Starting today, and continuing through tomorrow, the German Federal Constitutional Court (FCC) will consider the legality and conformability of the European Stability Mechanism (ESM) and the ECB’s Outright Monetary Transaction programme (OMT) in particular. What does the press expect will be the outcome of the FCC's deliberations (spoiler alert: nobody will dare to threaten Deutsche Bank's towering mountain of derivatives, all $56 trillion of them, but let's pretend it is exciting). Here is a brief recap via Bruegel Think Tank.
On 11 and 12 June, 2013 the German Federal Constitutional Court (FCC) will once again debate and consider the legality and conformability of the European Stability Mechanism (ESM) in general and the ECB’s Outright Monetary Transaction programme (OMT) in particular. In September last year, the court preliminarily approved the ESM on condition that German financial liabilities have to remain within the amount set by the German parliament (Court decision from September 2012 here). In the current hearing the FCC will consider several constitutional complaints (“Verfassungsbeschwerde”). According to the FCC’s press statement (here), the court will evaluate (1) scope and boundaries of the ECB’s monetary policy mandate, in particular the independence of the ECB and the OMT programme, (2) consequences of the OMT programme on the parliament’s budget right, (3) the role of the Bundesbank in the European System of Central Banks, and (4) possibilities of the parliament and the government react and respond to the ECB’s policies. The Court will invoke a joint assessment of whether or not the ECB acts ultra-vires and violates Germany’s constitutional identify.
The focus of this hearing will be on the ECB’s rescue policies and specifically whether or not the ECB’s OMT is indirectly circumventing the prohibition of financing euro zone countries’ budgets. While the programme eases borrowing costs of struggling states, critics stress that it also eases pressure on governments to reform their fiscal policies and render the independent central bank dependent on governments’ policy choices. The ECB argues that its primary goal to safeguard price stability has to be accompanied by secondary goals, in particular maintaining the stability of financial markets. The Bundesbank, by contrast, argues that OMT exceeds the boundaries set by the ECB’s mandate. In December last year, a statement by the Bundesbank in which the ECB’s OMT program is criticised was leaked and published by Handelsblatt.
The case is receiving wide coverage in the German press. The Welt writes that it is unlikely that the Court will deviate from its previous stance regarding the ESM, but that the constitutional complaints regarding the ECB’s OMT programme are a more delicate matter. The newspaper considers four potential decision scenarios: (1) The complaint is not admissible because the ECB is not subject to German but EU law and, hence, only the European Court of Justice (ECJ) has the competence to rule on the ECB’s policy. This scenario, however, is deemed highly unlikely because the FCC has already raised concerns that OMT might indirectly finance government deficits and because of the detailed structure of the hearing itself. (2) If the Court were to decide that the ECB is acting beyond its mandate, the ECB’s policies will no longer be covered by the German consent to EU treaties and OMT will violate German basic law. Such a decision, however, would necessitate the involvement of the ECJ, which in the past has always adopted a pro-European stance. But thus far the FCC has never referred a case to the ECJ. In extremis, the court may force the German government to complain against the OMT at the ECJ. (3) The FCC might consider ECB policies at odds with German basic law because they deprive the Bundestag of its budget right. In the eyes of the Handelsblatt such a verdict also seems unlikely because it is solely based on German law and therefore non-binding for the ECB and would essentially prohibit Germany’s participation in the common monetary policy. (4) Finally, the most likely outcome is that the FCC will turn down the appeal but still raise doubts and scepticism about OMT. Such a decision could potentially curb the scope of the programme and strengthen its critics in the Governing Council, most notably Bundesbank president Weidmann.
The Handelsblatt recently analysed the Bundesbank’s criticisms of the ECB’s policy. The Bundesbank’s main points of criticism are that the ECB’s Governing Council is not subject to parliamentary oversight and therefore should not be allowed to reach decisions that will lead to Germany having to take over financial liabilities. Stabilisation policies should rather be enacted through the ESM, while the ECB should restrict itself to the conduct of monetary policy. OMT also overstretches the ECB’s mandate of safeguarding price stability by supporting fiscal policies of heavily indebted countries and thereby threatening its institutional independence. While the ECB argues that OMT will also align interest rates across the euro zone and thereby keep monetary policy effective, the Bundesbank dismisses this justification because diverging level of interest rates across the euro zone only reflect different levels of economic strengths in the respective countries. Overall the Handelsblatt is confident that in the end the FCC will conditionally approve of the ECB’s rescue policies.
The Welt further quotes the German law professor Christoph Schalast who suggests that it seems unlikely that the FCC will stop the OMT and the complaint is rather “an act of despair of Euro sceptics”. Another law professor, Joachim Wieland, said that “if the FCC would rule that OMT is beyond the ECB’s mandate, not only the common monetary policy, but also the EU would be finished.” While most German law experts believe that OMT is at least problematic, they also share the view that the FCC will shy away from bluntly accusing the ECB of violating EU and German law. Still, according to the FAZ Udo Di Fabio, a former constitutional judge and professor of constitutional law, argues in a statement for the Stiftung Familienunternehmen, an interest group of family-owned companies, that if the ECB is indeed indirectly financing governments’ budget deficits through OMT, the FCC ultimately has to obligate the German government and the parliament to leave the euro zone should recommendations to change policies of the main German political institutions (“Einwirkungsaufträge”) remain unsuccessful. Other measures according to Di Fabio contain changes in the basic law as well as rules for a structured sovereign default in order to strengthen national governments’ fiscal responsibilities.
Most German newspapers, for example FAZ and Handelsblatt, portray the hearing before the FCC as a showdown between the Bundesbank and the ECB, where two Germans, Jörg Asmussen of the ECB and Jens Weidmann of the Bundesbank will defend the opposing views of the institutions they are representing. Asmussen and Weidmann shared a trust- and respectful working relationship due to their prior jobs, when Asmussen was working for the finance ministry and Weidmann for chancellor Merkel as an economic advisor. Regarding the ECB’s rescue policies, however, both now share diametrically opposed views. Mario Draghi’s choice to send Asmussen to justify the ECB’s policy instead of Yves Mersch, who was previously considered to testify before the Court, also reflects Asmussen’s knowledge of the Court’s procedures and peculiarities. Some members of the governing coalition, however, would still like to see Draghi testify before the Court. According to the FAZ, Rainer Brüderle, vice chairman of the Liberal parliamentary group (FDP) in the Bundestag and front runner for the party in the upcoming national elections, wrote a letter to Draghi requesting that he himself instead of Asmussen should testify before the FCC; the importance of the matter subject would require his attendance.