German court backs ECB’s bond buying programme in ruling

Germany’s highest court has dismissed constitutional challenges to the ECB’s bond-buying programme OMT, presented by the Frankfurt bank at the height of the euro crisis to stabilise the single currency.

The closely-watched ruling came after almost 40,000 complaints were lodged against the programme with Germany’s constitutional court in Karlsruhe.

Complainants feared the as-yet unactivated programme from 2012 to buy up bonds of struggling euro members breached the Frankfurt central bank’s mandate, amounted to illegal monetary financing and would - if activated - create a massive financial liability for Germany.

On Tuesday the constitutional court ruled that the Bundesbank may participate in the OMT programme if, among under conditions, the purchases are limited from the outset; the purchases are not announced in advance; and the bonds are only in exceptional cases held until maturity.

If these and other conditions are met, the court ruled: “The OMT programme does not present a constitutionally relevant threat to the Bundestag’s right to decide on the budget.”

The court added that the OMT bond-buying programme “does not violate the complainants’ rights” and that the rights of German federal parliament’s rights and obligations regarding European integration, including budgetary responsibility “are not impaired” by OMT.

However the court ordered Berlin’s federal government and parliamentarians to “closely monitor any implementation of the OMT programme” and intervene if any “specific threat to the federal budget” arose -- either through the volume or risk of bonds purchased.

In the middle of the euro crisis, ECB president Mario Draghi’s promise to “do whatever it takes” to stabilise the single currency area was greeted with cheers by spooked financial markets. But the promise horrified German politicians and savers, who feared the ECB, by opening the door to bond-purchases of struggling euro member states, had crossed the red line into forbidden monetary financing.

They launched a long and bitter battle against ECB bond-buying and, following oral hearings three years ago, it seemed that a majority of judges in Karlsruhe agreed with the German critics.

In a 2013 preliminary 6:2 ruling Karlsruhe said it viewed the programme as “incompatible” with EU law and out of step with the ECB mandate -- legal matters over which it has no direct legal competence.

Given that OMT remains dormant -- and may well remain so -- this was a largely symbolic battle, but one with far-reaching questions to be answered: how far can the ECB go to protect the single currency before it will be reigned in? And have member states’ parliaments any role in this process?

Parallel to fiscal and monetary policy concerns, the OMT case brought to a head a long-running legal rivalry between Germany’s highest court and the EU’s highest legal instance.

Karlsruhe’s referral of the OMT challenge to the CJEU in Luxembourg was the first move of its kind from Germany. It reflected the fact that European - and not German - courts oversee EU institutions. But the Karlsruhe court threw down the gauntlet to the rival legal institution by making clear in its referral that it viewed OMT illegal.

Last year, however, the CJEU ruled in favour of the ECB and its bond-buying programme, leaving the German judges with little option but to fall in line.

As the ECB answers to Luxembourg and not Karlsruhe, the German judges on Tuesday ruled the complainants’ case partly inadmissible.

However the Karlsruhe court recalled in its ruling that it has created some legal wriggle room for itself in previous cases. For instance Germany’s highest court believes it can intervene if European institutions acted in such a way that violate Germany’s constitutional identity or rights of German citizens under post-war Germany’s basic law. In addition, the court says it has powers to intervene to prevent a transfer of competences to the European level - in this case budgetary responsibility -- that would deplete the legitimacy of state bodies, directly elected by the people.

Complainants had argued that the failure of the federal government and Bundestag to intervene and prevent the 2012 OMT programme represented such a case. Though the Karlsruhe ruling found that neither citizens' nor the German parliaments' budgetary rights were impaired, the Karlsruhe judges repeated their own "serious objections" to the programme on Tuesday and concerns about the level of CJEU oversight of the ECB.

They took issue with the CJEU for failing, in its ruling, to “question, discuss or even review the soundness of the underlying factual assumptions behind OMT bond-buying”.

The German judges also took issue with the CJEU’s view that OMT was solely an instrument of monetary policy and noted that, in their view, their Luxembourg colleagues had failed to address the “noticeable reduction in the level of democratic legitimation” of the ECB’s actions through OMT.

With ill-concealed satisfaction, however, the Karlsruhe court noted that its intervention had forced the ECB to reveal the difference between OMT’s “shock and awe” announcement and the realities of its implementation.

Not only would OMT require further conditions if ever implemented, ECB officials conceded in oral hearings in Karlsruhe that the volume of bonds bought up would be limited.

In effect the German court forced the bank was to reveal that Mr Draghi’s “whatever it takes” announcement - at least where OMT was concerned -- was a bluff, though an effective one.

German critics of OMT expressed disappointment that the Karlsruhe court had failed to rule the programme unconstitutional.

“That is a shame because it’s clear that OMT, in the first instance, pursues a fiscal priority of giving highly-indebted countries access to loans,” said Prof Clemens Fuest, president of Munich’s Ifo economic institute. “The German taxpayer helps carry the risk for this though the Bundestag never voted in favour of it.”