The illustrious persons of the early European Court of Justice and more

Now that Brexit has been completed let’s take a look at what the UK has left. Perry Anderson has an article in the London Review of Books, ‘Ever Closer Union?‘. In it he covers the five principal institutions: the European Commission, the European Court of Justice, the European Parliament, the European Council and the European Central Bank. The most withdrawn of these is the European Court of Justice.

Today the court remains, of all Union institutions, the most withdrawn from the public. Discreetly situated in Luxembourg, not exactly a European crossroads, and composed of judges appointed – one per country – by member states, its proceedings are hidden from public scrutiny; its decisions permit no admission of dissent; its archives grant minimal access to researchers. In modus operandi, the ECJ is the antithesis of the US Supreme Court, whose emoluments it comfortably tops – its president receives a salary worth $400,000, plus many allowances; the chief justice in Washington a measly $277,000.

Its history features some illustrious persons.

Thanks to the pioneering work of a young historian from Luxembourg, Vera Fritz, we now have a detailed scholarly study of the composition of the court in the rst twenty years of its existence. Her findings are illuminating. There were seven founding judges and two advocates-general. Who were they? The Italian president of the court, Massimo Pilotti, had been deputy secretary-general of the League of Nations in the 1930s. There he acted as the long arm of the fascist regime in Rome, advising Mussolini on what counter-measures to take to shield Italy from condemnation by the League for its actions in Ethiopia. On resigning his post in 1937, Pilotti took part in the celebrations in Genoa of the conquest of Ethiopia; and during the Second World War headed the high court of occupied Ljubljana aer Italy’s annexation of Slovenia, where resistance was met with mass deportations, concentration camps, and police and military repression. The German judge on the court, Otto Riese, was so devoted a Nazi that without any duress – he spent the war as an academic in Switzerland – he retained his membership of the NSDAP until 1945. His compatriot Karl Roemer, an advocate-general to the court, spent the war in occupied Paris managing French companies and banks for the Third Reich; aer the war, he married Adenauer’s niece, and acted as defence lawyer for the Waen SS charged with responsibility for the massacre of the occupants of the French village of Oradour. The other advocate-general, Maurice Lagrange, was a senior functionary in the Vichy government, fully committed to the ideology of a ‘National Revolution’ to sweep away the legacy of the Third Republic. Acting as link-man between the judicial apparatus of the Conseil d’État and the political apparatus of the Council of Ministers, Lagrange was in charge of co-ordinating the rst wave of persecution of French Jews. When Laval took over the reins of Vichy in 1942, transferring Lagrange back to the Conseil d’État, Pétain thanked him for his ‘rare perseverance’ in the regime’s legislative and administrative work, to which Lagrange replied that ‘for me it has been a great privilege to be so closely associated with the enterprise of national renovation you have undertaken for the salvation of our country. I am convinced that every Frenchman can and should take part in this work.’ Aer the war he was chosen by the Americans to help democratise the civil service in Germany, and by Monnet to help dra the treaty establishing the Coal and Steel Community.

That gures like these were the ornaments of Europe’s rst Court of Justice reected, of course, the closing of political ranks aer the Cold War set in, when what mattered was not the misdeeds of the fascist past but the menace of communist present. It was a time when the last commander of the Charlemagne Division of the SS, ghting to the last bullet to defend Hitler in his bunker, could emerge as best choice for the Robert Schuman Prize for services to European unity.* Why should European justice too not let bygones be bygones? More generally, appointments to the court had little or nothing to do with juridical qualications. Nearly all were political. The Belgian judge was a leading gure in the Catholic Party of his country; one of the Dutch judges was the brother of a prewar foreign minister; the French judge, Jacques Rue, a former deputy governor of the Banque de France, was one of the founders of the Centre National des Indépendants et Paysans; a Catholic trade unionist from the Netherlands and a socialist magistrate from Luxembourg rounded out the set.

He concludes ominosly.

If the Union’s advertisements for itself, on which it spends a fortune in euros every year, meet no more than a listless acquiescence, rather than active endorsement from the populations over which it presides, that is sucient for its purposes. Fear of the unknown is the more important integument.

Read the whole here.

Christine PRADA Lagarde, President of the ECB, at the “ECB and Its Watchers XXI”

Excerpt from speech today.

The inflation objective

I start with the inflation objective because it anchors the inflation process for the whole economy. Three issues will feature particularly prominently in our review.

The first is how to formulate the inflation aim.

The arguments in favour of central banks aiming for positive inflation rates with a sufficient buffer away from zero were articulated during our strategy review in 2003. It compensates for possible measurement bias, helps countries rebalance their economies within a monetary union and creates a buffer against deflation, as well as leading to higher nominal interest rates over the medium term. That helps ensure that monetary policy is not forced too often towards the effective lower bound – the level of interest rates at which further cuts do not have the desired positive impact – when faced with shocks that push inflation too low.

Since 2003, the ECB has used a double-key formulation to set our objective, defining price stability as a year-on-year increase in inflation of “below 2%”, while aiming for inflation of “below, but close to, 2%”. This formulation was appropriate at a time when the ECB was seeking to establish credibility and too-high inflation was its main worry. As our research shows, it was a key factor in successfully capping inflation expectations.^[1]

But in the current environment of lower inflation, the concerns we face are different and this needs to be reflected in our inflation aim. Ensuring that there is sufficient space above zero to re-empower conventional monetary policy becomes more important. And, to underpin inflation expectations, we need to ensure that our aim is perceived to be symmetric by the public. So we should have an inflation aim that the public can easily understand.

Here is the “double-key formulation … of inflation of “below 2%”, while aiming for inflation of “below, but close to, 2%”. 

Alhambra Investments

The buffers are pretty impressive, aren’t they? The ECB is completely failing in its mandate.

What rode the German Constitutional Court on May 5?

“THE MAGNIFICENT scarlet robes that adorn the judges of Germany’s constitutional court trace their origins to a spot of judicial attention-seeking. Soon after the court was established in 1951, its judges decided they needed to distinguish themselves from their peers on the Federal Court of Justice, and recruited a theatrical costumier to update their look. Yet, as the judges showed on May 5th, their rulings can be even more eye-catching than their attire.”

That’s how The Economist started its article on the mind-boggling presentation of the German Constitutional Court (GCC) on May 5, 2020.

It is conceivable that Andy Vosskuhle and his entourage of judges would have preferred that “group of hard right politicians and economists (and for these purposes, they can be presumed to be the same)” would be rather six feet under had they placed, yet again after 2014, an action and the court had to deal with it. Back in 2014 the GCC got rid of it by simply transferring it to the ECJ and FT Alphaville asked “The OMT — um, what does this thing do again? A Bundesverfassungsgericht guide“.

May 2020 proved to be different. By a lot. Perhaps Andy Vosskuhle thought it’s my last day on the job anyway, so I might as well go with a bang and kick some ECJ ass. That he did. Kicking ass is fine, as long as you are right. Yet with his statement “The Court of Justice of the European Union exceeds its judicial mandate” his court was completely wrong. It did not take long and the ECJ punched back.

In a sharp rebuke of the German Constitutional Court (BVerfG), the European Court of Justice (ECJ) asserted that it alone had jurisdiction over the European Central Bank (ECB).

“In order to ensure that EU law is applied uniformly, the Court of Justice (ECJ) alone … has jurisdiction to rule that an act of an EU institution is contrary to EU law,” a statement said.

“Divergences between courts of the member states as to the validity of such acts would indeed be liable to place in jeopardy the unity of the EU legal order and to detract from legal certainty.

“Like other authorities of the member states, national courts are required to ensure that EU law takes full effect. That is the only way of ensuring the equality of member states in the Union they created.”

As the FT reported

A bombshell ruling by Germany’s constitutional court questioning the legality of European monetary policy impinges on central bank independence and imperils the EU legal system, former policymakers and legal experts have warned.

The court on Tuesday ordered the German government to ensure the European Central Bank carried out a “proportionality assessment” of its vast purchases of government bonds to ensure their “economic and fiscal policy effects” did not outweigh other policy objectives. It threatened to prevent the Bundesbank, Germany’s central bank, from making further asset purchases if the ECB failed to comply within three months.

Berlin MMT economist D. Ehnts comments thus:

In today’s ruling, the Federal Constitutional Court upheld several constitutional complaints against the Public Sector Purchase Programme (PSPP), stating that the ECB’s decisions on the Public Sector Purchase Programme were incompetent, as the proportionality had not been assessed:

A public sector purchase programme such as the PSPP, which has significant economic policy implications, requires in particular that the monetary policy objective and the economic policy implications are identified, weighted and balanced against each other. Therefore, the unconditional pursuit of the monetary policy objective of the PSPP to achieve an inflation rate below but close to 2 %, while ignoring the economic policy implications of the programme, appears to disregard the principle of proportionality.

The necessary balancing of the monetary policy objective with the economic policy implications of the means used does not follow from the decisions which are the subject of this procedure. They therefore infringe the second sentence of Article 5 (1) and (4) TEU and are not covered by the ECB’s competence in the field of monetary policy.

In my opinion, this assessment is adventurous. A central bank has a big hammer – interest rates – and almost as big – the rules on what collateral is accepted for central bank loans. To be able to influence interest rates in the long term, a central bank buys and sells government bonds. In the euro area, this is done through resale transactions (so-called repos = repurchase agreements). This is fundamental – without trading in government bonds, the central bank cannot influence interest rates and yields. (Technically, it would be possible to set interest rates in such a way that the interbank market rate is set without the central bank buying and selling government bonds, but this requires that, in case of doubt, government bonds can be bought in large quantities by the central bank. This is not permanently fulfilled in the euro zone).

Before he points out some hair-raising assertions of the GCC:

For example, there are significant risks of loss for savings. Companies which are no longer economically viable per se remain in the market because of the general interest rate level, which has also been reduced by PSPP. Finally, as the duration of the programme and the overall volume increase, the Eurosystem is becoming increasingly dependent on the policies of the member states, as it is becoming increasingly difficult to terminate and unwind the PSPP without jeopardising the stability of the monetary union.

Could the SNB please explain to the Central Bank at what exact interest rate ‘non-viable companies’ have disappeared? That is outrageous. Such an “equilibrium interest rate” may be haunting the minds of some errant economists, but that is not something that can be seriously advocated! What comes next? A lawsuit against government spending because it keeps “businesses that are no longer viable” alive? This approach presupposes that there is a balance in the economy and that it can be observed. I do not consider both of these conditions to be fulfilled. This argument should therefore be rejected.

Scott Sumner points to a rather funny tweet.

The General Theorist compares the bold GCC decision to a “fishing exhibition to find some technicality to trip up the ECB’s public sector purchase program (PSPP)”. Lamenting the “principle of proportionality” is like finding a hair in the soup. While the GCC admits that “it is not ascertainable that the purchases under the PSPP manifestly circumvent the prohibition of monetary financing” but “in light of the volume of bond purchases under the PSPP, which amounts to more than EUR 2 trillion, such a risk-sharing regime, at least if it were subject to (retroactive) changes, would affect the limits set by the overall budgetary responsibility of the German Bundestag”. IOW, don’t even think about making the German people responsible for the risk carried in the handling of peripheral government bonds! Perhaps nobody has explained to those illustrious judges what a spread of, say, -240 bps between the It/G bonds means: who pays and is is being paid when borrowing?

Bill Mitchell, as usual, puts it plain and simple: “BVerfG decision once again exposes the sham of the Euro system“.

But it won’t surprise you to know that I think the Court made the correct judgement by exposing the complete sham that the European Union and the Eurozone, in particular, has become – an illegal, look-the-other-way, neoliberal cabal that the Union has become.

I do not fully agree with this assessment as the court’s intention is to keep German taxpayers of the hook while reaping all the benefits (in the sense as the GCC understands the whole concept of the ECB’s QE program). It is rather as DEALBREAKER puts it:

It’s no secret that the Germans have had their differences with the European Central Bank which, while it has not been as profligate as certain members of the Eurozone and was certainly useful in bringing Greece to heel, was also perhaps a bit looser with the purse strings under a citizen of one of those members than it would have been under a properly tightfisted Teuton. This lingering frustration with the spending of German euros on things Germans do not want is certainly felt by the members of Germany’s Constitutional Court, which chose this week to express those feelings by essentially declaring the ECB unconstitutional under Germany’s Basic Law.

Here is CNBC:

German court ruling on ECB purchases is ‘laughable,’ Societe Generale chair says

“The court is asking the central bank to show that it took into its decision the proportionality principal,” Lorenzo Bini Smaghi, chairman of Societe Generale and a former member of the ECB’s executive board, told CNBC’s “Squawk Box Europe” Friday.

“Frankly, to think that the ECB did not do that is laughable — there is plenty of research, of reports, of statements, that clearly show the ECB doesn’t just meet in five seconds and say ‘let’s just raise rates or cut rates’ out of the blue. There is a very deep analysis, discussions, arguments, and sometimes disagreements.”

A former president of the German Buba sees the “Future of Europe is at stake” and rightly points out:

The Karlsruhe court judged that the ECB exceeded its powers as a result of inadequate consideration of the legal principle of ‘proportionality’. However, the court is skating on thin ice when it demands, as criteria for ‘proportionality’ of a government bond purchase programme, the ‘identification, weighing and balancing’ of the ‘monetary objective’ and ‘economic impact’. The court mentions savers, shareholders, property owners and insurance policy holders, among others. But the list fails to include taxpayers and employees, who have mightily benefited from the ECB’s policies – a truly astounding omission.

One can ask whether savers with money in German savings banks have not fared rather well, at least in the recent market downturn, relative to other groups such as shareholders. The German government’s revenue surpluses surely outweigh interest foregone in savings accounts. Some economically unviable companies have, as the court says, remained afloat, but many have used low interest rates to invest, create jobs, and service their bank loans – a positive contribution to the economy and to society.

Another contributor on OMFIF detects a “Revenge of the German constitutional court” and points to a speech by none other than the German member of the ECB Isabel Schnabel which the GCC apparently did not read. He cautions “Ultra vires. Ultima ratio. Beware of Germans using Latin.”

Yet another chap on OMFIF is more conciliatory and sees a “Key role for Bundesbank after German court ruling” He sees the ball in the court of the ECB.

The ball is now in the ECB’s court. The central bank does not lack legal expertise, starting from its president, Christine Lagarde, a lawyer by training.

Seriously? Well, here is the ECB. BANG!

Christine Lagarde says ECB is ‘undeterred’ by German court challenge

Christine Lagarde has fended off criticism of the European Central Bank’s government bond purchases, saying she was “undeterred” by an order from Germany’s highest court to produce a justification of its action.

This commenter has a suggestion how to respond to the Karlsruhe Klowns:

I think that the ECB should troll the German court and answer truthfully:

“Sorry, we are not acting proportionately at the moment, we should do so much more. We should at least convey in a credible way that we will do whatever it takes.”

It should also be kept in mind “… as a reminder, the last German declarations of war did not go well“.

Lastly, here is Wynne Godley in “Maastricht and All That”:

What happens if a whole country – a potential ‘region’ in a fully integrated community – suffers a structural setback? So long as it is a sovereign state, it can devalue its currency. It can then trade successfully at full employment provided its people accept the necessary cut in their real incomes. With an economic and monetary union, this recourse is obviously barred, and its prospect is grave indeed unless federal budgeting arrangements are made which fulfil a redistributive role.

There is a good chance the GCC will have to meet again over PEPP. What a mess. What a system this Eurozone.

Who moves markets more, Lagarde or the German Constitutional Court?

Here is the Germany 10 Years vs Italy 10 Years Spread on the day of ECB president Lagarde’s unfortunate slip-up on March 12 that the ECB was “not here to close spreads”.

That’s a change of a good – 60 bps. Let’s see how the Karlsruhe Court Judges in their magificent scarlet robes, created in 1951 by a theatrical costumier to update their look, fare. That of course means to concentrate on that equally unfortunate day on May 5 when they delivered their hair-raising decision on the ECB’s PSPP.

So the GCC moved the spread by – 15 bps. Clearly, Lagarde was the biggest market mover, but it must be noted that the drop of the It/G bonds spread on May 5 occurred from a level and stable basis over a couple of days. Be that as it may, one should be cautious, “Ultra vires. Ultima ratio. Beware of Germans using Latin“.

Interesting observation about QE’ing government debt

Neil Wilson (he seems to be back again) has this comment on Bill Mitchell’s post
“We need the state to bail out the entire nation”:

There’s also another unmentioned consequence of the neoliberal blinkers – QE’ing government debt removes income from the private sector. How are pension companies going to pay pensions without it?

Currently we are seeing dividends cancelled, rent payments withheld, government debt bought up – driving down yields and “compulsory pension contributions” (aka tax collected by the private sector to pay pensions) disappearing as wage flow collapses.

How long before there is a crunch in the pension payment system? How long can they handle new vesting – when there is a crunch lots of people decide to retire?

The state is going to struggle to get ‘volunteers’ to work unpaid if the pension payment system goes belly up…