Project Syndicate, 27.05.2016
June is shaping up to be a fateful month for the European Union. On June 21, the German Constitutional Court will rule on a challenge to a bond-buying program that is central to the European Central Bank’s response to the continent’s debt crisis. Two days later, voters in the United Kingdom will decide whether the UK should exit the EU. Both decisions will have serious consequences for the EU’s long-term political and economic stability.
The judgment by the German court is the less spectacular of the two, but it addresses the heart of the ECB’s interpretation of the Maastricht Treaty. The plaintiffs, who include members of the Bundestag, have questioned whether the Bundesbank should be allowed to participate in the ECB’s outright monetary transactions (OMT) program, arguing that it violates Articles 123 and 125 of the EU Treaty, which they claim forbids government bailouts with the printing press. In particular, they have objected to the ECB’s unlimited commitment (“whatever it takes,” in ECB President Mario Draghi’s famous phrase) to the purchase of crisis-hit countries’ government securities.
Under the OMT program, investors who buy such securities no longer need to worry about a potential default. Before the risk of bankruptcy presents itself, the ECB will be available to buy the endangered securities off investors’ portfolios. All that is required is an application to the European Stability Mechanism, a fund capable of providing rapid financial assistance to all members of the eurozone. As a result, the risk of bankruptcy is transferred from the bondholders to taxpayers in economically healthy eurozone countries, who would permanently lose interest income on the government bonds.
The question before Germany’s Constitutional Court is whether that arrangement, which has already received the blessing of the European Court of Justice, is compatible with the country’s Basic Law – specifically, whether OMT undermines the Bundestag’s budgetary authority. This is not a question that the ECJ can decide.
There are two reasons why the court is likely to impose conditions on the Bundesbank’s participation in the OMT program. The Bundesbank is said to have consulted the court already regarding the ECB’s program of quantitative easing, and the court is reported to have called for the effective exclusion of joint liability of central banks for government-bond purchases under that program. Furthermore, the court’s preliminary opinion expressed suspicion that the ECB might be overstretching its mandate.
If the court follows this line of reasoning and rules against the Bundesbank’s participation in the OMT program, the decision would cause the interest-rate spread between healthy and crisis-hit economies to widen, reflecting the true risk to investors. That would put an end to some pipe dreams, but it would also mean taking a step toward strengthening accountability and put the eurozone back on the path to hard budget constraints, without which no economic system can survive.
The second decision, regarding the UK’s membership in the EU, could be even more consequential. The vote is one more convulsion in a long history of tumultuous relations between the UK and the rest of Europe. The UK joined the European Economic Community, the predecessor to the EU, in 1973, on its third attempt, after French President Charles de Gaulle vetoed its applications in 1963 and 1967.
But the relationship was strained from the outset. Powerful resistance in Britain to the conditions for joining led to a referendum on membership in 1975. The majority of UK voters opted for staying in. After Prime Minister Margaret Thatcher came to power in 1979, she appeased skeptics by negotiating special conditions for Britain.
But the euro crisis in recent years has revived skepticism about Europe. The UK may have been only marginally involved in financing the EU’s response to the crisis, but fears are mounting in the UK that the country and its taxpayers will one day have to bail out southern European countries and EU banks.
At the same time, the European refugee crisis has begun to fray British nerves. Under Thatcher, and Prime Minister Edward Heath before her, the UK put a stop to easy immigration from the Commonwealth. Today, the fear is that the country is at risk of a new wave of immigration from the EU.
Undecided voters worried about the risks of “Brexit” are likely to provide the margin needed to keep the UK from leaving. But the referendum nonetheless has exposed the EU’s serious shortcomings and its leaders’ inability to present a credible and convincing strategy for addressing the challenges facing the continent.
Whatever the outcome of the two decisions in June, one thing is clear: The era of unconditional trust in the EU and its institutions has come to an end.
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