A German court has plunged the eurozone into fresh crisis
Written by Matthew Lynn
An epidemic has been raging across the continent. The economy is in lockdown, and GDP is in freefall. But, hey, just when you thought things couldn’t get any worse in the eurozone it now has a financial and currency crisis as well, and one that is being made worse by the week with the shambolic management of the European Central Bank by Christine Lagarde.
Today, the German constitutional court has, at least in part, ruled against the ECB’s bond-buying programme, which allows the central bank to print money and effectively bail out Italy, Spain, and probably quite soon France as well. You need to be a German lawyer – not usually among the most interesting people on the planet – to unpick the finer points of the ruling.
But, stripped of the finer points of the law, it basically boils down to this. The Bundesbank won’t be able to participate in the ECB’s bond-buying programme, at least not unless either the law or the treaties are changed. Sure, the ECB could carry on regardless, but the German central bank won’t be a part of it. And since that is where all the money in the eurozone comes from, good luck with that. It is as if the Bank of England couldn’t print any money unless it excluded London. The chances of success would be very slim.
We will see how it works out from here. ‘The men and women on Germany’s Constitutional Court are neither daft nor tone-deaf and they know that they have just stepped on a political landmine,’ argued Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics in an analysis today. ‘In other words, they have not just put the ECB on the spot, but also Germany’s politicians. It’s not easy to change the constitution in Germany, but that may be what is required here.’ In other words, it’s a mess, and at a moment of maximum danger, no one knows anymore what the central bank can or can’t do anymore.
In truth, that is the fault of its French President Christine Lagarde. A lawyer turned darling of the Davos set, she was a political appointment by France’s President Macron with no experience of how the financial markets work. She was a catastrophe at the IMF, where she presided over a deranged bail-out of Argentina that looks likely to end up in the worst losses in the fund’s history (Argentina is not great at repaying money – who knew?) and now she is plunging the ECB into crisis as well.
Her predecessor, the wily Italian former banker Mario Draghi had enough financial chicanery up his sleeve to push through a massive programme of money printing without anyone being able to stop him. Lagarde does not have anything like the same skills. With lawyerly arrogance, she stumbles from one disaster to another. It is going to be very hard to bail out the zone any further – at a moment when it desperately needs rescuing.
As well as the worst economic crisis in history, the eurozone has now added a financial and currency crisis into the mix as well. Great. It won’t necessarily mean the end of the euro. It is a resilient currency, with a huge amount of political capital invested in it. But it is going to make recovering from the crisis far harder – and for Italy and Spain tragically impossible.