The Euro’s German Question

The German Federal Constitutional Court’s recent ruling against the European Central Bank shocked many observers and could have far-reaching implications for the eurozone. What are the likely consequences of the court’s assertion of authority, and how should the ECB and the European Union respond?

In this Big Picture, Columbia University’s Willem H. Buiter says that the court’s ruling threatens to hamper the ECB’s efforts to assist distressed eurozone member states and could cause one or more countries to crash out of the monetary union. Katharina Pistor of Columbia Law School goes further, arguing that the judgment by an “out of control” court may even endanger the European Union’s survival.

Hans-Helmut Kotz, a former member of the executive board of the Bundesbank, takes a more optimistic view, arguing that the German judges’ criticism of the ECB may finally force the EU to adopt a common fiscal policy. But this probably won’t happen any time soon, notes Marcel Fratzscher of the DIW Berlin think tank. In the meantime – and despite the ruling’s many flaws – the ECB will need to strengthen its credibility with the German public.

Indeed, the University of Munich’s Hans-Werner Sinn argues that the German court’s ruling was a necessary reminder that the EU can be further developed only by its sovereign member states, and warns of potentially devastating consequences for the bloc should it initiate infringement proceedings against Germany. But Daniel Gros of the Centre for European Policy Studies compares today’s judicial clash to South Carolina’s efforts in the 1830s to nullify US federal tariff legislation, concluding that, like South Carolina, the German court picked a fight that Germany cannot win.