German court rules EU bond-buying scheme ‘incompatible’ with law

Germany’s highest court has said countries availing of the ECB’s unlimited bond-buying programme may only do so by agreeing to forego debt cuts.

The constitutional court in Karlsruhe said yesterday the outright monetary transactions (OMT) programme was “incompatible” with EU law and did “not appear to be covered by the mandate of the European Central Bank”.

However, the German court referred the complaint to the European Court of Justice, saying OMT lay outside the judges’ remit as German constitutional guardians.

The judges, in a 6:2 majority verdict, attacked OMT as bearing all the hallmarks of an illegal economic programme requiring a tight legal corset to make it fit with EU law.

'Firepower'
To do this, they argued, OMT's unlimited "firepower" must be strictly limited. Crucially for Ireland, which has floated the idea of an OMT application, they argued that a precondition of OMT participation would "probably require that the acceptance of a debt cut must be excluded".

Karlsruhe’s final ruling on the European Stability Mechanism (ESM) bailout fund, due on March 18th, will no longer incorporate an OMT verdict.

Unveiled last year, OMT would allow the ECB to buy up on secondary markets unlimited sovereign bonds of struggling member states on condition they submit to an ESM bailout programme. Though yet to be activated, the mere prospect of OMT – accompanied by ECB president Mario Draghi’s vow to do “whatever it takes” to defend the euro – is credited with returning calm to the single currency bloc.

Fiscal support
While the ECB argued the programme complied with its mandate to guard euro stability, complainants to Germany's constitutional court said it in effect dragged the Bundesbank into a pan-European fiscal support programme not envisaged by EU treaties.

The judges agreed with the complainants, seeing “grave reasons” to believe OMT went beyond the ECB’s core mandate to preserve monetary stability and breached the central bank’s ban on providing monetary financing of budgets.

The ECB argued before the Karlsruhe court that growing spreads reflected investor concerns about a possible euro area fragmentation – and thus came under its mandate to guard the single currency’s stability. However, the Bundesbank, a vocal opponent of OMT, argued such spreads reflected a vote of no-confidence by investors in the ability of a state to reform its economy to achieve budgetary stability.

The court suggested the ECB was being disingenuous in claiming OMT’s primary focus would be of a monetary policy nature. Economic influence was its focus, the majority of judges suggested.