The ECB’s Ordoliberal Roots

The court ruling — and challenge to the ECB program — results from the gap that has opened up between the ECB’s answer to the crisis, and its initial model as an independent central bank, which was largely drawn from the example of the German Bundesbank itself. This model is itself based on the negative lessons drawn from interwar German history, from the hyperinflation of the 1920s to the Bundesbank’s participation in financing the Nazi regime’s munitions policy.

In fact, the hyperinflation of the 1920s primarily hurt the wealth of the richest savers and did not lead directly to the fall of the Weimar Republic. Rather, it was the austerity policy implemented under Catholic conservative chancellor Heinrich Brüning that facilitated the Nazi takeover and the subsequent Bundesbank participation in arming the regime. However, in the postwar period, hyperinflation and the loss of central bank independence were portrayed by the dominant ordoliberal school as the cause of the destabilization of the Weimar Republic and the rise of the Nazis.

After 1945, this ordoliberal school made it a principle that the central bank should be independent of political intervention, with price stability as its primary goal. Given the Bundesbank’s dominance in the early phases of the European Monetary System, this ordoliberal perspective on monetary policy was crystallized during the establishment of the continent-wide ECB. With the signing of the Maastricht Treaty in 1992, the ECB’s high degree of independence was legally enshrined, and maintaining price stability became its main objective. The European Court of Justice would monitor the compliance of the ECB’s actions with regard to the treaties.

The only explicit limit to the autonomy of the ECB’s monetary policy is, again, related to the German taboo of the 1920s. The central bank is prohibited from buying government debt directly (on the so-called primary market). This is intended to prevent “debt monetization,” (i.e., direct financing of the state by the central bank). But it is also linked to the German fear of “moral hazard.” It worries that other Eurozone countries could use the fact that Germany is transferring its high creditworthiness to the ECB, both to take excessive financial risks and push for fiscal transfers between Eurozone countries.

The March Through the Courts

The divergence of ECB actions from the ordoliberal conception of central banking truly emerged with the 2007 financial crisis and especially its worsening in the Eurozone since 2010. The unstable and oversized financial systems threatened to implode. In line with other central banks, the ECB implemented three asset purchasing programs to confront this risk, in which government bonds were bought out on a large scale (albeit on the financial markets — the so-called secondary market). This was much to the annoyance of the German conservative elite, who consider themselves the guardians of the ECB’s original ordoliberal architecture. They perceived the repurchasing of government bonds as a form of debt monetization, and thus a patent threat to the European legal and economic order.

This vehement opposition among German conservative elites is driven both by ideological convictions and by perceived national interests. First, they are convinced of the solidity of the ordoliberal approach to monetary policy and fear that any deviation from it would undermine the central bank’s credibility, thus destabilizing the economy. In particular, they fear that low interest rates will threaten pension funds and prudent savers’ deposits. Second, they are also upset because the ECB’s response to the crisis implies, to some extent, a pooling of financial risks between European countries. For the ordoliberals, this pooling triggers the aforementioned “moral hazard,” allowing peripheral member states to refinance their public debt at a cheaper cost, supposedly at the expense of the German taxpayers.

This culturalization of the crisis — blamed on careless Southerners — however stands up poorly to any kind of close economic analysis. Even mainstream macroeconomists recognize that the roots of the crisis in the Eurozone do not owe to supposed wasteful spending on the periphery, but rather in the deep imbalances within the financial system and the lack of redistribution mechanisms (common fiscal instruments) within the euro area.

Yet the protest against the ECB’s new crisis-response policy within Angela Merkel’s Christian Democratic Union (CDU) was not effective — and nor could the ordoliberals assert themselves by calling for a halt to the ECB’s measures. Rather, in response to these defeats, the radical wing of the German conservatives pursued the strategy of judicializing European monetary policy (i.e., embarking upon a “march through the courts”). Each of the three ECB bond purchase programs has been systematically challenged before the German Constitutional Court and the European Court of Justice — and, while the two first of them have been legally validated, the German judges now question the legality of the 2015 PSPP.

Behind the Elite: the AfD

The plaintiffs at the core of these lawsuits form a homogeneous group of old, highly educated, and almost exclusively male capitalists and conservative intellectual elites. Complainants included the former president of the Federation of German Industries (BDI) Heinrich Weiss, Christian Social Union (CSU) member of parliament Peter Gauweiler, right-wing activists Beatrix and Sven von Storch, former CEO of Thyssen AG Dieter Spethmann, and lawyers and economics professors such as Johann Heinrich von Stein, Markus Kerber, Joachim Starbatty, Bernd Lucke, and Karl Albrecht Schachtschneider.

The social trajectories of these plaintiffs correspond to three categories of elites: academia (university professors), right-wing political sphere (advisers or MPs for the CDU or its Bavarian sister party, the CSU — and later on the AfD), and economic elites (CEOs of companies and links with the Federation of German Industries).

Individuals’ biographies sometimes cover several of these areas — and all have an important legal dimension. While finding themselves in the minority position on European issues, at least as far as the German right was concerned, these figures pursued a strategy of specialization in order to strengthen the recognition of their expertise and gain domestic political prestige. The career path of the lawyers involved in this case shows a similar logic. This is how a complainant like Markus Kerber is — in his own words — using his legal activism to take part in European legal history.

This judicialization of monetary policy is also directly linked to the formation of the far-right party Alternative für Deutschland. The failure of the right-wing conservative opposition to the euro rescue policy within the CDU/CSU led to a large part of this group joining the AfD upon its foundation in September 2012. Upon its launch, the AfD was known as the Professorenpartei (party of the professors) due to the overrepresentation of conservative academic and university circles in its ranks.

Back then, the AfD was a single-issue party that organized itself around criticism of the euro and the dangers of pooling sovereign debts. We found many connections between the AfD and the plaintiffs. Before being brought down by allies of leader Frauke Petry in 2015, the plaintiffs Joachim Starbatty and Bernd Lucke were thought leaders of the AfD. Karl Albrecht Schachtschneider is active in various radical right-wing anti-refugee campaigns and is a board member of the AfD-attached Desiderius Erasmus Foundation together with Joachim Starbatty. In 2014, Joachim Starbatty, Bernd Lucke, and Beatrix von Storch were elected in the European Parliament for the AfD. Headed by Sven and Beatrix von Storch, the right-wing reactionary political association Zivile Koalition was also part of the lawsuit.

German Judges: Pyromaniacs in the Fire Department

In the course of their judgments, the judges of the Federal Constitutional Court essentially confirmed the ordoliberal arguments defended by the plaintiffs. In the Gauweiler ruling of June 16, 2015, they took the view that the ECB’s sovereign debt purchases blurred the distinction between fiscal and monetary policy and could thus jeopardize its independence.

The court was also aware that checking the legality of the measures taken by the ECB falls not only within its jurisdiction but also within that of the European Court of Justice. Since the Gauweiler judgment, the German Court has passed on the cases to the European Court of Justice, but reserves the right to revise this latter’s decisions. Indeed, in 2016, when the German judges accepted the European Court’s decision to reject the Gauweiler’s complaint, they also expressed their dissatisfaction with the content and form of the decision by the European authorities. The judgment of May 5 this year must be read as a continuation of this power struggle between institutions.

At first glance, it is hard to deny the judges’ emphasis on the lack of substantial legal control over the activities of the ECB. In itself, this is hardly surprising — courts in the United States and the United Kingdom also do not control the substance of decisions made by central bankers. But in both countries, there is a tighter control on central bank actions exerted by parliament and government agencies (US Congress can change the Federal Reserve’s statutes and the UK government can change the Bank of England’s goals).

However, in the case of the Eurozone, the different interests and views of national governments prevent the council from commenting on monetary issues, while neither the European Parliament nor the commission has legal powers to exercise this control. The German judges are therefore right to point out the institutional and political vacuum in which the ECB finds itself and the problematic discretion that it is granted.

But if the Constitutional Court could thus be viewed as a kind of alarm that points to fire hazards in the architecture of European democracy, the way that it raises this warning is the approach of an arsonist. If it were up to the German judges and the ECB was forced to return to ordoliberal monetary policy principles, the Eurozone would simply implode.

Given the current structure of global financial markets, the separation between monetary and fiscal policies simply no longer makes sense. Since government debt plays a role of safe asset and determines other financial values, it would be impossible today to fight a financial crisis without central banks acting on government debt. In addition, the demand for an assessment of bond purchase programs by the Bundestag and the German government undermines the credibility of a genuinely European monetary policy. This bears the risk of further restrictions on much-needed decisions for joint European protection against financial risks. In any case, it is likely that the legal activists of right-wing ordoliberalism will continue their judicial guerrilla war, spurred on by this judgment. Their next target will, then, be the ECB’s measures to combat the COVID-19 crisis.

Finally, the willingness of German judges to give national economic doctrines priority over European law also harbors the risk of an outright fragmentation of the European legal order, the main engine of European integration. Without wanting to misrepresent the primacy of European law as somehow progressive per se, it should be remembered that it does, after all, enable the most blatant forms of autocracy to be combated in countries like Hungary and Poland — countries whose right-wing governments also immediately welcomed the decision of the Constitutional Court.

In short, the decision of May 5, 2020 is part of a long process of judicializing monetary policy — an approach pushed by the radical core of Germany’s right-wing elites to force the ECB to conform to ordoliberal principles. At the same time, it marks an ambivalent turning point: on the one hand, the German judges rightly emphasize the problematic institutional and political vacuum in which the ECB operates. Yet the German Constitutional Court’s attempt to fill this vacuum will not solve the Eurozone’s democratic and macroeconomic problems, but only intensify them.