Government bond negotiations: the ghosts i called

The German Constitutional Court is once again hearing cases against the European Central Bank. At stake is the control of a powerful institution.

Still looking down on us: nominated ECB President Christine Lagarde Photo: ap

The newly elected Molvanian President Claus von Wagner actually wanted to do good for his subjects, to invest in education and social welfare. But the man’s hands are tied: An arrogant representative of the European Central Bank puts his feet on the table in Wagner’s office and declares that Molwania must cut spending for the good of the financial markets. Otherwise, there would soon be no more banknotes coming out of the machines in his country.

Democratic governments no longer have anything to say; Europe is dominated by its uncontrolled and uncontrollable central bank, the ECB. At least that was the message of an episode of the ZDF satirical show "Die Anstalt" in May. On Tuesday and Wednesday of this week, there will finally be a sequel, not on ZDF, but at the Federal Constitutional Court.

The official title of the event in Karlsruhe is somewhat more brittle: it is about the European Central Bank’s Public Sector Asset Purchase Program (PSPP) for the purchase of public sector securities. In media reports, the program is often translated as "money glut." The ECB bought €2.2 trillion worth of eurozone sovereign debt through the program. Add to that another 400 billion for other programs with which the ECB purchased debt from large companies, for example. Together, the sum is equivalent to eight times the federal budget for one year.

But regardless of whether it is a constitutional court or satire, the core of both programs is negotiating what the European Central Bank is allowed to do and who controls its enormous power. Lawsuits against the program have been filed, for example, by CSU politician Peter Gauweiler or AfD founder Bernd Lucke, who now has his own party (Liberal-Conservative Reformers). They regularly file lawsuits against the ECB’s policies.

The program

From March 2015 to December 2018, the ECB bought corporate and sovereign debt instruments and other assets for a total of 2.6 trillion euros. This was officially intended to raise inflation to 2 percent. According to the ECB, the margin is considered favorable for the economy.

The criticism

Moderate inflation ensures that money is invested because otherwise it loses value. So far, however, the ECB’s trillion-euro programs have not led to inflation rising. This depends on numerous other factors, such as wages. Critics therefore believe that the ECB actually wants to finance states indirectly.

The future

ECB chief Mario Draghi indicated last week that the fight against excessively low inflation will be stepped up. Observers therefore expect that the European Central Bank could resume or expand its purchase program in view of the increasingly weaker economy. (ia)

Germans in particular have a huge problem with the ECB’s measures. The Germans in particular have a huge problem with the ECB’s measures. In addition to Bundesbank President Jens Weidmann, the German government (behind closed doors), and some of the economic research institutes such as the ifo in Munich, the German Constitutional Court has also criticized the central bank: with the above-mentioned PSPP, the ECB could covertly finance states and conduct economic policy, both of which the central bank is actually prohibited from doing. The Federal Constitutional Court came to this conclusion back in 2017 and referred the case to the European Court of Justice. The Court contradicted the Karlsruhe colleagues in 2018, saying that the ECB was concerned with monetary policy objectives. Now the Federal Constitutional Court must hear the case again.

It is not without irony that the Germans, of all people, have such a problem with the ECB. The European Central Bank is located in Frankfurt for a reason: In 1993, the EU member states, under German pressure, created the ECB in the Maastricht Treaty, largely along the lines of the German Bundesbank: in other words, it is independent of politics to the maximum, committed solely to the stability of the new currency in order to prevent an inflation crisis like that of the Weimar Republic. The ECB is therefore explicitly not allowed to finance states. Otherwise, Paris or Rome could come along and finance their latest election promises (more schools, higher pensions, heavier tanks) not with taxes or debt, but with freshly printed banknotes.

2008 financial crisis as an epochal turning point

What no one in Germany expected was that the ECB would really take its independence seriously – and pursue a monetary policy that its creators rejected. The financial crisis of 2008 played an epochal turning point in this. To stimulate the economy, central banks around the world cut interest rates to zero, and borrowing money was cheaper than ever. Because that didn’t work, they switched to buying government bonds. The ECB does not buy them directly from the states, it is not allowed to do that. It buys them from the secondary market: Max Mustermann lends money to Germany. At some point, he thinks there are more sensible investments and sells the debt instrument on the open market, where the Bundesbank strikes on behalf of the ECB. Max Mustermann has money again, invests in a chewing gum factory and thus boosts the economy. That is the theory. Is the Bundesbank illegally financing Germany with it? That’s what it’s all about, in part. In its broadcast, "Die Anstalt" criticized another practice of the ECB, namely that it made the purchase of government bonds from countries like Ireland, Spain and Italy dependent on certain economic reforms in 2011 in letters that were secret at the time.

Then as now, the ECB’s monetary policy has serious effects on everything, but no one democratically legitimizes them. A current example: of all things, a panel of experts led by Mario Draghi, still head of the ECB, warned on Wednesday that a real estate bubble is forming in Europe. What the European Systemic Risk Board (ESRB) euphemistically describes as "signs of overvaluation" of residential real estate is, in everyday life, what many people personally experience. The large amount of money that the central bank puts into circulation must somehow be invested profitably. Because it no longer pays interest to simply lend money to states, other investments have to be made: money flows into the stock markets and pumps up prices, investors buy real estate like crazy. As a result, rents are exploding; anyone who wants to buy a condominium on a normal salary will hardly be able to pay it off during their lifetime. At the same time, there is hardly any interest left for small savers; those who understandably do not want to invest their savings for old age in the stock market for fear of the next financial bang are paying for this policy.

Voters are furious with their governments, but they can do very little about it: they have zero influence on the European Central Bank. Well, that’s not quite true: they decide on the post of central bank head, but once he or she is enthroned in Frankfurt, they no longer have any influence. And that’s where the euro states have just chosen Christine Lagarde, whom all observers so far believe will continue Draghi’s policy.

The only institution that can actually exert direct influence on the ECB is the European Court of Justice. So far, however, it has approved the central bank’s purchase programs except for a few details. It is unlikely that the Federal Constitutional Court will contradict this and seek an open confrontation with its EU colleagues: the EU would then have a conflict of jurisdiction between its most important courts with an uncertain outcome.

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