Trust 71%
Don't Trust 23%
Don't Know 6%

German voters trust the German Constitutional Court

A huge majority of German voters (71%) say they trust the German Constitutional Court. With the Court likely to set out red lines on how far Germany can go in its response to the Eurozone crisis, it is clear that German voters will take its judgements very seriously.Source: YouGov Deutschland for Open Europe & Open Europe Berlin.
Trust 30%
Don't Trust 60%
Don't know 10%

German voters don't trust the European Commission

The majority of German voters (60%) said that they don't trust the European Commission when polled in 2013. Germans place far more trust in national institutions like the German Constitutional Court, which will play a key role in deciding Germany's role in the Eurozone crisis.Source: YouGov Deutschland for Open Europe & Open Europe Berlin.

7 February 2014

The German Constitutional Court and  ECB’s OMT bond-buying plan

The German Constitutional Court in Karlsruhe, referred several questions surrounding the European Central Bank’s  Outright Monetary Transactions bond-buying programme (OMT) to the European Court of Justice on 7 February 2014.

It is evident that the German Constitutional Court believes the OMT is illegal and incompatible with both EU and German law. However,  given that the Court only has jurisdiction on matters of German domestic law, it argues that it must refer key questions to the European Court of Justice  (the body which interprets EU law),  given that the European Central Bank’s mandate and any overstepping of EU treaties is a question of EU law.

The European Court of Justice (ECJ)  is likely to side with the EU institutions and rule that OMT is compatible with EU law, with the German Constitutional Court then likely to say its hands are tied. Still, the decision throws new uncertainty into the fragile Eurozone economy and could hamper the recovery. The German Constitutional Court may also, in its interpretation of the OMT’s compatibility with German law, insist in new red lines – potentially limiting the level of purchases. This itself would severely restrict the role of the European Central Bank.

What are the new developments?

Surprising news out of Karlsruhe this morning as the German Constitutional Court (GCC) has asked the ECJ to rule on whether the ECB’s OMT programme (a promise by the ECB to buy an unlimited number of government bonds if the Eurozone crisis worsened) is “compatible with the primary law of the European Union”. The legality of the OMT is a hugely important issue as it is widely seen as a key factor in stabilising and preventing a break-up of the Eurozone.

The Court stresses that it believes the ECB’s programme does violate the law, but can be brought in line with the EU treaties, saying:

The subject of the questions referred for a preliminary ruling is, in particular, whether the OMT Decision is compatible with the primary law of the European Union.In the view of the Senate, there are important reasons to assume that it exceeds the European Central Bank’s monetary policy mandate and thus infringes the powers of the Member States, and that it violates the prohibition of monetary financing of the budget. While the Senate is thus inclined to regard the OMT Decision as an ultra vires act, it also considers it possible that if the OMT Decision were interpreted restrictively in the light of the Treaties, conformity with primary law could be achieved. [1]

German Federal Constitutional Court, 7 February 2014

What questions have been referred to the ECJ?

The first key question the German Court asks the ECJ is whether the OMT is “to be qualified as an independent act of economic policy?” The GCC believes that it is, and that it goes beyond the mandate of the ECB, which only refers to monetary policy. It also stresses that the OMT could lead to “considerable redistribution between the Member States”, which is forbidden by the EU treaties.

The German Constitutional Court also asks the ECJ to rule whether the OMT programme “violates the prohibition of monetary financing of the budget (Art. 123 TFEU).” Again, here it seems the GCC believes that it may well do, and that if it were decided so, the GCC would have to stop the German authorities from taking part. Essentially, the GCC has asked the ECJ to rule whether the OMT is fundamentally compatible with the primary law of the EU.

Will the GCC still provide its own ruling?

Yes, but likely only after the ECJ has ruled. The German Court seems to be stuck. It has serious concerns over the OMT and its compatibility with the EU treaties and German law. However, it feels it cannot rule on issues of German law until the questions over EU law have been settled – which are outside of its jurisdiction. Once the ECJ has ruled, the GCC will likely re-examine how the OMT fits with German law. However, it will be constrained by the ECJ’s ruling and interpretation of EU law.

How might the GCC and ECJ rule?

It is patently obvious that the GCC believes that the OMT violates primary EU law, because it goes beyond the mandate of the ECB,  thus breaking the EU Treaties, and violating German law. The Court says:

The OMT Decision does not appear to be covered by the mandate of the European Central Bank.The existence of an ultra vires act as understood above creates an obligation of German authorities to refrain from implementing it and a duty to challenge it. These duties can be enforced before the Constitutional Court at least insofar as they refer to constitutional organs.

German Federal Constitutional Court,  7 February 2014

However, given that the GCC cannot rule on EU law it has referred this decision to the ECJ. That said, as the quote below shows, it could still be forced to accept that the OMT is legal if the ECJ approves it and/or there are further restrictions put on it:

Subject to the interpretation by the Court of Justice of the European  Union, the Federal Constitutional Court considers the OMT Decision incompatible with primary law; another assessment could, however, be warranted if the OMT Decision could be interpreted in conformity with primary law.

In the view of the Federal Constitutional Court, the OMT Decision might not be objectionable if it could be interpreted or limited in its validity in conformity with primary law in such a way that it would not undermine the conditionality of the assistance programmes of the EFSF and the ESM, and would indeed only be of a supportive nature with regard to the economic policies in the Union. In light of Art. 123 TFEU, this would probably require that the acceptance of a debt cut must be excluded, that government bonds of selected Member States are not  purchased up to unlimited amounts, and that interferences with price formation on the market are to be avoided where possible.

German Federal Constitutional Court, 7 February 2014

Importantly, the GCC flags up that it could be willing to accept the OMT if it is no longer seen as being “unlimited” and if it is no longer seen as its own economic policy – but as long as it continues to have conditionality. This would require a significant reworking of the OMT and would severely hamper the ECB’s approach to tackling the crisis. It may also provide new boundaries (both legal and practical) on what the ECB can do in a crisis.

Ultimately, the final GCC ruling will depend heavily on how the ECJ rules. That being said, it seems very unlikely that the ECJ would rule against something as significant as the OMT, which has played a huge role in securing the Eurozone.

Does this mean the OMT is now invalid?

It certainly casts significant doubt on the issue, however, it remains somewhat in limbo for the time being. The GCC evidently believes that it is illegal and should be invalid or at the very least amended. However, it also cannot provide such a categorical ruling before the ECJ has had a chance to rule or before the OMT has been amended and clarified.

Given that the ECJ tends to rule in line with EU policy and with EU institutions it seems highly doubtful that it would rule against the OMT. If it were to support OMT without any changes, this would put the GCC in a very difficult position. It would be stuck between believing it falls outside the mandate of the German institutions as to their responsibilities to the EU, however, it would not have any clear basis in terms of EU law.

In the meantime, it is clear the ECB still considers the OMT practically operational. In its response to the referral, the Central Bank said:

The ECB reiterates that the OMT programme falls within its mandate. [2]

European Central Bank, 7 February 2014

What does this mean for Eurozone?

This could well spark further jitters in the Eurozone. For all the talk or institutional and structural change as well as national governments pushing reform, the OMT has been the key factor in easing the crisis. It certainly throws a new bout of uncertainty into the very fragile economic recovery in the Eurozone. It could drive flows back to where they were previously, with the core countries benefiting from safe haven flows and the periphery being hit by the uncertainty. That said, it is likely that most investors will take a wait and see approach given the number of moving parts in this decision.

Footnotes

  1. German Federal Constitutional Court Principal Proceedings ESM/ECB: Pronouncement of the Judgment and Referral for a Preliminary Ruling to the Court of Justice of the European Union, Press release no. 9/2014, 7 February 2014
  2. Thomson Reuters Market News, ‘ECB says OMT plan “falls within its mandate’, 7 February 2014.