La German constitutional court recently ruled against the European Court of Justice and this is worth reflecting on.
For the European Court the purchase of national government debt securities on the secondary market does not violate the art. 123 of the Treaty, which prohibits the ECB from financing the States; that yes prohibits the purchase of debt securities, but if direct, i.e. at the time of issue; which therefore allows them to be purchased on the secondary market, which is functional to monetary stability. According to the German Court, the financing effect of the State, produced by the purchase on the market, ceases to be secondary if, due to the size and continuity of the operations, it is consolidated in a manner which circumvents the prohibition of direct financing: the purchase is not proportional to the goal; is in fraud of the art. 123.
From a technical point of view, the argument of the European Court is flawless. The judgment falls on the single operation in dispute; valid if, in terms of the quantities and methods of the purchase, it complies with the conditions that make it an intervention of monetary stability, with precise indications so that the unavoidable financing of the issuing State remains limited with effect indirect. Effect quota since the financing ceases with the resale of the securities in pursuing the primary objective: for the issuer, the precariousness of the financing prevents it from being able to rely on it; therefore the funding is assessed by the Court proportional to the primary goal. The Court's judgment remains circumscribed the validity of the purchase decision which gave rise to the dispute. While the correct execution of the purchase decision falls under the responsibility of the ECB, as well as any deviation from its powers for the repetition of purchases over time. Liability issues that may be raised upon objection of data subjects. The Court may eventually be called to judge on them, but in these cases the conflict would not be on the purchase of the securities, but on the behavior of the Bank, denounced by the interested party as abusive.
It is from this perspective that it should be understood the decision of the German court. If we look with the eye of the politics of the institutions, the ECB has operated from lender of last resort to repair the debt, not only public, which produced the severe depression of 2008; again it is called to intervene in the current crisis due to the pandemic; it will be called upon to support the European debt which has become necessary to subsidize national economies in crisis. Evidence of this is the expansion of the Bank's balance sheet as a result of the protracted interventions physiologically, as is the case with the Fed and central banks in general. According to the German Court, art. 123 prohibits the Bank from operating as lender of last resort.
In comparing the two decisions, beyond the technical ability of the argument of the European Court, the antinomy between the prohibition of art. 123 and the creation of the euro; better, between the configuration of the ECB in the structure of the European institutions and the political will to create the new European currency with the euro: to replace the national currencies with the euro. It may be a stable monetary order without recognizing to the central bank the competence of lender of last resort?
It is the antinomy that we see underlying the decision of the European Court, resolved in favor of the ECB. It is not possible that the European legislator created the euro without the support of the central bank in its lender of last resort competence. Having acknowledged that the creation of the single currency is a fundamental political decision, monetary discipline must be made consistent with it; the interpretation of the individual provisions must be subjected to it, to avoid that the prevalence of the particular provision leads to the dissolution of the fundamental decision; in other words to avoid that the prevalence of the letter of the art. 123 lead to the fall of the euro as the common currency due to the occurrence of a very serious depression in the European economies, of which, in fact, the euro is now the currency. Instead, the German Court opens up to this second alternative: the possible elimination of insolvent states, if not the dissolution of the euro.
Why the antinomy in the European monetary system?
We owe it to the ideology of the centrality of the market in the organization of the economy, which has emerged since the 80s, starting from the USA. The market must be subtracted from the intervention policies of the State, which must be relegated to the task minimum to order the tools for carrying out transactions that are the exclusive pertinence of the protagonists for the organization of their interests, decisions and responsibilities: in fact, of the exclusive pertinence of the market. The ideology imposed itself in the constitution of the ECB, invested with the exclusive technical function of the stability of the currency (euro) at the service of private transactions. The central bank in its own is taken away from the state original and traditional function of lender in budgetary imbalances; in its function, later acquired, as a monetary instrument to correct the economic downturns and to promote investments in market failures. Crises are a private affair that the market absorbs in returning to equilibrium according to its natural propensity: as with any ideology, the truth of the dogma on nature of things. The ideology has imposed the art. 123; justifies, in the role of technical agency, the marked independence of the ECB; he also explains the institution of the euro despite the plurality of member states, enslaved to the budget constraint like any other market player: it is not the state that creates the currency through its central bank, but it is this one, the ECB, which creates the currency to the exclusive service of the market, binding the national states. It is an ideology that has found such full formulation only in the European institutions; the Fed does not respond to this idea, neither in its monetary management experience, nor in its independence from the President and Congress. The crisis of the '08, still ongoing, now the pandemic crisis, make evident the inconsistency in terms of experience. It is an idea that could only be realized with huge economic and therefore social costs for the destruction of resources that are otherwise available; it is placed artificially a constraint for political intervention in tackling crises, which cannot be eliminated in the dynamism of society; bond far more consistent than the anchoring of the coin to gold at the time.
The evolution of things – accompanied by the jurisprudence and the political orientations that are emerging at the levels of the acceding States, and consequently at the level of the European institutions – places the ECB back in the traditional function of central bank lender of last resort, due to its ability to create currency according to the needs of the economic policies expressed by societies through their democratic institutions. But precisely for this reason, the question of the independence of the central bank, which is no longer justified in the current conditions, is rightly being raised in many quarters. The interventions of the lender of last resort may require to distinguish the States and the entities to be supported; e.g. the request has emerged that in the purchase transactions on the market of private securities the ECB should favor issuers that direct production towards the Verde. The Bank cannot engage in politics except under the responsibility of democratically dependent political institutions. On the other hand, monetary policy, subtracted from the states, organized in federal terms, implies solidarity in management.
So, to fix it it is not enough to bring the Bank back to EU political institutions. The monetary system needs to be rethought and reinvented to make it suitable for the new federal experiences. On the one hand, freed from gold, from any other parity, the creation of money has become free: the Age of Magic Money; the Deficit Myth. On the other hand, the solidarity implicit in the common monetary policy must be oriented.
But there is more. Ideology doesn't end there doctrinal debate between Friedman and Keynes, between monetarists and interventionists, between neoliberals and socialists, between the minimum state and the welfare state. The doctrine is taken up by politics, which reconfigures it in the consistency of opposing interests: it unfolds in the USA in the evident opposition of Republicans and Democrats (at least until the Trump presidency). In the perspective of the minimal state, capital, finance, in globalization escape state regulation, take possession of monetary creation. In Europe the story is different due to the presence of welfare states. The political alternative is reflected in the conception of the EU: technical coordination or social integration? Between a technical Europe, privileged by global capital, or a political Europe which, in the global economy, can only thus be invested with the social problems of the territory. The debate at the top political levels has its roots in the division of public opinion: we have seen it in the Greek affair. Recent events are leading to this second alternative, a modification of the original approach: the difficult negotiations are explained; explains the exit of England already opposed to social integration.
