The German highest court last week declared that there were “important reasons” to rule against the European Central Bank’s promise to buy unlimited government bonds in order to save the euro.
This means that the actions of the ECB in this regard may be unconstitutional. This may sound as if it is the beginning of the end for the euro, or may even sound as the mortal blow for the currency that is common to several members of the EU, including Malta. Hence the question posed in the title of this week’s contribution.
The purchase of sovereign bonds by the ECB has helped the governments of the affected countries to raise the funds they needed to continue to operate.
The liquidity that was provided by the ECB could not be provided by the private investors and has also contributed significantly to reducing the borrowing costs of the respective governments.
Thus, if the largest economy in the eurozone were to decide to use its weight so that the ECB desists from taking part in these operations, some countries may have to exit the euro and kill any idea of monetary union.
There are those analysts who believe that this decision by the German courts will actually end up strengthening the euro.
If Germany were to decide to use its weight so that the ECB desists from taking part in these operations, some countries may have to exit the euro and kill any idea of monetary union
This is because the next step is for the matter to be referred to the European Court of Justice, which is very unlikely to rule against the ECB. If the ECJ rules in favour of the ECB, the actions of the ECB will also have the seal of approval of the ECJ (in addition to the seal of approval of the European political class), which will, as a consequence, increase the space for manoeuvre for the ECB itself.
It needs to be remembered that the action against the ECB in the German courts was initiated by the Bundesbank (the German Central Bank) which has always taken a very hard stand against bailing out countries that have found themselves in difficulty.
On the other hand, it also needs to be remembered that some countries have found themselves in difficulty because of the political decisions that were taken and which were (up to a certain extent) imposed on the weaker countries.
So the German government will find it difficult to simply wash its hands off this matter.
In fact, German Finance Minister Wolfgang Schaeuble has been quick to point out that curbing the ECB’s powers to do “whatever it takes” to save the eurozone will not harm the single currency.
He even went as far as claiming that “the return of financial market confidence in the stability of the euro has been due not only, not even primarily, to the ECB’s (unlimited bond buying) announcement”.
The reason for this is that the ECB statement made in 2012 that it was prepared to make the potentially unlimited sovereign bond purchases to defend the single currency has never been acted on. It did, however, manage to calm down the financial markets.
In the same statement, Schaeuble also disagreed with the International Monetary Fund that the latest inflation figures (0.7 per cent) represented any cause of concern. The fear expressed by the IMF and other analysts is that this could lead to a deflationary spiral if consumers believe that inflation could go down even further.
If deflation really sets in, that would also put the euro under threat, and a negative ruling by the ECJ, would practically disable the ECB. With little scope for an expansionary fiscal policy, governments will be at a loss as to how to address such a situation.
This means that governments in the eurozone could well end up in a catch 22 situation.
This does imply that at best there are doubts about the euro’s credibility while, at worst, the euro is under threat, thereby raising even more the fear of a deflationary spiral. The solution will therefore need to be a political one, whereby the ECJ rules in favour of the ECB.
Even with such a decision, the worst of the storm will not be over yet. The ECB and governments still need to convince commercial banks to increase their lending to the private sector. However, this is another story.