all this works. My impression was that the ECB was insulated from political pressures in EU member countries. But it looks like Germany can try to stop the ECB from doing one of the minor things it's doing to save Europe from ongoing economic disaster, while everyone else is powerless to affect central bank policy in ways that save themselves.

There's been a lot of talk of kicking Greece out of the Euro. Maybe it'd be better if the other countries just kicked Germany out. 


Greg Hao said...

There is no such thing as "insulated" from politics when it comes to anything related to the Euro, including the ECB.

Under Trichet (the previous ECB President), ECB was a primary proponent of austerity which pushed Greece to the edge of collapse.

Neil Sinhababu said...

That's exactly the sense in which the ECB is insulated from politics. There is, as far as I can tell, no way for Greek, Portuguese, or Spanish voters to vote for a new ECB. They're just a bunch of unelected bureaucrats who do whatever they want.

Except, now, if a German court shows up and says they can't. WTF?

Anonymous said...

"That's exactly the sense in which the ECB is insulated from politics. There is, as far as I can tell, no way for Greek, Portuguese, or Spanish voters to vote for a new ECB. They're just a bunch of unelected bureaucrats who do whatever they want."

They're insulated from political pressures by design - apparently independent central banks seemed like a good idea at the time.

But they are ultimately chosen by the EU Heads of State, so if the Eurozone voters wanted to roll their Central Bank and force them to adopt Abenomics they could, only not very fast. Basically it would be a question of electing a majority of Abenomics-friendly governments, then replacing the ECB board one at a time. There are eight of them, and one comes up every year.

On the German court thing, technically what they get to decide is whether Germany is allowed to still be in the Euro when it starts doing things like this. In theory Germany could leave and the rest of the Euro-zone could carry on Euro-zoning. Other countries could also leave the Euro if their parliaments or courts demanded it. (The slightly murky thing about this is that it doesn't seem to have occurred to anyone writing the treaties that someone might want to leave, so it's not obvious what the procedure is, but they'd figure something out.)

Neil Sinhababu said...

Thanks for filling me in on the procedures, edmund. Basically what we're seeing there is that it'd take at least a decade to replace the ECB board by a bottom-up electoral process, which is not an appropriate time frame for macroeconomic stabilization policy.

Anonymous said...

Well sure, it would take too long, although the process looks fairly similar to most other countries with independent central banks. Governments can't just force them to print money overnight - that's the whole point of setting them up that way. Abe just happened to be lucky that he came into office just as the BOJ governor's term in office expired; if the election had been six months later he'd have had to wait five years until he could appoint someone he could push around, which would be a problem as a typical term in office for a Japanese PM lasts a little over 25 minutes.

But the bigger problem in Europe is that the voters are broadly in favour of austerity.

This is something English-speaking commentators tend to miss because the dominant news narrative in the US and UK is that Europe is socialist and liberal, and it confuses the story-line to talk about the actual governments they keep electing. But the reality is that the reason Europe has been getting conservative economic policies is that it's been voting for conservatives for the last 10 years.

Greg Hao said...

No answers here but you, Neil, might be interested in this OpEd posted on Economist's Free Exchange:

First, the court has no jurisdiction over the ECB, which is an EU institution subject to the European Court of Justice. The court can only judge whether the ECB has usurped powers which Germany never ceded to the bank. But the German parliament, which is the body which actually ceded the power to run monetary policy to the ECB, has brought no complaint against the OMT to the court and seems to back the ECB with a considerable majority.