As EU leaders strive toward ending the economic crisis sparked by the coronavirus pandemic, the German Constitutional Court has created an obstacle for the European Central Bank (ECB) which is buying the bonds of indebted southern European countries at an alarming pace.
Economy and Financial Affairs Commissioner Paolo Gentiloni said the best way to prevent the collapse of the EU’s single market is through joint European action.
The Bundesbank May No Longer Help the ECB
Germany’s Constitutional Court ruled on Tuesday that the European Central Bank (ECB) must clarify how the EU’s bond-buying scheme to support the eurozone economy is “proportionate,” or else Germany’s central bank, the Bundesbank, may no longer participate in it.
Furthermore, the Bundesbank will be excluded from joining the quantitative easing asset purchase program in three months’ time unless the ECB’s Governing Council adopts a new decision that proves that the monetary policy objectives pursued by the central bank are not disproportionate, the Constitutional Court said.
The ECB responded to the Constitutional Court’s statement by stating that it remains fully committed to doing everything necessary within its power to ensure that inflation increases to levels consistent with its medium-term aim. It added that the monetary policy action taken in pursuit of the aim of preserving price stability is transmitted to all parts of the economy and to all jurisdictions of the eurozone.
Dark Times for the EU
However, this is a troubling time for the EU. It was Germany’s ability to finance the debts of countries like Greece, Spain, Portugal, Ireland and Italy that rescued the eurozone in 2012. Considering southern Europe’s debts keep rising to unprecedented levels, it is understandable why Germany’s political institutions have intervened to question the EU’s current financial path. The coronavirus is shattering the eurozone’s ability to survive and without German money, it is impossible for it to do so.
Even the EU’s executive arm, the European Commission (EC), warned that the coronavirus has triggered the deepest economic downturn in its history. According to Bloomberg, the EC is convinced that COVID-19 threatens the euro’s future if the crisis is handled badly.
The eurozone is set to shrink by 7.7 percent this year, which would send unemployment and public debt levels surging. Officials warned that the crisis could widen the gulf between northern and southern European countries and push the bloc to breaking point due to varying exposures to the tourism industry and governments’ capacity to support households and businesses.
Economic output in Greece, Spain and Italy may fall by more than 9 percent this year, while it could be less than 7 percent in Germany and the Netherlands.
Prior to the coronavirus, the eurozone area was set to grow by 1.2 percent.
Without Joint Action the Eurozone Could Collapse
Gentiloni is right to warn that without joint action, the eurozone could collapse. Prior to the Constitutional Court’s decision, EU leaders were divided over what type of joint action is needed to tackle the bloc’s economic stagnation. Italy and Spain favor so-called “coronabonds,” a form of debt-sharing, while Germany and the Netherlands are opposed to this idea.
A crucial meeting this month will determine whether the EU is capable of joint action. Regardless of whether EU leaders agree on anything, the euro’s prospects are dire.
Until a way can be found to overcome the Constitutional Court’s opposition, it is unclear where the EU goes next. Time is running out for its leaders to agree upon a joint solution that is both financially sustainable and acceptable for all member states.
The coronavirus has tested the EU’s limits as a bloc and its leaders are on the verge of determining its future forever. Even if Germany and the Netherlands eventually agree to a form of joint action, there will come a time where their voters and institutions will no longer tolerate their financing of southern European debts, and it is clear that moment is fast approaching.