Published in Business Spectator (Melbourne), 20 June 2013

The weekend after the Australian federal election, on September 22, Germany will go to the polls. Speculation about the potential outcome lacks any excitement value. The question is not whether Angela Merkel will remain chancellor, but only which flavour of coalition government she will lead. Changes in the general direction of German politics are highly unlikely in any case.

Around the time of the election, probably a few days or weeks later, we will also find out the result of another vote. The first difference is that this is not a popular vote but it involves only eight people. The second dissimilarity is that the outcome is a bit more uncertain. And the third and final difference is this: The decision really matters.

I am, of course, talking about the German constitutional court and its decision on the legality of the European Central Bank’s policies. The eight judges are, in effect, deciding not just on some odd technicalities of monetary policy but on the future of Europe’s monetary union – and perhaps also on the future of the European Union itself.

Viewed from outside Germany, it must appear bizarre that one country’s – albeit highest – courts can wield so much influence on issues concerning the entire eurozone and the global economy. However, in a European Union in which anything seems to go as long as it keeps the dying currency alive, the judges are the only hope for anyone believing in adherence to the law. Or, for that matter, for anyone who still cares about the separation of fiscal and monetary policy.

The legal and economic matters on which the court needs to decide are fiendishly complex for constitutional lawyers and economic experts alike. But in essence they are actually quite simple:

– What is the role of a central bank?

– Is there an acceptable blur between a central bank pursuing monetary policy and financing governments?

– And can the European Central Bank be allowed to act in a way that effectively forces Germany into a liability union with other countries?

Last week, the court examined expert witnesses on the case. Despite considerable media interest in these hearings, there was nothing surprising about them.

The Bundesbank, Germany’s central bank, once again voiced its criticism of the ECB’s policies. The ECB, on the other hand, ironically represented by its German board member Jörg Asmussen, defended itself against any allegations of wrongdoing (though technically, the ECB was not the defendant in this case).

All other expert witnesses basically repeated their well-known positions in favour of or against the ECB’s actions. Instead of inviting them to the court in Karlsruhe, the judges could have just read the opinion pages of Germany’s major newspapers or watched one of the many political talk shows on German TV.

Nevertheless, there were still a few surprising moments, courtesy of the judges.

Previously, there was speculation that (as so often before) the court would be afraid of its own power and shy away from making tough decisions. There was even the idea that the court might just delegate any decision-making to the European Court of Justice – which would have been a de facto surrender of the German court’s power and influence (not very likely).

In fact, it is now clear that the constitutional court is not going to be pushed over. The judges, led by the court’s president Andreas Vosskuhle, are determined to put a limit to European monetary policy.

Vosskuhle left no doubt about what he made of the ECB’s policies. He explained how the ECB was engaged in financing European governments through the back door, and warned that this practice would be hard to reconcile with parliament’s sovereignty on budgetary issues. But of course, Vosskule explained, such measures were popular with everyone – except for those poor taxpayers who would ultimately have to foot the bill, he said.

It seems that after many ‘yes, but’ decisions on questions of European integration, the German constitutional court is finally willing to show its teeth. Maybe it’s just because the illegality of the ECB’s policies is too plain to see. It is ludicrous to limit the extent of Germany’s liability for other European countries to €190 billion under the European Stability Mechanism while simultaneously allowing the ECB to increase Germany’s financial exposure ad libitum.

After last week’s hearings, we may now expect a judgment sometime in September or October that will restrict the ECB – especially in its ability to purchase government bonds. This may not be an outright ban of bond purchases but it may put a hard constraint on them – or even subject such measures to parliamentary scrutiny.

Whatever the precise ruling may be, it is not going to be compatible with the ECB’s ‘Whatever it takes’ attitude. In the end, there will be limits on monetary policy, probably defined by the constitutional court. This would damage the ability of the ECB to defend the euro at all costs. No longer could it credibly announce ‘shock and awe’ measures as there would always be constitutional terms and conditions attached to them.

As a consequence of such a decision, the euro crisis will become acute again. ECB President Mario Draghi had managed to calm it down by announcing potentially unlimited bond buying. If he cannot deliver on this promise thanks to German constitutional road blocks, the ECB’s crisis management strategy will lie in tatters – and monetary union may fall apart quickly without an ECB backstop.

Angela Merkel may get re-elected in September and not even the choice of her coalition partner will make a difference. But the court’s ruling will determine what Germany will really allow Europe to do.

Germany’s most important decision for this year will not be made by its people in general elections but by eight judges in red robes. And that makes it worth paying attention to this rather obscure and complicated law case.

One final irony: If the judges manage to strengthen parliament’s position in the context of Europe’s crisis management, they would have done a great service to the rule of law and the principle of democratic accountability. When was the last time that a court case mattered more to democratic culture than a general election?