German court parks tank
on ECB lawn, kills OMT bond rescue
Doubtful whether ECB’s
back-stop scheme for bonds can be implemented if Europe’s debt crisis blows up
again
It is the first time in
the history of the German constitutional court that the judges have referred a
question of law to the European Court of Justice
7:48PM GMT 07 Feb 2014
368
Comments The tough language leaves it doubtful whether the ECB’s back-stop scheme for Spanish and Italian bonds can be implemented if Europe’s debt crisis blows up again, and greatly complicates any future recourse to quantitative easing if needed to head off Japanese-style deflation.
The German constitutional court refrained from issuing a final ruling on the legality of the plan, known as Outright Monetary Transactions (OMT). It referred the case to the European Court instead, but only after having pre-judged the issue in lacerating terms that effectively bind German institutions. “The Court considers the OMT decision incompatible with primary law,” it said.
“This is a massive attack on Europe’s rescue strategy. I do not know whether the markets have understood this yet,” said Clemens Fuest, head of Germany’s ZEW Institute.
Marcel Fratzscher, from Germany’s Institute for Economic Research (DIW), said the judgment kills the OMT for the time being. “I don’t think the ECB can activate the programme as long as the case remains open at the European Court,” he said.
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“The German Court
has parked a tank on the lawn of the ECB,” said one expert closely involved
with the case. “The bank’s nuclear weapon is no longer operational, but you
could say they bought 18 months of eurozone calm, so the OMT served its
purpose.” The court judgment was shockingly harsh, though it left a possible way out if the OMT is redesigned and greatly limited in scope. “There are important reasons to assume it exceeds the ECB’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,” said the court.
The eight judges said they were “inclined to regard the OMT decision as an Ultra Vires act”, adding that this “creates an obligation of German authorities to refrain from implementing it”.
The verdict is a blow to the ECB’s president Mario Draghi, who unveiled the OMT in July 2012 with his pledge to do “whatever it takes” to save monetary union. The gambit restored faith in Spanish and Italian sovereign debt almost overnight and averted the imminent collapse of EMU, but Mr Draghi was always sailing close to the wind. While the German finance ministry backed the scheme, the Bundesbank and top German economists opposed it vehemently as a fiscal blank cheque for Club Med, and a fatal erosion of ECB independence.
The ECB insisted on Friday that “the OMT programme falls within its mandate”. One EU official said the Bundesbank is legally obliged to take part in OMT operations if called upon, but admitted that nobody can force it to obey. “If necessary we could still implement the OMT without Germany, but it would not send a good signal,” he said.
Hans Redeker, from Morgan Stanley, said the court - or Verfassungsgericht - had crippled the ECB. “They taken away the ECB’s weaponry, and greatly increased the hurdle for QE. The ECB won’t be able to respond as another wave of deflation hits from Asia, leaving the eurozone a step closer to a Japanese crisis,” he said.
Ebrahim Rahbari, from Citigroup, said the surprise decision was a “clear negative” that binds the hands of the ECB. While the European Court may eventually validate the OMT, it cannot deviate far from the German verdict without provoking a political backlash.
Udo di Fabio, a former judge at the Verfassungsgericht and author of earlier rulings on the euro, said the court is deliberately fencing in the ECJ, constraining its room for manoeuvre by issuing its own prior judgment.
Investors reacted calmly to the news, with bond yields falling slightly in southern Europe. “Italian and Spanish bonds have a gigantic comfort zone of 600 basis points. The market view is that the ECJ will wink this through when the time comes so there is nothing to worry about,” said Andrew Roberts, from RBS.
This is the first time that the Verfasungsgericht has referred a case to the European Court. Contrary to general belief, however, the ECJ is not the higher judicial body. The referral is a courtesy, and in this case a clever political ploy.
The Verfassungsgericht ruled in its famous judgment on the Maastricht Treaty in 1993 that it reserves the right to strike down any EU law that breaches the German Grundgesetz or Basic Law.
It went even further in its ruling on the Lisbon Treaty in 2009, reminding the EU authorities in acid terms that the sovereign states are the “masters of the EU Treaties” and not the other way around.
It set out limits to EU integration and warned that whole areas of policy “must forever remain German”, adding that Germany must be prepared to “refuse further participation in the European Union” if EU aggrandizement threatens its democracy in any way. Today Europe's most powerful court dropped another bombshell.
