Le blog du CEPII

The French should care about Karlsruhe

Strikingly, the debate about the Feb 7 ruling of the German Constitutional Court against the ECB’s flagship OMT programme has gone almost unnoticed in France. This is wrong. The French should care about it.
By Natacha Valla
 Post, February 12, 2014

With the crisis, key principles of the ECB’s monetary policy have been put on hold. One of them is the prohibition of monetary financing of governments by the central bank, enshrined in the EU Treaty under Article 123. But back in September 2012, the ECB announced that they could purchase sovereign debt for potentially unlimited amounts in case of need. This was President Draghi’s famous « whatever it takes » magics.

The sentence fulfilled its purpose. Markets gave their plebiscite to the OMT by lowering significantly and durably sovereign risk premia in southern euro area debt markets. But this peaceful interlude might soon come to an end. The Karlsruhe German Federal Constitution Court stated that the ECB had exceeded its mandate with its OMT programme. In parallel, the court referred the case to the European Court of Justice, which some interpreted as a victory for the ECB (claiming that the ECJ would never rule against the ECB). But things might not be that easy.

Irrespective of what the ECJ will say, Karlsruhe’s verdict tells a lot about the future of Monetary Union. Many heterodox decisions were taken in Europe during the crisis thanks to a state of emergency. Even Karlsruhe lifted eyebrows on the ESM without blocking it. But heads are cooler now. Time pressure has vanished. And truths can be told more easily than only a few months ago.

The OMT programme is institutionnally and legally fragile. Karlsruhe’s warning is reasonable. The OMT programme would redistribute wealth in Europe towards countries in difficulty. It would jeopardise equal treatment of member states by the ECB. It would duplicate the ESM without democratic controls, and violate Article 123 of the Treaty.

Of course, if Germany knew that its neighbours Italy or France would never ever need the ECB in their debt markets, they would be more relaxed about the OMT programme. But that is far from being the case. Italy is still stuck with low growth and high public debt. France has sworn that its policies would change (towards less public spending, supply side policies, and structural reforms), but words have not been followed by deeds – as yet. This very likely worries Germany a lot. The Italian and French sovereign debts are gigantic, and it is simply not credible to pledge the open ended ECB balance sheet in these markets.

So it is high time that Italy and France put their acts together, otherwise the OMT may well be at risk. European elections are looming and, with them, the not so unrealistic outcome of a Eurosceptic European Parliament. The euro can survive many things, but not everything.
Economic Policy  | Europe 
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