Reconciling ECB and Germany’s highest court over OMT won’t be easy

The European Court of Justice has the unenviable task of refereeing a far-reaching legal clinch between powerful institutions with contradictory traditions

Germany’s constitutional court will refer a complaint against the ECB’s flagship bond-buying scheme to the European Court of Justice. photograph: sascha schuermann/afp/getty images

Germany’s constitutional court will refer a complaint against the ECB’s flagship bond-buying scheme to the European Court of Justice. photograph: sascha schuermann/afp/getty images

Fri, Feb 14, 2014, 01:15

There was a distinct whiff of sour grapes about last week’s ruling from Germany’s constitutional court in Karlsruhe.

The scarlet-robed judges were expected to deliver their verdict next month on two ingredients of Europe’s antidote to the euro crisis. First: their final verdict on the ESM bailout fund after a provisional green light last year. Second: the ECB’s unlimited bond-buying programme – Outright Monetary Transactions (OMT) – that was announced in 2012 to succeed previous bond-buying programmes.

OMT promised unlimited ECB fire power to steady bond markets through indirect secondary market purchases, a second line of defence behind the ESM promise of conditional financial assistance. The OMT programme, sealed with Mario Draghi’s promise to “do whatever it takes” to defend the euro, is credited with calming the choppy waters around the euro zone ship.

For many German politicians, lawyers and media outlets, however, ESM and OMT reek of a sell-out, a breaking of the “no-bailout” promise made to Germans at the start of monetary union and enshrined in Article 125 of the Lisbon Treaty.

Few bailout critics in Germany ever mention Article 123, permitting EU financial assistance if “a Member State is in difficulties or is seriously threatened with severe difficulties caused by ... exceptional occurrences beyond its control”.

This was how euro crisis assistance to Greece, Ireland and others was justified and formed the core of Berlin’s defence of the ESM in last year’s oral hearings in Karlsruhe. In a provisional ruling, the judges said it was likely ESM adhered to German constitutional provisions. The final ruling, due next month, will present conditions under which the German Bundestag can participate in the bailout programme – a ruling in the classic “yes, but” Karlsruhe tradition.

Last week’s announcement on OMT, however, had all the hallmarks of a “no, but” ruling.

In a 6-2 split vote the majority of judges warned that, in their eyes, OMT was “incompatible” with EU primary law and “does not appear to be covered by the mandate of the European Central Bank”.

In a minority ruling, two judges argued that they had no business ruling on OMT at all. With no direct remit over OMT and the ECB, the judges, for the first time in the court’s history, passed the issue onto the European Court of Justice in Luxembourg for clarification.

That done, the six-judge majority launched a legal attack on the ECB, accusing its OMT programme of opening the door to illegal monetary financing, while masquerading behind a concern for stabilising the euro.

If OMT was allowed to pass unchecked, the German judges argued, it would grant the ECB carte blanche to intervene on markets every time bond yields began to spread again.

This causes democratic problems in Germany, Karlsruhe judges argue, because activating OMT would oblige the Bundesbank to co-finance bond-buying, impinging on its own independence as final guardian of Germans’ money. OMT would also, so the concern, undermine the budgetary independence of the Bundestag. If money is flowing into bond-buying, it isn’t available for MPs to spend at home. That, without ESM or OMT, the euro might no longer exist is an argument rarely heard in the German public debate.

But it was a point raised by ex-ECB executive Jörg Asmussen last year in Karlsruhe. Prior to the OMT announcement, he said, “the euro was on the brink of a disorderly break-up”.

Within hours of Karlsruhe’s ruling on OMT, German bailout critics pronounced the programme dead in the water.

Prof Dietrich Murswiek, representing a main complainant in the case, says Karlsruhe backed his argument that OMT moves the ECB beyond its mandate and outside EU law. Now the German court wants the ECJ to confirm this and force the ECB to make concessions, such as limiting OMT’s “unlimited” fire power and ruling out debt write-downs on bonds bought.

“At its heart you could call this a poisoned compromise offer from Karlsruhe,” said Prof Murswiek of the University of Freiburg. “Regardless of how the ECJ decides on OMT – as illegal or requiring limits – the programme has died.”

Other experienced observers are less sure the bond-buying programme has expired before ever being activated.

Ongoing battle
Many see the OMT ruling as the latest round in a battle between Karlsruhe and EU institutions going back to its 1993 Maastricht ruling, when the German court left an option open for it to identify in future so-called ultra vires acts – taking place beyond EU law.

“They have now discovered in OMT what they identified in 1993,” said Prof Franz Mayer, who represented the Bundestag in several constitutional cases in Karlsruhe. He predicts that, before the year is out, Luxembourg will seek a compromise in the case, “finding a way to leave OMT intact while leaving something for Karlsruhe – but in this order”.

Once the ECJ has made its ruling, Karlsruhe will decide if it can live with that. If not it could, in an extreme case, block Bundesbank OMT participation – forcing other euro area banks to close the funding gap.

For Germany’s neighbours, this raises serious questions about who has the final say on compliance with EU law: Luxembourg or Karlsruhe. “I don’t think there is any appetite to see any supreme court in any jurisdiction usurp the role of the ECJ,” said Dr Gavin Barret, senior law lecturer at Trinity College Dublin. “The activism of Karlsruhe in recent years in European affairs has been watched with concern around Europe.”

It is a concern shared by leading German European lawyers. “If we allow national constitutional or supreme courts to propound ...European law, we risk ending up with twenty-nine different versions of EU law at the national level,” said Prof Mayer. “It would make a mockery of the whole idea of a single body of EU law.”

For Germany’s neighbours, that raises serious questions about Karlsruhe’s empowering itself as a final court of appeal on EU issues.

“If we allow national constitutional or supreme courts to propound ... European law, we risk ending up with 29 different versions of EU law at the national level,” said Prof Mayer. “It would make a mockery of the whole idea of a single body of EU law.”

Indeed the two dissenting Karlsruhe judges in the OMT case question whether or not they had any right to hear the OMT case at all.

Justices Michael Gerhardt and Gertrude Lübbe-Wolff concede the ECB is treading a delicate line between economic and monetary intervention, the former legal and the latter illegal under the central bank’s mandate. But had the Bundestag felt the ECB was muscling in on its budgetary territory, they point out, it could have gone to – or threatened to go – to the ECJ.

“The fact that it did none of this does not indicate a democratic deficit, but is an expression of its majority decision for a certain policy when handling the sovereign debt crisis in the euro currency area,” wrote Justice Michael Gerhardt.

Justice Lübbe-Wolff had stinging words for complainants who insisted the court must pre-cook possible reactions should OMT be activated in the future. Germany would have to cross that bridge when it came to it, she argued. And even then, she said, deciding on a course of action was the responsibility of Germany’s politicians and voters – not red-robed judges in Karlsruhe.

“In an effort to secure the rule of law, a court may happen to exceed judicial competence,” she wrote.

The ECJ has the unenviable task of refereeing a far-reaching legal clinch between powerful institutions with contradictory traditions: a central bank committed to defending its currency using carefully-calibrated linguistic ambiguity, and Karlsruhe judges obliged to pin down the meaning of words and ensure their compatibility with the constitution. Reconciling the two is the challenge facing the Luxembourg court this year.

Karlsruhe versus Europe Key rulings
of Germany’s constitutional court

Karlsruhe rules in a case euphemistically dubbed “Solange I” (as-long-as I) that it views the fundamental rights of Germany as supreme until as long as the European Community has no codified fundamental rights.

The ruling allows German courts review all incoming European legislation to ensure it doesn’t conflict with German fundamental rights.

Its “Solange II” (as-long-as II) ruling, partially reverses the 1974 ruling. Karlsruhe says courts need not review all EU legislation as long as European treaties guarantee the same fundamental rights as the German constitution. However Karlsruhe retains German courts’ authority to interpret new primary law of the European Community.

Karlsruhe backs the Maastricht Treaty but claims a competence to oversee whether legal acts of European institutions remain within or “break out” of their legal boundaries.

Any such break-outs, it ruled, are not legally binding in Germany.
Karlsruhe backs the Lisbon Treaty but warns of limitations of further EU integration without greater democratic controls at EU level. It underlines greater oversight of EU affairs for the German parliament and cites Germany’s so-called “eternity clause” – non-negotiable references to democratic and social values in the post-war constitution – to make the court a guardian of democratic values and thus a key player in European policymaking.

After widespread criticism of its Lisbon ruling Karlsruhe seems to roll back in its “Honeywell Ruling”, saying it will only examine whether European law exceeds EU competences if there is an “obvious” attempt to push through a “structurally important shift” of competences at member state expense.

In a 6-2 ruling, Karlsruhe describes the OMT bond-buying programme as “incompatible” with EU primary law and “does not appear to be covered by the mandate” of the ECB, asks the ECJ for a ruling.

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