As the euro crisis has rumbled on over the past three years, politicians, analysts and commentators around the world have frequently referred to Germany as the hardline taskmaster of the continent, the nation that insists on financial austerity in the rest of Europe despite the growing human cost of lost jobs and destroyed businesses. But in a courtroom in the provincial town of Karlsruhe this week, a rather different picture has emerged: that of a Germany that is far from being monolithic on the issue, and in fact is itself divided over what the right course of action should be, and whether German taxpayers should end up footing the bailout bill for their neighbors at all.
Intriguingly, given her reputation for inflexibility around Europe, it’s the German government of Chancellor Angela Merkel that turns out to be on the side of the doves in this dispute. It has spoken out unambiguously in favor of pragmatism in dealing with the euro crisis. Even if German cash is involved, is the message, Merkel and her ministers are willing to compromise if that’s what it will take to save the euro.
The hearing took place before the Federal Constitutional Court, the highest in the land. It is considering a suit brought by about 37,000 German citizens who argue that the European Central Bank’s promises to “do whatever it takes” to rescue financially troubled euro-zone nations is in breach of the German constitution. In particular, they are objecting to the idea that the ECB could essentially bail out other European nations by buying up sovereign bonds of struggling euro-zone nations.
The court will deliver its ruling in the fall, probably not before the German parliamentary elections on September 22. It can’t tell the ECB what to do. In the past, it has considered other complaints about European encroachment on German sovereignty, but has so far never struck down EU decisions in a way that could fundamentally disrupt the workings of the single currency. However, in a landmark decision on the Greek bailout in September 2011, it did insist that the German parliament should give its approval in order for financial rescues involving German tax money to go ahead. The most dire outcome for the euro in this case would be a ruling that the ECB’s rescue measures are in breach of the German constitution. While unlikely, it would require a complete rethink of the bank’s mandate and powers.
The hawk in this case is Jens Weidman, the president of the Bundesbank, the German central bank. He was appointed by Merkel, but is now on the opposite side of this argument. Weidmann takes fundamental issue with the decision by the ECB to buy up unlimited amounts of sovereign bonds of nations that are under attack on financial markets, a policy announced last September by ECB president Mario Draghi after a vote of its governing council. Weidmann sits on that council and was the dissenting voice in the decision.
In the Karlsruhe courtroom, he laid out his key reasons. The ECB bailouts would be a threat to the maintenance of price stability that is the core mandate of the central bank, he told the judges. And allowing the ECB to get so involved in the rescue of sovereign states amounts to a blurring of the lines between monetary policy – which is the domain of the ECB – and fiscal policy, which is not. This blurring “would substantially spread the solvency risk among taxpayers in the currency union without removing the causes of the crisis,” he said on June 11. In other words, the Germans would end up paying for the sins of their profligate neighbors without any ability to control the situation.
In fact, so far, the ECB has not actually mounted any bond-purchasing campaigns, known in technical jargon as Outright Monetary Transactions; merely the threat that it might do so calmed financial markets. The court is focusing on the principle, not the practicalities, and Weidmann’s position was backed up by two of Germany’s best-known economists in their testimony on June 12 – Hans-Werner Sinn, the president of the Munich-based IFO institute, and Clemens Fuest, who heads the ZEW center for European economic research in Mannheim. Both argued forcefully that the ECB had no right to get involved in bond-buying rescue operations. In the ensuing discussion with the judges, Weidmann then went further than he had done in his scripted testimony. He said that the monetary policy mandate of the European Central Bank should actually be defined more narrowly, to “limit its room to maneuver.”
The counter blast came quickly – and out of court – from another member of the ECB’s board, Frenchman Benoît Coeuré. As Weidmann was speaking in Karlsruhe, he told a conference in Berlin that the ECB’s independence was under strain and that, “we don’t have to change the mandate, we don’t have to change the objectives.”
The main defense of the ECB in the court hearing fell to a friend and longtime colleague of Weidmann’s, Jörg Asmussen, who is now an executive board member of the central bank. Both men studied at the University of Bonn under the same professor and both served in the German government in senior positions before becoming central bankers; Asmussen worked in the Finance Ministry while Weidmann worked in the chancellery Inevitably, some of the media attention in German and elsewhere has focused on the intellectual jousting between the two men who sat side by side in the courtroom.
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Yet the more striking element in the courtroom drama is the position of Merkel’s government: it is unequivocably backing the ECB against Weidmann and his like-minded partners in this case. (Although, in another indication of how divisive this issue is at the heart of power in Germany, not everyone in Merkel’s governing coalition is lock-step with the Chancellor; Weidman’s allies in the dispute include a number of conservative politicians from parties that form part of the coalition government. They include Peter Gauweiler, a Bavarian deputy whose spokesman declared at the hearing that, with the ECB decision, “democracy has gone to the dogs.”)
Wolfgang Schäuble, the powerful Finance Minister, was present for the court hearing, and shortly before it began he made a short statement that directly undercut the hawks. “We have no doubt that the ECB in its decisions remains within the limits of its mandate.” Merkel herself wasn’t present at the hearing, but in Berlin she told a meeting of leading German industrialists that she was convinced that the ECB “is doing what is necessary to safeguard monetary stability.” The German government, in other words, has come down clearly on the side of the “yes, let’s rescue them if need be” faction. As Asmussen underlined in his testimony, the ECB will only launch a bond-buying operation if the nation in trouble agrees to implement sweeping economic and financial reforms. And given the apparent success of the program’s announcement in calming the market tempest, it seems justified. “The risks of not acting would have been greater,” he said, underscoring the pragmatic approach that Merkel and her government support.
So where does the German public stand on all of this? The short answer is, on both sides. A Forsa poll for the business daily Handelsblatt shortly before the hearing showed that 48% opposed the ECB’s bond-buying plans, with 31% in favor and a relatively large number, 21%, undecided. The issue being discussed in Karlsruhe is a highly technical one, and for many Germans it boils down to basic notions of whether the euro is a safe currency, or whether they will have to foot a big bill for their neighbors, says Peter Matuschek, head of political research at Forsa. There’s nothing very new in those concerns. But what has changed very substantially over time is the German public’s appreciation of the euro itself, he says. In a Forsa poll dated April 1998, before the euro replaced the German mark and other national currencies, 69% of the German public opposed it and only 27% were in favor. Asked in April 2013, 15 years later, whether they wanted to return to the mark, the figures are exactly inverted: 69% support the euro against 27% who oppose it. In other words, all the Sturm und Drang about European central bank bond-purchasing programs actually masks a bigger reality: the Germans themselves have learned to love the euro, which is why they get so het up at the prospect that it might be in danger.