The Case Against the Fed is a book by Murray Rothbard. It explains why central banks like the US Federal Reserve are such a disastrous idea. You can download it for free here.

But be warned if you click that link. When I did so in 2008, it opened my eyes so wide that my life shifted to an entirely different path. And my entire career was defined by what I read there.

Thirteen years later, I face the very same situation again. But this time, you’re here with me. And we’re about to discover The Case Against the Euro.

Only, this time, it isn’t a book. I’m talking about a court case. One that threatens to undermine the euro itself.

Last week, Philipp Bagus explained the background to Fortune & Freedom readers. Why the euro is so bad. Its painful effects on Europeans. And why it is unlikely to last. You can watch the interview here.

You can also read Philipp’s book Tragedy of the Euro for free here. (You might notice it has the same niche publisher as Case Against the Fed, by the way. That’s no coincidence.)

In our interview about his book, Philipp mentioned having joined a court case to stop the EU’s latest nonsense. For today, I asked Philipp to explain the court case he has joined – the case against the euro. Because, if I’m right, the very existence of the entire euro project itself is at stake.

The case against the euro

By Philipp Bagus

In its latest seven-year budget, the EU is trying to take another bold step toward a United States of Europe – a debt and transfer union. It wants to issue its own debts for the first time to finance its own coronavirus recovery budget. The plan is to issue €750 billion of its own bonds. The problem is, this procedure is a blatant violation of European law.

Article 311 of the Treaty of the Functioning of the European Union states that: “Without prejudice to other revenue, the budget shall be financed wholly from own resources.” In plain English, the EU should have a balanced budget. Debts are not “own resources,” they constitute borrowed capital.

In order to prevent another potential breach of law in the EU, I have joined preparations for a class action before the Bundesverfassungsgericht (the German constitutional court). Our aim is to prevent the German Bundestag (parliament) from agreeing to the €750 billion in bonds being issued.

The suit has been signed by many professors of economics and business in Germany and is led by prominent German eurosceptics. I form part of the group of 40 main complainants. Total signatures, which also include non-academics, are already at more than 1,000.

But this isn’t the first time that German professors have taken on the EU, the European Central Bank, and the euro itself…

The last time the Bundesverfassungsgericht almost undermined the euro

In May 2020, the German constitutional court ruled that the German government had failed to monitor the European Central Bank (ECB) properly. And that the ECB had failed to explain sufficiently whether its actions, namely its government bond purchase programme (PSPP) were within its mandate. The court gave the ECB three months to explain itself.

At the time, the ruling was a shock for financial market participants that did not know how to interpret the move. The ECB ignored the ruling at first, then answered the questions of the Bundestag, which considered that everything was explained sufficiently and just fine. But the ruling was a warning that the ECB should not overstep its competencies.

Another follow-up case lead by Professor Markus Kerber against the ECB policies was presented at the German Constitutional Court on Monday 8 March 2021. This time the case questions the constitutionality of the Pandemic Emergency Purchase Programme or PEPP.

In that case, it is argued that the ECB overstepped it competencies and the boundaries set in previous rulings with the coronavirus inspired purchases of government bonds because it is not in the mandate of the ECB to save the euro and finance struggling governments.

The latest farce

Because of Covid-19, ECB and EU actions are at a whole new level, in a blatant breach of EU law. We have to be aware that this EU law was introduced on the insistence of Germany, which would not have given up the Deutschmark and entered the EU without a prohibition of the monetisation of government deficits and a debt union. In addition to the PEPP, which is under the responsibility of the ECB, the European Commission itself is heading for the decisive step of issuing its own debts. Presumably, because it has no other choice to hold the eurozone together without strong tensions and even defaults. 

The case against the euro

The new case I have joined is financed by the private association Bündnisbürgerwille e.V., which has entrusted the elaboration of the case to Professor Dr. Hans-Detlef Horn from the University of Marburg. It is important to point out that the case is about a legal peculiarity.

The European law does not prohibit member states to indebt themselves and transfer funds to the European Commission for common expenditures and tasks. However, the European law rules out the possibility that the EU commission indebts itself; at least this is what the signatories argue.

The difference is crucial. Today countries like Italy could indebt themselves at very low rates to make expenditures during the coronavirus pandemic on its own responsibility and risk. With the plan of the European Commission, however, Italy could spend the funds of other countries through the common and debt financed budget. The incentive for Italy and others is then to overspend because the costs are shared but the benefits localised. Indeed, the common EU debts are a way to redistribute wealth, as the debts are guaranteed by all countries, but spent in specific countries.

Germany has to ratify the decision of the European Council to issue EU debts, as have all member states. If one country does not ratify the decision, it is void. The case brought before the German Constitutional Court argues that it is unconstitutional for the German president to sign such a ratification. And without German ratification, the EU cannot issue debts.

The case also argues that the German parliament would have to ratify a change in the EU Treaties with a two-thirds majority first, which has not been done. This requirement applies because the budget rights of the German parliament are affected by the issuance of debts that are guaranteed by German taxpayers’ money.

Furthermore, the case argues that the decision of the European Council is not backed by European law, which brings into consideration the so-called “ultra vires control.” Ultra vires argues that the Constitutional Court has to examine if a measure issued by the EU is within the competences that have been transferred to it by the German parliament. The ultra vires control is a protection against unilateral assumption of competences by the Union. It can’t simply claim authority for what has not been granted by member states of the EU.

This time, if the case is won, it will not take five years, as with the ruling on PSPP. That’s because the suit wants the constitutional court to bar the German president from signing a law that is unconstitutional. The effect would be immediate, as without the German ratification the EU debts are dead in the water.

Knocking on the door of Hotel California

One could argue that the case would not be decisive, because it does not affect the capacity of the ECB to monetise debts, nor the capacity of member states to indebt themselves. However, the ramifications are important and crucial.

This is so because the very existence of the euro hinges on the idea that debts will be mutualised and sustained by the strongest member states. And that sooner or later there is more “integration” into a European super state. Without this implicit guarantee, some European nations would struggle to finance themselves. If financial markets begin to doubt the support for this “project”, and especially if the unconditional German support for unlimited fiscal spending and debt monetisation starts to waver, trouble lies ahead for those who cannot stand on their own two feet in bond markets.

If the idea of further debt mutualisation in the EU has a setback, and the EU debts are stopped, southern governments could experience problems in their bond markets. They are very overindebted and need the support of the stronger states.

And therein lies another important question for common EU debts. Once there are such common EU debts, it is more difficult for a peaceful euro breakup to occur, because one would have to deal with the common debts somehow. It’s a similar issue to Scottish independence. How will the common debt be apportioned?

Without the possibility of common debt and using EU funds transferred to them, southern governments may just have to indebt themselves independently. When the euro breaks, the losses would then be easier attributed to those who are responsible for them and who spent the money.

Maybe this is an unwelcome side effect of the EU’s attempt to issue its own debt. It would make the breakup of the euro more painful to everyone mutually instead of just to the nation that is in default and wanting to leave. As such, the German constitutional court plays an important role for the future of the euro.

Philipp Bagus
Author of Tragedy of the Euro