Robert HARNEIS -TDO- (FRANCE)- The German court decision threatens to undermine confidence in the Euro and kills off any hope of mutualized Eurobonds or joint member state debt issuance.

The German Constitutional Tribunal has put the European Central Bank (ECB) and the European Court of Justice 5ECJ) on notice that it will no longer tolerate breaches of the European treaties. At issue is the conduct of the ECB in helping financially weaker member states fund their debt.

The judgement of the Court reflects growing concern in German political circles that the ECB is prepared to break the treaties and favor those nations that need financial help at the expense of those that do not, notably, but not only, Germany.

The court said the German Bundesbank may continue to buy bonds during a three-month transition but must then cease any further role in the “implementation and execution” of the offending measures, until the ECB has justified its actions and met the court’s objections. It also said the Bundesbank must clarify how it is going to sell the bonds it has already purchased.

The German constitutional court ruled that the ECB had exceeded its legal mandate and “manifestly” breached the principle of proportionality with mass bond purchases, now topping €2.2 trillion and set to rise dramatically. The bank had strayed from the monetary realm into broad economic policy-making for which it has no mandate under the Treaties.

The judgement was clearly coordinated with the Bundesbank and did nothing immediate to stop the ECB’s activities. However what is unprecedented was the clear assertion that the German Court would decide whether the German Central Bank is legally permitted to take part in any future debt purchasing actions undertaken by the ECB and not the European Court.

In startling language in a long and carefully worded judgement, the court set out that it would not take account of a ruling by the ECJ of 11 December 2018 that the ECB’s activities were lawful because its interpretation of the treaties was not “comprehensible therefore becomes arbitrary”.

The court set out what is in effect a reminder of the doctrine of “ultra vires” stating that ‘the constitutional institutions, the authorities and courts cannot take part in putting into effect, carrying out, or operation of actions beyond their powers.’ It added significantly ‘in principle that applies equally to the Bundesbank.’ What the court is saying in effect is that the ECB cannot unlawfully prop up the finances of individual member states but if they do the Bundesbank is not going to be allowed to take part in such illegal activities. Germany is the ECB’s biggest shareholder.

The European Union’s highest court replied in a press release that it alone has legal authority over the European Central Bank (ECB). It rejected the recent ruling in Germany questioning the ECB’s power to print money without members’ consent.

“In order to ensure that EU law is applied uniformly, the Court of Justice (ECJ) alone... has jurisdiction to rule that an act of an EU institution is contrary to EU law,” it said in a statement. “Divergences between courts of the member states as to the validity of such acts would indeed be liable to place in jeopardy the unity of the EU legal order and to detract from legal certainty.”

To add to the worries of the EU bank and court the judges went further and gave the ECB an ultimatum of three months to justify its actions, ordering that otherwise that the Bundesbank would no longer take part in the bond purchasing programme and would be required to sell the bonds it had unlawfully purchased.

The German court further requires the ECB to confirm that it has properly ‘evaluated the impact its government bond purchase programme can have on public debt, savings, pensions, property prices, the survival of businesses that are not economically viable’ noting in passing that ‘private savings have suffered considerable losses.’

The challenge to the ECJ will come as music to the ears of the Polish and Hungarian governments already at loggerheads with the EU over constitutional matters.

Many observers believe that, as in the past, the German court will draw back from effectively causing the break up of the Euro, at least in its present form. In short there will be a legal fudge to enable the ECB to save the Italian economy within the Euro.

However, for those that hope that this is so, the latest Target 2 figures will have come as an unpleasant surprise. Italy has established a new debt record of 513 billion Euros owed to the ECB. This money is totally unsecured and Italy has no apparent legal obligation to repay it they leave the Eurozone. It reflects anecdotal evidence of a further flight of capital from Italy to other EU countries which would fare better in the event of a Euro breakup.

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