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14th Aug 2022

Banking union faces legal challenge in Germany

  • ECB governing council (Photo: European Central Bank)

Germany's constitutional court is once again to be a testing ground for the eurozone's reponse to the financial crisis as a group of academics has filed a case arguing that the banking union is illegal.

The five academics argue that the Banking union - a new supervisory and bank resolution system for eurozone banks - breaches German law as it was not agreed with the right treaty changes, reports Die Welt am Sonntag.

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Markus Kerber, a finance professor at Berlin Technical University (TUB), told the paper that the banking union had "no legal basis in the EU treaties and so represents a breach of constitutional rights."

The supervisory system - under which the European Central Bank will, from November, oversee the financial health of around 120 banks with the power to shut them down - is the "pinnacle of Brussels power-grabbing to date", says Kerber.

The complainants, who filed their papers last week, also find that a conflict of interest has arisen because the ECB council, which also makes interest rate decisions, has a veto right on banking supervision decisions.

The challenge also calls into question the Single Resolution Mechanism, which sets out to deal with failing banks, as well as the €55bn fund meant to cover the costs of the process.

Kerber and his allies say that EU leaders did everything to avoid a treaty change because the ensuing national ratifications would have been too politically risky.

He accused German finance minister Wolfgang Schaeuble of "misleading" the public about the risks of the banking union and said the parliament was "fast asleep".

Germany's constitutional court has been the scene of several challenges concerning further economic and monetary integration in the eurozone. Its rulings normally allow the action to go ahead but with some caveats.

Each challenge, however, represents renewed uncertainty for policy-makers and the markets while the case makes its way through the court.

The banking union is seen by some as the most far-reaching integration step since the introduction of the euro.

The court earlier this year rejected a challenge - in which Kerber was also involved - to the eurozone bailout fund, the European Stability Mechanism.

It found the fund to be legal so long as the Bundestag, the German parliament, exercised enough oversight on it.

But the court also referred a decision on Outright Monetary Transactions (OMT) a never-used 2012-announced plan to buy the government debt of troubled eurozone countries, to the European Court of Justice (ECJ).

The German judges asked several questions about the legality of the scheme - widely credited with easing the eurozone crisis - and outlined how the EU court would have to interpret OMT in order for the German court to find it acceptable.

The ECJ still has to rule on the matter.

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