And Barney Reynolds, a leading UK and international financial services lawyer and a partner at Shearman and Sterling LLP, said the move underlined the deep and widening divisions between countries in the north of Europe, such as Germany and the Netherlands, and those in the south, such as Italy, which has been particularly badly hit by COVID-19, leaving the bloc facing a “critical moment”. Plaintiffs including former MEP Hans-Olaf Henkel had initiated the case, at Germany’s constitutional court, based in Karlsruhe, last week in which they argued the Public Sector Purchase Programme (PSPP), the mechanism by which the ECB is attempting to mitigating the impact of the coronavirus pandemic by purchasing private and public sector securities to the tune of £657billion (750 billion euros), represented direct financing of governments.
The court did not find proof of direct sovereign financing – but did conclude the German government had failed to adequately scrutinise the objectives and mechanisms of the scheme – a verdict Mr Henkel later described as a “declaration of war” against the ECB.
Mr Reynolds, who has previously issued warnings about the way the eurozone operates, told Express.co.uk: “Germany is essentially saying it has delegated certain powers to the EU, but that it controls how the EU operates within those powers – so as to ensure the EU doesn’t overreach.
“Meanwhile, the ECJ asserts that it, alone, is the arbiter of whether the EU is operating within its powers and that the German constitutional court can play no role in the issue.”
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The ECJ did not regard as the German court’s decision – essentially that the set-up of the EU comprises a delegation of power from member states which members can continue to oversee – as correct, Mr Reynolds pointed out, instead seeing it as an autonomous legal order which they determine the scope of.
However, he added: “The fact is that the German constitutional court is in ultimate charge of that issue for Germany.
“In practical terms the member state courts are ultimately able to trump the EU court because they are the ones with the ability to bind their national entities – such as the Bundesbank, in this instance, which is being told not to cooperate with the ECB unless the ECB behaves in a manner satisfactory to the German constitutional court.
We’ve come to the crunch point when the northern eurozone is being asked, finally, to share in the fiscal costs arising from the zone
“The national courts are also best placed to enforce their views within the state in which they operate.”
Mr Reynolds said: “We’ve come to the crunch point when the northern eurozone is being asked, finally, to share in the fiscal costs arising from the zone.
“This is an inevitable moment for any such zone and has been long-heralded.”
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Assessing the north/south divide, he added: “So far, the north has had huge benefits – in terms of an artificially depressed currency, which lowers its export prices, the subsidisation of its producers through eurozone fiscal measures, and nobody blowing the whistle on the extraordinary financial risk they have created through insisting on treating member state debt as risk-free, when it is not.
“This last point has been essential to permit the half-built euro structure to operate given that the north insists that all eurozone states should finance themselves on their own.
“If this EU law treatment were undone, the eurozone would have to fund itself communally, and the northern eurozone would be exposed to the south financially.
“This arrangement has allowed the north to avoid the liabilities across the zone that naturally arise from the benefits it currently enjoys.
“It has also however polluted the financial markets with exceptional risk, exposing the assets of savers and investors.
“The UK mitigates that risk for itself and the rest of the world, but at the cost of the competitiveness of UK-based businesses.”
The extraordinary costs of COVID-19 meant the south could not continue to finance itself alone, and needed help from the north, finally seeing the fiscal benefit they had expected from the zone as a whole, Mr Reynolds said – but leaving Germany and the Netherlands strongly opposed to helping out.
He added: “Now the German court is saying the ECB can’t assist through its monetary policy operations – except on terms which Germany regard as satisfactory – since those operations mutualise to some degree liabilities within the zone, which is something Germany objects to.
“This restricts one of the remaining Eurozone levers for assisting the south financially and brings forward the critical moment when the south will have to decide what it makes of the entire system.”
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