Covid, as described in the last post, has threatened the European Union (EU) by exacerbating an already severe north-south divide. Nor is this matter the only crack in union solidarity. A fight is brewing between Germany on the one hand and the EU Commission on the other over the behavior of the European Central Bank (ECB). Worse it revolves on the sort of sovereignty issues that prompted Britain to exit the union. A breakup is far from immanent, but the dispute adds yet another threat to Europe’s entire super-national experiment.
Problems began with the ECB’s immediate response to this year’s pandemic. Recognizing that the lockdowns and quarantines instituted to fight the virus would hurt economic activity, monetary policy makers under the bank’s new president, Christine Lagarde, moved quickly to ensure that markets and businesses had sufficient financial liquidity to cope with the strains. Since interest rates were already low, the ECB reconstituted the “quantitative easing” measures it had previously put in place to help eurozone economies recover from the 2008-09 financial crisis. Under such practices, the bank has entered financial markets to buy bonds and notes directly. Lagarde and others at the bank admit that the policy is no panacea but insisted that that its provision of liquidity along with fiscal relief from member governments could mitigate the strains of the seemingly unavoidable lockdowns and quarantines. Now the German courts have challenged the practice.
Even back in 2015, when the ECB first used such policies to help the recovery from the financial crisis, the German Constitutional Court (GCC) had its doubts about the legality of such purchases under German law. It began deliberating and asked the European Court of Justice to offer an opinion. After the European Court declared “quantitative easing” entirely acceptable, the German court nonetheless kept it under consideration. This past May, the GCC declared the practice contrary to the German constitution. The court’s objection hinges on a question of proportionality. It wants the ECB to demonstrate how the benefits of the asset purchases outweigh the negative effects on certain groups, including German savers. Until the ECB makes assurances to the court’s satisfaction, it has ordered Germany’s central bank, the Bundesbank, to cease cooperating with the ECB.
This seemingly arcane legal matter has the power to threaten EU stability on the most fundamental level. On one side is Europe’s most powerful economy and arguably its most important member. On the other side is the ECB, surely the union’s most active and widely recognized institution. If this were not serious enough, the European Commission has raised tensions still more by threatened legal action against the German court for defying the decision of the European Court of Justice. Should the Commission take such action, it will have elevated this already difficult dispute to a question of sovereignty, the very matter that prompted Britain to vote for exit four years ago.
Chances are that the parties involved will find some way to gloss over their differences. As with similar matters in the past – with the notable exception of Brexit – all the leaders involved have enough political capital at stake to strive for a union-saving outcome. But there is no getting away from the fact that this matter, especially alongside the north-south divide, threatens the European Union. And since the political, economic, and financial stability of the rest of the western world remains vulnerable to a European breakup, these problems threaten the global economy as well.
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Source: Forbes – Money