Europe’s economic future in German judges’ hands

The European Central Bank’s emergency actions face a test Tuesday at the Constitutional Court in Karlsruhe.

Europe’s economic future in German judges’ hands

The European Union has struggled to craft a united response to the COVID-19 pandemic, but at least it has so far had a central bank acting to prop up the economy with unprecedented levels of support.

That advantage may go up in smoke on Tuesday.

That’s the day when Germany’s top court, in Karlsruhe, issues its final ruling on a lawsuit brought against the European Central Bank’s bond purchases, also known as “quantitative easing.”

If the German Constitutional Court sides with the plaintiffs, it could stop the Deutsche Bundesbank from executing the policy which is the ECB’s first line of defense against the pandemic.

Although the suit challenges past ECB actions, it could have a knock-on effect against President Christine Lagarde’s new bond-buying program, which aims to defeat speculation in the market that the health emergency will cascade into a new government-debt or banking crisis.

“There is still a high likelihood that Karlsruhe will again grudgingly follow Luxembourg as provided for in the treaty” — Lucas Guttenberg, economist with the Jacques Delors Institut

A court order for the German central bank not to take part in asset purchases could explode the credibility of Europe’s crisis response. It would mean that “mayhem of a previously unseen scale will descend on Europe and the world,” Erik Nielsen, chief economist at UniCredit, said in a preview on Sunday.

Eurozone sovereign yield spreads, the barometer of fear about the euro’s long-term viability, have already risen in recent weeks, meaning investors see a bigger gap between the risk levels of Germany and, say, Italy. That reflects doubt in the market that the Union’s poorer members can afford the massive increase in government debt that will be needed to cover budget deficits — and, possibly, bank capital shortfalls — that will almost inevitably follow the worst recession in nearly 90 years.

Those afraid of the financial apocalypse can take comfort in the fact that Germany’s top court has already passed up plenty of previous opportunities to challenge the ECB, even as Frankfurt has embraced ever more radical policies to keep a disparate currency union together.

In this case, as in a previous one on Mario Draghi’s plan for “Outright Monetary Transactions,” it has deferred to the EU’s Court of Justice, rather than provoke a full-blown financial crisis that would simultaneously threaten the Federal Republic’s single most important foreign policy goal: keeping the EU together.

The Luxembourg court decided in December 2018 that the ECB’s QE program, as designed, was indeed an instrument of monetary policy, and thus covered by the EU treaty’s provisions for the central bank to do its job independently.

‘Nonzero’ risk

“There is still a high likelihood that Karlsruhe will again grudgingly follow Luxembourg as provided for in the treaty,” said Lucas Guttenberg, an economist with the Jacques Delors Institut in Berlin, albeit with the caveat of a “nonzero probability that this time is different.”

Perhaps the biggest risk comes from how much the world has changed since 2018. The European court had based its ruling, in part, on the ECB’s own self-imposed limits on how much of whose debt it could buy through QE. However, with the pandemic threatening to expose the euro’s fault lines in March, the ECB abandoned the limits when it set up its new €750 billion Pandemic Emergency Purchase Program. The PEPP is set up to be able to buy extra debt from Italy or wherever else may be needed to shore up a weak spot in the defense.

“To the extent that some self-imposed limits might hamper action that the ECB is required to take in order to fulfill its mandate, the Governing Council will consider revising them to the extent necessary to make its action proportionate to the risks that we face,” the institution said on announcing the new program.

The limits had been adopted to ward off mainly German criticism that the policy masked large-scale transfers of risk to Germany from countries such as Italy and Portugal. The critics — repeatedly, if obliquely, supported by Bundesbank President Jens Weidmann — argued that such risk transfers effectively put it in the realm of fiscal policy, outside the ECB’s legal remit.

To head off such criticism, the ECB had initially only undertaken to buy debt proportionally to its “capital key,” which reflects the size of population and economic power behind each national central bank in the Eurosystem. It also promised not to hold more than one-third of any issuer’s debt.

Writing last month, Goldman Sachs’ Alain Durré argued that the EU court’s ruling still has enough wiggle room to allow the new parameters.

By Tuesday evening, it could be a problem far, far beyond Frankfurt.

However, the German court had already voiced doubt about QE’s legality before kicking the case to Luxembourg, and its doubts will hardly have been assuaged by March’s decisions. Nor will it be blind to how Mario Draghi reactivated QE last year, over the heads of a solid bloc of Northern European countries that shared Weidmann’s concerns.

Another factor of possible significance is that the court’s president, Andreas Vosskuhle, is due to step down on Wednesday.

“He might try to take a stand,” said Rafael Mentges, a professor at the Autonomous University of Barcelona, in a Twitter thread on Sunday. “Given his rather conservative views about monetary financing and the competences of the ECB this could become a problem for the ECB.”

By Tuesday evening, it could be a problem far, far beyond Frankfurt.

This article is part of POLITICO’s premium policy service: Pro Financial Services. From the eurozone, banking union, CMU, and more, our specialized journalists keep you on top of the topics driving the Financial Services policy agenda. Email for a complimentary trial.

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UK launches large-scale coronavirus app test

New technology always comes with headaches — and the coronavirus-tracking app is no different.

UK launches large-scale coronavirus app test

LONDON — Residents of a small U.K. island are being urged to download a coronavirus-tracking app to “protect the NHS and save lives.”

Health Secretary Matt Hancock confirmed Britain will begin rolling out one of the largest coronavirus-tracking app trials in Europe on the Isle of Wight — an island of 140,000 inhabitants off the south coast of England — from Tuesday. It will be available to health care workers first, then will be rolled out to all residents by the end of the week.

“Pease download the app to protect the NHS and saves lives,” Hancock said at the daily Downing Street press conference on Monday afternoon, in a direct appeal to Isle of Wight residents. “By downloading the app you are protecting your own health, the health of your loved ones and the health of your community.”

He added that residents on the Isle of Wight are “at the forefront of helping Britain get back on her feet. Where the Isle of Wight goes, Britain follows.” But he insisted the island will not see its lockdown lifted earlier if the app does indeed prove successful as part of the so-called “test, track and trace” approach.

The app will work by asking people to log their health status after registering the first half of their postcode. If they develop coronavirus symptoms, they can use the app to alert the NHS and at that point upload the data to a central server. People they have been in contact with will receive an alert and will be able to order a test through the software.

Hancock rejected criticism that the technology presented privacy risks for users.

Those who test positive for coronavirus will be asked to self-isolate, and their app will trigger alerts for people they have been in contact with. An army of human contact tracers will also help hunt down anyone they might have infected over the previous few days.

The app will use a version of Bluetooth wireless technology to sense when one phone comes within the necessary proximity of another for potential infection, and will trigger alerts accordingly.

All the data will be fed back to the government (with devices identified through anonymous and randomly-generated numbers) giving a realtime picture of where the virus is spreading and which kinds of symptoms should trigger early action.

Hancock rejected criticism that the technology presented privacy risks for users. “The app has been designed with privacy and security front of mind … This has the highest level of privacy built in both to make sure we can reassure people in terms of privacy but also so that it can be effective and save lives,” he said.

Data remember

But privacy concerns when it comes to new technology can rarely be brushed off easily — and the coronavirus-tracking app is no different.

The official tasked with rolling it out revealed that the team building the app, NHSX, is open to a fundamental overhaul of how it works, after privacy campaigners raised concerns.

Britain has taken a “centralized” approach to the app, meaning the data, although anonymized, will be uploaded to a central government database. The alternative approach, which is known as “decentralized” and has the backing of tech giants Apple and Google, means data is kept across the country on the mobile phones in the network. The choice between the two has plagued development of similar apps across Europe.

At a virtual hearing of the joint committee on human rights on Monday, Michael Veale, a lecturer in digital rights and regulation, said a central server could allow individual devices to be identified. He added that future versions of the system could demand more data from users, allowing the government to build risk profiles and act on them preemptively.

But Matthew Gould, the official heading up the NHSX project, told the same committee, “We are not irredeemably wedded to one approach.” He added, “If we need to shift then we will … We won’t lock ourselves in.”

But Gould defended the U.K. decision. He said having a central database would allow the government to learn more about the virus, including which symptoms should warrant action and what kinds of contact between people are more risky. It will also allow the government to identify areas of the country that are becoming virus hotspots.

“If privacy was the only thing we were optimizing for, then it may well be that a decentralized approach would be the default choice. But actually we are balancing a number of things here,” he said.

Various apps have launched since the coronavirus pandemic began, aiming to help users track symptoms | Leon Neal/Getty Images

And in a candid moment, he added, “We don’t yet know exactly how it will work … There will be unintended consequences. There will for sure be some things that we have to evolve.”

Gould insisted the system will not contain identifiable data, and that a centralized approach will allow the government to see if a hacker is trying to use the app for malign purposes. “We have put privacy right at the heart of the app and the way it works,” he insisted.

But in a legal opinion published on Sunday, lawyers Matthew Ryder, Edward Craven and Ravi Naik argued the centralized approach requires a better justification to prove it does not contravene human rights and data protection laws.

Computer could say no

Gould did admit that international collaboration to manage travel once the coronavirus crisis dies down could be hampered if different countries are using different systems.

“We are worried about interoperability,” he told the committee. Asked whether there could be travel issues between Northern Ireland and Ireland, which has taken a decentralized approach to its own app, he added, “It raises a further question of interoperability that we will have to work through.”

Another concern is that the app will not be downloaded and used by enough people to be useful. Experts have suggested around 60 to 80 percent of a population would have to engage with it for it to work effectively as part of a “test, track and trace” approach.

Matthew Gould, the official heading up the NHSX project, said that the app will not be a “silver bullet” for the coronavirus crisis.

The U.K. app will work on a voluntary basis. Other countries that have taken a voluntary approach, such as New Zealand, have seen takeup of around 20 percent.

But Gould said there was no “minimum percentage” for the U.K. to be satisfied. He said even if 20 percent of the population downloads the app it will still offer insights into the virus, and from 40 percent takeup upward it can begin to make a big difference to the track-and-trace system.

He added that the app will not be a “silver bullet” for the coronavirus crisis. “It’s part of a wider strategy of test and trace,” Gould insisted. “We are trying very hard to do the right thing in the right way.”

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