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The European Central Bank Goes to Court

June 20, 2013 in Economics

By Dalibor Rohac

Dalibor Rohac

Last week, Germany’s Federal Constitutional Court concluded public hearings in Karlsruhe on the European Central Bank’s (ECB’s) program of bond purchases from shaky eurozone member nations. The court ranks among the most powerful national courts in the world, and historically it has not shied away from controversial decisions — like overturning the decriminalization of abortion in 1975, two years after Roe v. Wade. So a sweeping decision in this case would not be out of character.

It may seem odd that a German court would have jurisdiction over European monetary policy. In fact, the court can rule only on the legality of Germany’s participation in the ECB; but since Germany is easily the eurozone’s biggest cash cow, if it stops shoveling money to the ECB, the ECB will have to curtail its activities drastically.

Will Germany’s high court strike down the EU’s bailout program?”

At issue is a provision in Germany’s constitution, the Grundgesetz, that allows for the transfer of authority over monetary policy from Germany’s Bundesbank to the ECB only if the ECB is bound by the purpose of securing price stability. For understandable reasons, the Germans are historically skittish about inflation.

The hearings took place following a series of complaints that the ECB’s bond-buying program, known as Outright Monetary Transactions (OMT), goes beyond the bank’s narrow official mandate of maintaining price stability, and is therefore illegal under German constitutional law. The fact that OMT exceeds the mandate is not seriously in question: The program was launched in September 2012 by the ECB expressly to provide liquidity for eurozone members in fiscal distress, such as Greece, Portugal, and Italy. Yet the court may well rule nonetheless that it passes constitutional muster.

Legal issues aside, the case raises the question: What should the purpose of monetary policy in the eurozone be? Clearly, in the face of an economic downturn, there is a place for monetary stabilization. In the United States in the early 1930s, according to a classic work by Milton Friedman and Anna Schwartz, the Fed let the money supply collapse, leading to the Great Depression.

It would probably have been a mistake if the ECB had not tried to prevent a collapse in the money supply, which could easily have occurred during Europe’s continuing sovereign-debt crisis. In fact, one could argue that the ECB should have been much more aggressive in preventing the contraction in credit that has …read more

Source: OP-EDS

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