A Bloodless German Duel Over the ECB
Reading the newspaper headlines in Berlin this morning, there are two conclusions to draw.
The first is that Germany's constitutional court in Karlsruhe will this week determine the fate of the euro. The second, only slightly less spectacular conclusion, is that this court case amounts to a duel to the death between the two main German central bankers: Bundesbank President Jens Weidmann and Joerg Asmussen, a member of the European Central Bank's executive board. I doubt both narratives.
The German constitutional court is meeting on June 11 and 12 to determine the legality of the ECB bond-buying program called outright monetary transactions. It makes sense that Germans will be waiting on tenterhooks for the ruling. German elections are coming and in Karlsruhe the entire European policy response to the euro-area crisis over the past year -- supported by the incumbent chancellor, Angela Merkel -- is in the docks.
What makes this a little less exciting is that the constitutional court is unlikely to rule before the election, which is in September. Furthermore, the ECB is an independent institution and doesn't fall under the jurisdiction of any country's constitutional court. The only way that a ruling on the ECB could be binding is if the judges in Karlsruhe were to send the case up to the European Court of Justice. Germany's constitutional court has ruled in favor of further European integration in the past, so it seems unlikely to escalate the case.
There's certainly some drama in the idea of a courtroom confrontation between two high-profile German central bankers. In one corner, we have Weidmann, who says the ECB overstepped its narrow mandate of maintaining price stability when it devised the bond-purchasing program last August. In the other corner is Asmussen, who says the program falls within the ECB’s mandate, because it addresses the breakdown of the euro area's monetary-policy transmission mechanism.
The debate probably won't be very technical. The ECB's bond-purchasing program has yet to be invoked and the bank has given very few details of how it will work if it is ever needed. This vagueness was an essential part of the program's success in bringing down sovereign-bond yields for weaker economies, from the unsustainable peaks they reached last summer.
Much of Weidmann and Asmussen’s back-and-forth will therefore be based on their opposing theories of monetary policy, which are rather blunt weapons for a duel and unlikely to wound either man fatally. Furthermore, Weidmann and Asmussen go way back; they studied together at the University of Bonn, both under Axel Weber, a former Bundesbank president. Both men are young, ambitious and deeply ensconced in the German political scene, meaning that they will have to work together for decades. They are likely to handle their disagreements with care.
Anyone looking for an immediate, decisive ruling or a bruising fight between the German central bankers in Karlsruhe will probably be disappointed. The most likely outcome is that the German constitutional court eventually delivers another “yes, but…” ruling, approving of the ECB's program but demanding some conditions that will technically limit Germany’s financial exposure.
The court might demand that conditions for the bond-buying program's use are fleshed out, to ensure that Germany is not indirectly forced to buy weaker countries’ sovereign debt, without any way to get out of it. Given that investors already assume that Germany’s exposure is somewhat limited, due to the ECB's pledge of strict conditionality for any bond purchases, such a ruling probably wouldn't be fatal to the program, either.
(Megan Greene is a Bloomberg View columnist and chief economist at the consulting firm Maverick Intelligence. Follow her on Twitter.)