my interview in Bruegel’s newsletter.
What are the implications of the Karlsruhe ruling on the European economy?
At its core, the ruling puts into question whether the Court of Justice of the European Union has the final word on interpreting EU law. This is highly problematic, especially when it comes to EU exclusive competences. Could policies on competition, trade, currency and the single market be interpreted by every national court in the Union? Could those courts assess and define proportionality according to their national interests or even particular interests within a country?
What does this mean for the monetary policy of the ECB?
For the moment, the ECB continues to operate as before. However, if it was to incorporate the German court’s proportionality rules, its monetary policy would be constrained. If, on the contrary, the ECB ignores the ruling, we will see an escalation of the confrontation and the Bundesbank will not participate in the PSPP purchases anymore. A solution needs to be found that preserves the integrity of the ECB.
Could the ruling represent an opportunity?
The court points to a difficult problem of the monetary union. Every economist knows that there are no clear boundaries between fiscal and monetary policy. But the founders of the euro area have agreed on a single monetary policy but not on a single fiscal policy, thus creating an incomplete monetary union.
It is now high time that the euro area works on creating a large EU safe asset to remove this fundamental problem. The court’s ruling increases the urgency to address this but at the same time its interpretation of EU and German law has made finding a solution much more difficult.