German court hears argument over ECB bond buying plan

Germany’s highest court this morning is hearing arguments this morning that the European Central Bank’s bond-buying programme was a flagrant breach of its monetary policy mandate.

The hearing in Karlsruhe comes almost four years after ECB president Mario Draghi announced the Outright Monetary Transactions (OMT) programme, stabilising the single currency at the height of the euro crisis.

Even though the bank has yet to activate the programme, it remains a bone of contention among prominent politicians and economists in Germany, who argue that it is incompatible with Germany’s post-war constitution, the Basic Law.

Bundesbank president Jens Weidmann, the loudest and most prominent critic of the programme, is testifying at the court today. It is his second appearance in Karlsruhe on the OMT, which he voted against in the ECB governing council.

In 2013 he told the constitutional court it was “not the task of monetary policy to buy time for fiscal action”. Defending the ECB actions today will be Mr Yves Mersch, a bank executive board member.

The long-running row is about high-stakes euro crisis monetary policy.

But it also marks latest round in a long-running battle of wills – and EU competence – between the highest court of the EU’s largest member state in Karlsruhe and Europe’s highest court, the European Court of Justice (ECJ), in Luxembourg.

In their 2013 OMT hearing the Karlsruhe judges said they saw no option, given ECJ competence over EU and ECB legal affairs, to ask the Luxembourg court for a ruling on the bond-buying programme.

But their referral to the ECJ had a distinct whiff of sour grapes: in a

6:2 majority view, the German court said it viewed the programme as “incompatible” with EU law and did “not appear to be covered by the mandate of the European Central Bank”.

Six of the eight Karlsruhe justices attacked OMT as bearing all the hallmarks of an illegal economic programme, requiring a tight legal corset to make it fit with EU law.

Two Karlsruhe judges refused to join that ruling, saying it was beyond their competence, but the majority agreed with the German opponents of OMT, seeing “grave reasons” to believe the plan 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 in the original Karlsruhe hearing that growing interest rate spreads among euro members reflected investor concerns about a possible euro area fragmentation – and thus came under its mandate to guard the single currency’s stability. But the Bundesbank argued that such spreads reflected a vote of no-confidence by investors in the ability of a state to reform its economy to achieve budgetary stability.

In their referral the majority of Karlsruhe judges appeared to argue that economic influence was the focus of OMT, and that it was disingenuous of the ECB to claim that monetary policy was the programme’s main focus.

Last year, however, the European Court of Justice in Luxembourg backed the ECB on its bond-buying programme, saying it contributed to the “singleness” of single monetary policy – a requirement of EU treaties – and was a “proportionate” measure to support the ECB primary objective of price stability.

The Luxembourg court ruled that EU treaties permit bond purchases on secondary markets, as planned by the OMT programme, given the conditionality built into the programme by the ECB.

The Frankfurt bank said it would only buy bonds of crisis-hit countries that had secured a bail-out from the ESM fund, which offered emergency funding in exchange for a tight reform corset. The ECB also reserved the right to throttle bond-buying if a government failed to meet its reform obligations, or if Frankfurt felt the bond-buying goal had been achieved.

Two years after their referral, the Karlsruhe judges appear to have painted themselves into a legal corner. They now have to reconcile the ECJ ruling with their own concerns. The German court was particularly worried about the potentially unlimited nature of OMT bond purchases, but the ECJ ruling appeared not to share their concerns.

After today’s hearings the constitutional court in Karlsruhe will have to deliver a carefully calibrated legal ruling. Given its European obligations, it cannot contradict the ECJ ruling, nor can it now call the ECB bond-buying into question.

On the other hand the German court’s first obligation is to the Basic Law, the post-war German constitution. If the court believes its concerns were addressed adequately by the ECJ ruling it will find a way of squaring the circle while maintaining its own institutional credibility. If not – and it declares bond-buying illegal in Germany – a long-running legal standoff between Karlsruhe and Luxembourg enters uncharted waters.