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EU Risks Institutional Showdown After German ECB Ruling

Alexander Weber, Nikos Chrysoloras and John Martens

(Bloomberg) -- The European Commission threatened twice in a weekend to sue Germany over a ruling by the country’s constitutional court challenging the European Central Bank’s monetary authority, raising the prospect of an institutional showdown on the continent amid the deepest recession in a century.

“The final word on EU law is always spoken in Luxembourg. Nowhere else,” Commission President Ursula von der Leyen said in a statement on Sunday, referring to the headquarters of the European Court of Justice. She also threatened a lawsuit after Germany’s constitutional judges gave the ECB a three-month ultimatum to fix alleged flaws in its quantitative easing policy.

The landmark May 5 German court decision risks opening a legal can of worms, as it challenged the supremacy of European Union judges, whose rulings are binding across the 27-nation bloc. The court accused its EU counterpart in Luxembourg of overstepping its powers when it backed the ECB’s monetary policy.

That poses the risk of other nations starting to doubt the authority of the EU Court of Justice, an issue that may eventually threaten the future of the common currency, according to Wolfgang Schaeuble, Germany’s former finance minister.

“EU law has primacy over national law,” von der Leyen said in her Sunday statement. In a letter to EU lawmaker Sven Giegold published on Saturday, the head of the EU executive arm said the German court ruling is being analyzed and an infringement process against Germany is possible, a threat she reiterated on Sunday.

Serious Implications

The euro-area’s central bank was given three months to prove that its asset-purchase program, which has bought 2.7 trillion euros ($2.9 trillion) of debt since 2015 and is adding more each month, is in line with the law. Such court rulings raise both practical and political questions for the ECB.

According to the EU’s treaties, the ECB is independent in its conduct of monetary policy and doesn’t answer to national courts. This means that any response, even if it is one that reassures German judges, would create a precedent of the ECB having to give explanations to national courts about its policies.

The Bundesbank is bound by the ruling, so if the ECB doesn’t comply, the German central bank could be barred from the asset-purchases program, which is running at 20 billion euros a month with an additional 120 billion euros as part of measures to combat the current downturn. Germany is the euro zone’s biggest economy and its central bank accounts for the largest share of the ECB’s purchases.

To be sure, the German ruling won’t stop purchases immediately and it doesn’t affect a separate 750 billion-euro support plan launched in March to combat the impact of the coronavirus. It does, however, raise question marks over just how far the ECB can push its monetary stimulus.

Crucially for the stability of the EU, the ruling sets a precedent of national courts scolding the European Court of Justice and attempting to overrule its judgments. This could provoke a legal chaos in the bloc, which is already struggling to force illiberal governments in its Eastern flank, such as Poland and Hungary, to abide by commonly agreed decisions and democratic standards.

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