ECB paralysed by German court decision as deflation threatens

Last week’s ‘thunderbolt’ ruling on eurozone rescue policies by Germany’s top court marks a serious escalation of Europe’s governance crisis and may ultimately force Germany to withdraw from the euro, the country’s most influential magazine has warned.

A sweeping report by Der Spiegel said the court ruling amounts to a full-blown showdown between Germany and the European Central Bank over the methods to shore up southern Europe’s debt markets.

“It is nothing less than a final reckoning with the crisis-management strategy pursued by the ECB. The German justices insist that the German constitution sets limits on the ECB’s crisis strategy. In a worst-case scenario, the Court could forbid Berlin from contributing to efforts to save the euro or even force Germany to leave the currency zone entirely,” it said.

The German court does not accept the primacy of EU law over Germany’s Basic Law, and reserves the right to strike down any decisions by the ECJ, but views on this cover a wide spectrum. Gunnar Beck, an expert on European law at the University of London, said the German court is legally obliged to follow the verdict of the ECJ and has in effect cleared the way for a positive ruling by referring the case and “washing its hands” of matter.

Hans Werner Sinn, head of the IFO institute, said the German government cannot ignore the judgement by Karlsruhe “whatever the ECJ says”, and warned that markets were likely to react badly once they grasp that “German resistance” to eurozone rescues is hardening.

The German court said the ECB’s actions are probably “Ultra Vires”. If so, German institutions such as the Bundesbank are prohibited from taking part.

The ECB can in theory carry out rescue policies without the Bundesbank. Whether this would have any market credibility in a crisis is doubtful.

Full article: ECB paralysed by German court decision as deflation threatens (The Telegraph)

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