Marcel Fratzscher - Why the Karlsruhe Court ruling is wrong

The great German economist Marcel Fratzscher, director of the prestigious Deutsches Institut für Wirtschaftsforschung in Berlin, on Handelsblatt replies to HW Sinn and explains why there is a need for a deep and definitive clarification between the Court of Karlsruhe and the ECB and why at this point the only way out of the institutional confrontation is through a modification of the European treaties. Wishes! Marcel Fratzscher replies to Sinn on Handelsblatt

Following the ruling by the German Constitutional Court on the work of the ECB, the European Commission is examining the possibility of opening an infringement procedure against Germany. This shows once again how explosive this ruling was. In addition to three serious economic errors, the ruling also contains legitimate critical points that must be addressed as soon as possible in order to defuse this creeping conflict which risks exploding at any moment, without however further weakening the euro.

The basic critical point raised by the Federal Constitutional Court is that the ECB's PSPP bond purchase program does not meet the proportionality requirement. The Court complains that the ECB's program would entail disproportionate costs for savers, for some companies and for other groups and would excessively assist governments in refinancing their public debt.

This accusation shows a decidedly insufficient understanding of the economy. A central bank can only fulfill its mandate to pursue price stability in a sustainable way if employment is high, growth is solid and the financial system is stable. In other words, a central bank will never be able to fulfill its mandate if zombie companies thrive, savers are expropriated and the banking system collapses.

The accusation is therefore a contradiction in terms. In short: it will be easy for the Bundesbank or the ECB to demonstrate the proportionality of monetary policy, as indeed they already do in their quarterly forecasts.

The second weak point in the verdict of the Court of Karlsruhe is the request made to the ECB not to pursue at all costs the objective of price stability provided for by the EU treaties, but to consider whether in any single case it is really worth trying to achieve this. target. It is ultimately an invitation to violate the central bank's mandate. After all, according to European treaties, price stability is the ECB's only primary mandate.

There are also other central banks, such as the American central bank, which aim to pursue full employment in addition to price stability. The revision of its strategy, scheduled for this year, will certainly offer the ECB the opportunity to address some of the criticisms made by Karlsruhe. But a fundamental change in his mandate would require an adaptation of the European treaties.

The third weak point is the demand that the ECB judge the redistributive effects of its monetary policy, not only within individual countries, but also among the eurozone countries. This ruling is not the first ruling by which the Federal Constitutional Court complains that the ECB is taking on quasi-fiscal risks and that it is implicitly bearing Germany's risks related to other countries. Such risk sharing is a necessary element in any economic and monetary union, from which all participants benefit in the end, as this reduces the risks for all members.

The Federal Constitutional Court is right when it says that through its monetary policy, the ECB is taking on many of these risks, buying government bonds and offering a lot of liquidity to banks, especially from weaker countries. Indeed, if the euro area had an adequate fiscal union and a single capital market, the ECB would have to take less risks.

The biggest contradiction of the many German ECB critics is that they would like to reduce the ECB's ability to act, but at the same time they reject the necessary measures to create a fiscal union and a capital market. Many of the ECB's critics are also among those who are now attacking the European reconstruction program proposed by Chancellor Merkel and French President Macron to ease the burden on the ECB.

The EU and the federal government must urgently address this conflict with the Federal Constitutional Court. This creeping conflict has caused enormous damage to the ECB. Because in Germany the criticism of the Constitutional Court is shared by a large part of public opinion, the media and also by some economists.

The result is that in Germany it is the confidence of the ECB that suffers greatly, and ultimately also its ability to successfully pursue a long-term monetary policy suffers. Much of the criticism of the ECB can be considered fundamentally wrong - and I think so too - but the conflict will eventually have to be clarified in order not to cause further damage to the ECB and the euro.

The right conclusion after the Karlsruhe ruling should not be the abandonment by the ECB of its monetary policy stance. Instead, it will be necessary to modify the European treaties which explicitly define the mandate, the permitted political instruments and the framework for the actions of the ECB.

Equally important is a reform of the economic and monetary union, through common tax instruments at European level and the completion of the internal market. Both steps are extremely difficult to implement. Failure would be catastrophic and could endanger the euro itself.