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FINANCE | 05.20.2020

Challenges beyond “Whatever it takes”

Gonzalo de Cadenas-Santiago

Director of macroeconomic and financial analysis at MAPFRE Economics.

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The recent decision by the German Federal Constitutional Court, which ruled on the legality of the European Central Bank’s Quantitative Easing (QE) program in its purchase of sovereign bonds throughout 2015, raises doubts that go beyond ensuring whether the ECB can maintain its commitment to do “whatever it takes” to maintain the Union’s stability and ensure its proper future development. The challenge posed by the German Federal Constitutional Court could have implications for the very nature of the Union itself.

Firstly, timing is particularly inconvenient as it will draw a great deal of attention from the ECB, which the only institution capable of providing the financial resources necessary to combat the crisis and to outline the longer-term future with the European Recovery Fund.

Secondly, the ruling may limit the role of the institution—led by Christine Lagarde—in purchasing bonds as part of its new stimulus program (“Pandemic Emergency Purchase Programme” (PEPP)), given that new court cases are likely to be filed to challenge it on the grounds that it may involve covert funding from some member states, which would reignite doubts about fiscal sustainability.

Furthermore, although the decision only requires the ECB to justify its current monetary decision and does not imply a policy change in general, the constitutional implications may be even more significant than the financial implications, which could, in the medium-term, weaken the legitimacy of the Union per se.

Although the German Federal Constitutional Court did not question the supremacy of EU legislation over national legislation or even the capacity of the Court of Justice of the European Union (CJEU) to be the ultimate arbiter of EU legislation, it did question whether the CJEU had exceeded its competences. This has emboldened several euroskeptic governments, such as Poland and Hungary, which have repeatedly invoked national sovereignty to question the jurisdiction of the European court.

Both countries have faced infringement proceedings before the CJEU initiated by the European Commission for failing to implement EU legislation on the independence of the judiciary and the media. In other words, the ruling could encourage other countries to follow Germany’s example and challenge the European Court of Justice’s precedence over decisions of national courts, which could inflict a profound change in the nature of the Union, which is, after all, a construction based on the “rule of law.”