"A Legal Nightmare": In Latest European "Freakshow", EU Threatens To Sue Germany Over QE Ruling

In the latest European farce, the European Commission threatened to sue Germany after the country’s top court questioned the legality of the ECB’s bond-buying program, Bloomberg reported over the weekend. In what Nordea's Andrewas Steno Larsen dubbed the "ongoing freakshow in the Euroarea", the EC president - a German no less - Ursula von der Leyen said that "The final word in EU law is always spoken in Luxembourg. Nowhere else."

In other words, following last week's shocking decision by Germany's constitutional court which found that some aspects of the ECB's QE are not constitutional and gave the ECB a 3 month ultimatum in which to demonstrate that QE was a proportional response, "we are gearing up for a remarkable legal stand-off between EU and Germany" writes Larsen, who adds that "the German head of the EU Commission, Ursula Von Der Leyen, is now openly battling her mother country's constitution as she hinted that Brussels is considering taking legal steps that could result in Germany being sued in Europe's highest court over the ruling from its constitutional court on ECB bond buying in a letter to the German Press Agency. Never underestimate the arrogance of EUR-crats!"

And here is the German European who is tasked with leading the onslaught on the German constitution.

German head of the EU Commission, Ursula Von Der Leyen.

And just to make sure the Germans are really pissed off, the ECB has tasked its staff to study if they should consider buying junk corporate bonds according to Reuters, "as if the ECB hasn’t manipulated credit prices enough already" as Nordea helpfully adds, noting that "ultimately, we think the EUR-ship will be glued together again – but markets are rightfully pricing in a risk of an ugly political showdown for the time being (wider spreads, relatively low EUR/USD etc)."

Going back to the EU threat to sue Germany, one which as Bloomberg notes "has major implications for the European project itself and the monetary policy that underpins it" and would be a "legal nightmare", here is how it might play out, courtesy of Bloomberg:

1. What infringement would the EU claim?

Germany’s constitutional court decided last week it wouldn’t follow a 2018 judgment by the EU Court of Justice that cleared the central bank’s debt purchases, totaling 2.7 trillion euros ($2.9 trillion) since 2015. But under EU treaties, the top European court ranks higher. The German judges said they could deviate because the bloc’s top judges overstepped their powers when they backed the ECB’s policy in a previous ruling. It was a stinging challenge to the 68-year-old EU tribunal. That prompted a rebuke by European Commission President Ursula von der Leyen on Sunday. “The final word on EU law is always spoken” by the European court, she said. “Nowhere else.”

2. How can the EU sue a member country?

The European Commission, the EU’s executive and administrative body, has the task of policing whether member states are abiding by EU law. If it finds that an EU country isn’t complying, it has to take action. The commission first informs the country that it’s in breach and tries to negotiate a solution. If that goes nowhere, the commission files a court case.

3. How real is the risk of the case going to court?

This warning by the Brussels-based guardians of the EU doesn’t necessarily trigger an infringement procedure. Yet von der Leyen also has to consider the deterrent effect. “On the other hand, the commission cannot simply ignore this challenge to EU law,” Miguel Maduro, a former advocate general at the EU Court of Justice, said in an interview. Otherwise, such national challenges “might be replicated by other states. What would the commission do if the Hungarian constitutional court or the Polish constitutional court, or others, do something like this.”

4. Is there a road map for such lawsuits?

So-called infringement proceedings aren’t unusual. Most of them don’t make headline because they often address very technical questions on EU regulations. However, they’ve usually resulted in a kind of give-and-take where EU complaints are resolved with policy changes or, in extreme cases, fines. Yet it’s unlikely that Germany’s top court would reverse its ruling if the European court overturned it. That could trigger an institutional crisis for the EU. “Making this statement that they’re considering opening an infringement procedure without actually opening it is a smart, prudent approach,” Maduro said.

5. Would the EU sue the German court or the German government?

The EU can only sue member states. That kicks in if an institution in a country — even a court — allegedly breaks EU law. Under international law, countries need to ensure that their agencies are in line with the law and must fix any transgressions.

6. Which court would hear the EU’s suit – and is that a problem?

The case would be heard by the EU’s top court, the same one the German judges attacked in their May 5 ruling. A 15-judge panel handed down the December 2018 judgment on the ECB’s asset purchases. Since the court has 27 judges, that gives it some leeway to make sure that all of the same judges don’t rule on this case if it goes to court.

7. What’s the politics behind the dispute?

German opponents of euro-area bailouts and ECB bond-buying to protect the shared currency repeatedly challenged those policies in the country’s high court, which until last week broadly went along with the rescue measures. Former German Finance Minister Wolfgang Schaeuble, a veteran of Europe’s bailout battles, warned that letting nations cast doubt on the EU court’s authority could eventually threaten the euro’s survival.