German court’s “No, but” may undermine ECB’s OMT

The constitutional court strongly implied that the central bank’s bond-buying programme is outside its remit. OMT defenders will worry, but there are hints that the higher European court can make things right. Still, the decision will reinforce German doubts about the ECB.

From legal and economic perspectives, the German constitutional court’s judicial opinion on the ECB’s bond-buying programme will not have immediate consequences. Politically, however, the Karlsruhe judges’ statement is dynamite.

The court suspended its case on the legality of OMT, the bond-buying programme that ECB President Mario Draghi announced back in 2012 after pledging to do “whatever it takes” to save the euro. The German judges are asking the European Court of Justice to rule on the conformity of the announced policy – it has so far remained virtual – with European treaties. This buys some time, because the legal proceedings are likely to drag on for a while. Meanwhile, the ECB can theoretically proceed. Moreover, the European Court of Justice is unlikely to be as strict on the interpretation of the ECB’s mandate as German judges. No wonder financial markets took the news in their stride.

In Germany, however, the fact that six of the eight Karlsruhe judges think OMT is basically verboten can only strengthen the criticism of the ECB’s actions in the last two years. The ruling states that the German government would have the constitutional duty to fight the ECB’s decision if found illegal – and German citizens the right to sue if the government stayed idle.

Karlsruhe is convinced the ECB is exceeding its legal power on two accounts. OMT, they argue, would boil down to the ECB conducting its own economic policy. Moreover, the judges claim the programme violates the treaties’ ban of monetary financing of governments by the central bank.

These views may be without consequences if Luxemburg approves OMT – even less so if OMT, as could be the case, is never actually implemented. Furthermore, Karlsruhe leaves a back door open by suggesting a strictly-defined version could pass its rigorous test.

Politically, the judges plain language will cause a stir in Germany, where the court is highly regarded and seen as a moral watchdog. The fact that it backs flawed arguments of an outdated economic orthodoxy will undermine the ECB’s legitimacy in Germany. Angela Merkel, who supported Draghi when he launched his flagship plan, might find herself in a tight spot.

This article was initially  published as a Reuters Breakingviews comment on 7 February  2014.

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