Evolution of Central Banks in Global Economics

How does a judgement of the German constitutional court threaten to explode the European project? David talk to Helen Thompson, Adam Tooze and Shahin Vallee about what the court's decision might mean for the Euro, for the response to the pandemic, for Franco-German relations and for the future of central banks. Can the great European fudge continue? And what happens if it can't?

Plus a bonus chat with Ed Miliband and Geoff Lloyd from the ‘Reasons to be Cheerful Podcast’ https://www.cheerfulpodcast.com/

The German Constitutional Court ruled that the ECB’s QE program is illegal. 

• It says that the German government has failed to control the ECB’s program and its compliance with the German constitution.
• It ruled that the European Court of Justice made an illegal judgment.
• And it gives the ECB 3 months to provide a clear analysis and a new decision. If not, the German government can’t continue to participate in QE.

This raises three fundamental political questions: 

• Does EU law take precedence over national law? 
• Has the ECB ventured too far outside of monetary policy?
• Should the ECB’s independence be as absolute? 

Monetary union rested on a sharp distinction between monetary policy, which was going to be a matter for the EU, and the rest of economic policy, where there was going to be no federal authority.

• The economic premise of monetary union is no longer supported by a great number of people in the monetary union.
• Of course the advocates of the system believe the fudge.

This is a very political judgment. 

• The ruling inadvertently opens the question not only about the financial constitution, but, more deeply, if it’s time for the monetary union to have a proper fiscal risk sharing instrument, a proper budget, and political accountability.
• The judgment forces a conversation about the architecture of the monetary union.

Part of this judgment is about democratic control over otherwise unaccountable institutions.

• The German Constitutional Court is one of the anchors of the success of German democratic model since 1949.
• It acts as a driver of modern constitutional jurisprudence. 

Independent central banks were meant to reign in the inflationary tendencies of democratic governments. Now their primary role is to guard against the forces of deflation.

• They have changed their character while maintaining their form.
• The ECB’s QE was an absolutely massive bond buying scheme.
• The court is registering the need to start talking about re-legitimising and redefining the role of central banks.   

Mentioned in this Episode:

• The last time we talked to Adam
• Adam on the death of the central bank myth

Further Learning: 

• More on the German court’s decision
• More on the Franco-German plan
• Shahin on Macron

And as ever, recommended reading curated by our friends at the LRB can be found here: lrb.co.uk/talking