The European Union faces a number of existential treats in the wake of Britain quitting the Union, but perhaps none greater than what happened this month in Germany, where earlier this month the Federal Constitutional Court ruled that the bond buying programme of the European Central Bank’s (ECB) was illegal, or to be more precise, that the European Court of Justice’s (ECJ) approval of the programme was “incomprehensive” and “meaningless”. In order to enable the EU’s economic basket case member states to raise funds needed to cover costs incurred because of the lockdown the ECB, backed by the European Commission, the ruling bureaucracy of the EU had undertaken to buy the bonds issued by nations like Italy, Spain, Portugal and Greece and most of the EU’s former Soviet bloc members, which were so broke their debt had been downgraded to junk bond status long before the lockdown began.
The effect of Germany’s Constitutional Court judgment is both a challenge to the higher authority claimed by the ECJ to the independent right of the ECB to set monetary policy, two fundamental pillars of the EU constitution. Some commentators have described it as a cruise missile aimed straight to the heart of the European Union. It Germany, long supposed to be the most committed of EU membrs to European Unity, now set to blast any pretence of unity to kingdom come in order to protect its own economy?
In explaining the ruling, one of the justified and ancient* gnomes who sits on the Panel of Justices who make up the BVerfG, to give the Federal Constitutional Court its German acronym, suggested that he was fed up concerning himself with minority human rights issues and was instead siding with the “silent middle” in defending savers and pensioners from those who would destroy their hard earned wealth.
Whether in agreement with this economic nationalism mindset or not, this is probably not the best time to decide to blast the foundations from under the EU.
It is also a reminder of the way in which Germany, the European Union’s dominant economic power since the days when the EU was the pain old Common Market, has come to regard the Union as a vehicle for moving forward its own economic and political interests, bending the rules whenever they obstruct German schemes but ruthlessly imposing its will on others when they get in its way.
The Constitutional Court is not the German government, it is rumoured that Chancellor Merkel and others across the political spectrum regard the court’s casual dismissiveness of the European Commissions call for unity in the face of the Coronavirus crisis with the same horror as many other EU member states. But Hausfrau — Volksfuhrer Merkel is a lame duck leader, her ruling coalition has no majority in the Bundestag and could collapse at any time.
The episode serves to highlight the inescapable fault lines of the Continent’s aspiring United States of Europe but with France in almost as much shtuck as Italy and Spain and the only other solvent economies besides Germany being relatively small, which way will Europe turn next?
Laying aside the Constitutional Court’s the point of principle here, which is whether it is Germany’s national court, or the European Court of Justice, that rules supreme in German law, the real issue in this confrontation which could spell the end of the European Monetary Union, the single currency and the EU itself is whether there should be free market in the money sector (i.e. absence of state privileges) or not; and whether state privileges are compatible with the rule of EU law.
“The same monetary therapy is being applied in the United States, Japan, China, and everywhere else with its own sovereign central bank” This “monetary therapy” (artificial expansion of money and credit) is the one that, by distorting prices (and. above all the most important price of all: the price of time preferences), creates artificial, unsustainable growth followed by a harsh recession.”
To American economists, the defining event of the last one hundred years was the Great Depression. Thus their biggest fear is the mass unemployment that changed American society. But for Germans the defining experience was the hyperinflation during the era of The Weimar Republic in the years following World War One.
To be fair to the Weimar politicians, these devaluation of German currency and destruction of destruction of middle class savings and asset values was in a large part due to the punitive reparations imposed on post war Germany by France, Britain and the USA. It was impossible for the Germany economy, damaged even more by the effects of war than those of France and Britain, to meet the enormous sums due to the victors in any other way that by borrowing heavily (i.e. selling treasury bonds, which is the way governments usually borrow.) But the value of those bonds has to be underwritten by something. Traditionally it was by gold but now it is based on an estimation of the value of a nations assets. An as the value is supposedly fixed, the more currency that is issued, the less each until of currency is worth (this is a brief summary of course, in reality the system is complex and convoluted.)
Hyperinflation occurs when banks lose confidence in a currency and a nation can only sell its bonds at prices far below the nominal value, for example if a $1000 bond would only command as price of $950.The German government of the Weimar republic, unable to meet the reparations payments imposed on it, or even to service the interest on its debts, restored to selling more and more bonds, thus increasing the amount of currency in circulation exponentially. During the collapse of Weimar, a loaf of bread would cost a billion Marks and when people talked of having to take their wages home in a wheelbarrow they were not joking. The eventual consequence of that was the rise of the National Socialist (Nazi) movement
It is no wonder then that Germans are wary of inflation considering what past episodes of it have visited on them. They have a consequent, almost pathological, aversion to debt funded government spending. Both America’s Great Depression and Germany’s hyperinflation were the result of artificial expansion of money and credit, the twin therapies being suggested for repairing the economic damage of the coronvirus lockdown.
In order to understand the consequences of the expansion of money and credit (and why this is never a cure, but always only a drug), one should read Ludwig von Mises (“Human Action”), Murray Rothbard (“America’s Great Depression”), Jesus Huerta de Soto (“Money, Bank Credit and Economic Cycles”).
With this in mind it the German aversion to debt is understabable, as is the unwillingness of German taxpayers to continue funding the Union’s economic failed states and the EU’s enormous aid budget which pumps money into Africa and other economic black holes, while Germany itself slips closer to recession. Given the precariousness of Merkel’s government, the lack of a natural successor, and the indications that such a vote would usher in a right wing, Eurosceptic government, a General Election is the last thing the EU wants.
Footnote: *Justified and ancient may sound portentous but to the best of my knowledge is the title of a song by Britpop band KLF featuring vocals from Tammy Winette. I like to throw these thongs in to remind readers that when I’m writing on serious topics I’m always aware of the absurdity of everything.