German Top Court Finds ECB's OMT Is Illegal, Then Promptly Washes Its Hands Of Final Decision

Tyler Durden's picture

In what was a shocking and disappointing at the same time decision, overnight the German Constitutional court, which had been contemplating the legality of the ECB's still non-existent OMT program, conceived in July 2012 to prevent the collapse of the Eurozone and still only existing in Mario Draghi's head as it has zero legal documentation supporting it, said that, in its judgment, the ECB's Outright Monetary Transactions program likely exceeded the central bank's powers.

"There are important reasons to assume that [the OMT] exceeds the European Central Bank's monetary policy mandate and thus infringes the powers of the member states, and that it violates the prohibition of monetary financing of the budget," the German court said Friday. "Subject to the interpretation by the Court of Justice of the European Union, the Federal Constitutional Court considers the OMT decision incompatible with primary law," the German court said.

At that point it quickly washed its hand of the consequences of having founds the OMT illegal, and referred the final decision on the legality of the European Central Bank's bond-purchase program to the European Court of Justice, and in doing so gave the ECB a panel of judges that is more sympathetic to the OMT and the central bank's ability to conduct monetary policy as it sees fit. It also killed two birds with one stone: allowed Germans to claims internally that the OMT is illegal, while everyone else in Europe gets to pretend that the continent is solvent, and that the ECB can backstop sovereign bond purchases with an imaginary contraption that contrary to mass delusion, simply does not exist and would fall apart the second it is used for the first time.

The WSJ reports:

The European Court of Justice has traditionally sided with European Union institutions on their interpretation of EU law.


"The announcement should clearly reduce the Karlsruhe fear factor for the ECB," said Carsten Brzeski, an economist at ING Bank, referring to the city that is home to Germany's top court.


Friday's announcement "could either be a sign that the court has reached its legal limits on European issues or that the issue is so tricky and touchy that it is better to pass it on," Mr. Brzeski said.




The OMT is widely seen as a success. Spanish and Italian bond yields fell sharply after Mr. Draghi's July 2012 speech and subsequent creation of the OMT, and have remained low since. The pledge to buy bonds was so successful in shoring up investor confidence in the euro's future that the OMT has yet to be used.


But the program, which was vehemently opposed by Germany's central bank, raised concerns in Germany that the ECB was blurring the line between fiscal and monetary policy and making it easier for governments to backtrack on their commitments to reduce debt.


"The ECB reiterates that the OMT program falls within its mandate," the ECB said in a statement after the German court's announcement.


But German judges had a different view.

It remains to be seen if the Germans react to this decision in any way, although at this point it is safe to assume that things in Europe will continue on their unmerry path until finally one of the unintended consequences of the monetary union - such as completely social collapse and record poverty and unemployment - force one of the member nations to revolt on its own and finally bring the entire artificial construct crashing down.


For those who wish to learn more, here is Open Europe's flash analysis of the Constitutional Court's decision:

* * *

New Open Europe flash analysis: I’m the German Constitutional Court, get me out of here! Court sees ECB bond buying as illegal but refers questions to ECJ

Summary: The German Constitutional Court (GCC) – Bundesverfassungsgericht – has referred several questions surrounding the ECB’s Outright Monetary Transactions (OMT) programme to the European Court of Justice (ECJ). It is evident that the Court believes the OMT is illegal and incompatible with EU and, therefore, German law. However, the Court only has jurisdiction to rule on matters of German domestic law. It therefore argues that it must refer the key questions to the ECJ – the body which interprets EU law – given that the ECB’s mandate and any overstepping of EU treaties is obviously a question about EU law.

The ECJ is likely to side with the EU institutions and rule that the OMT is compatible with EU law, with the GCC likely to therefore say its hands are tied. Still, the decision throws new uncertainty into the fragile eurozone economy and could hamper the recovery. The GCC may also, in its interpretation of the OMT’s compatibility with German law, insist in new red lines - potentially limiting the level of purchases. This itself would severely restrict the role of the ECB.

What are the new developments?

Surprising news out of Karlsruhe this morning as the GCC has asked the ECJ to rule on whether the ECB’s OMT programme – a promise by the ECB to buy an unlimited number of government bonds if the eurozone crisis worsened – is “compatible with the primary law of the European Union”. The legality of the OMT is a hugely important issue given that it is widely seen as a key factor in stabilising the eurozone and preventing a break-up.

The Court stresses that it believes the programme does violate the law, but can be brought in line with the treaties.

“The subject of the questions referred for a preliminary ruling is in particular whether the OMT Decision is compatible with the primary law of the European Union. In the view of the Senate, there are important reasons to assume that it exceeds the European Central Bank’s monetary policy mandate and thus infringes the powers of the Member States, and that it violates the prohibition of monetary financing of the budget. While the Senate is thus inclined to regard the OMT Decision as an ultra vires act, it also considers it possible that if the OMT Decision were interpreted restrictively in the light of the Treaties, conformity with primary law could be achieved.”[[1]]

What questions have been referred to the ECJ?

The GCC only has competence over German law and cannot make judgements surrounding EU law. Clearly from the above, the GCC believes that the OMT violates the mandate of the Bundesbank and the ECB. However, to conclusively prove so, it requires the ECJ to make a judgement on the OMT as well. The first key question it asks is:

Is the OMT “to be qualified as an independent act of economic policy?”

The GCC believes that it is and that it therefore goes beyond the mandate of the ECB, which only refers to monetary policy. It also stresses that the OMT could lead to “considerable redistribution between the Member States”, which is forbidden by the treaties. The GCC also asks the ECJ to rule whether:

The OMT programme “violates the prohibition of monetary financing of the budget (Art. 123 TFEU)”.

Again, here it seems the GCC believes that it may well do, and that if it were decided so, the GCC would have to stop the German authorities from taking part. Essentially, the GCC has asked the ECJ to rule whether the OMT is fundamentally compatible with the primary law of the EU.

Will the GCC still provide its own ruling?

Yes, but likely only after the ECJ has ruled. The GCC seems to be stuck. It has serious concerns over the OMT and its compatibility with the EU treaties and German law. However, it feels it cannot rule on issues of German law until the questions over EU law have been settled – which are outside of its jurisdiction. Once the ECJ has ruled, the GCC will likely re-examine how the OMT fits with German law, however, it will be constrained by the ECJ’s ruling and interpretation of EU law.

How might the GCC and ECJ rule?

It is patently obvious that the GCC believes that the OMT does violate primary EU law, because it goes beyond the mandate of the ECB and breaks the EU Treaties, and therefore violates German law.

“The OMT Decision does not appear to be covered by the mandate of the European Central Bank.”

“The existence of an ultra vires act as understood above creates an obligation of German authorities to refrain from implementing it and a duty to challenge it. These duties can be enforced before the Constitutional Court at least insofar as they refer to constitutional organs.”

However, given that the GCC cannot rule on EU law it has referred this decision to the ECJ. That said, as the quote below shows, it could still be forced to accept that the OMT is legal if the ECJ approves it and/or there are further restrictions put on it.

“Subject to the interpretation by the Court of Justice of the European  Union, the Federal Constitutional Court considers the OMT Decision incompatible with primary law; another assessment could, however, be warranted if the OMT Decision could be interpreted in conformity with primary law.”

“In the view of the Federal Constitutional Court, the OMT Decision might not be objectionable if it could be interpreted or limited in its validity in conformity with primary law in such a way that it would not undermine the conditionality of the assistance programmes of the EFSF and the ESM, and would indeed only be of a supportive nature with regard to the economic policies in the Union. In light of Art. 123 TFEU, this would probably require that the acceptance of a debt cut must be excluded, that government bonds of selected Member States are not  purchased up to unlimited amounts, and that interferences with price formation on the market are to be avoided where possible.”

Importantly, the GCC flags up that it could be willing to accept the OMT if it is no longer seen as being “unlimited” and if it is no longer seen as its own economic policy – but as long as it continues to have conditionality. This would require a significant reworking of the OMT and would severely hamper the ECB’s approach to tackling the crisis. It may also provide new boundaries (both legal and practical) on what the ECB can do in a crisis.

Ultimately, then the GCC ruling will depend heavily on how the ECJ rules. That being said, it seems very unlikely that the ECJ would rule against something as significant as the OMT, which has played a huge role in securing the eurozone.

Does this mean the OMT is now invalid?

It certainly casts significant doubt on the issue, however, it remains somewhat in limbo for the time being. The GCC evidently believes that it is illegal and should be invalid or at the very least amended. However, it also cannot provide such a categorical ruling before the ECJ has had a chance to rule or before the OMT has been amended and clarified.

Given that the ECJ tends to rule in line with EU policy and with EU institutions it seems highly doubtful that it would rule against the OMT. If it were to support OMT without any changes, this would put the GCC in a very difficult position. It would be stuck between believing it falls outside the mandate of the German institutions as to their responsibilities to the EU, however, it would not have any clear basis in terms of EU law.

In the meantime, it is clear the ECB still considers the OMT practically operational. In its response to the referral the central bank stated that, “The ECB reiterates that the OMT programme falls within its mandate.”[[2]]

What does this mean for eurozone?

This could well spark further jitters in the eurozone. For all the talk or institutional and structural change as well as national governments pushing reform, the OMT has been the key factor in easing the crisis. It certainly throws a new bout of uncertainty into the very fragile economic recovery in the eurozone. It could drive flows back to where they were previously, with the core countries benefitting from safe haven flows and the periphery being hit by the uncertainty. That said, it is likely that most investors will take a wait and see approach given the number of moving parts in this decision.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
GetZeeGold's picture



Judas scores!

SafelyGraze's picture

in the history of the pulitzer prize, the award has never been given to someone who investigated central banking and reported on the ponzi process of fractional fiat utterance and clearing by the wealthy.


(scroll down or search for 'jekyll')

(and "net worth")

BandGap's picture

How much shit can they eat?

Ghordius's picture

meh. they waited until Dirty Harry did not need his gun anymore. then said: perhaps it would have been illegal for Dirty Harry to shoot after his "Make My Day". Yet Dirty Harry's gun is not a national affair, so this goes back to the court that has to judge on the treaties

meanwhile all the superstate and federalism proponents of europe see this as a reason to integrate more. meh

Occident Mortal's picture

Germany should really keep quite about the Lend and Pretend strategy of the ECB. After all it's Germany who is on the hook if/when Draghi's bluff gets called.


In the UK, Thatcher once said that unemployment in the regions was a good thing, because it kept inflation low in London.


The EU has copied Thatcher's model exactly, with the PIGS suffering high unemployment in order to keep inflation low in Germany.


30 years after Thatcherism, the model still stands, and now all Brits realize than when you are young you have to go to London to work. It may take a decade or two but eventually Germany will be full of young Spanish, Itlatian and Greek men and women, all offering to work for 1/2 the wages of their German incumbent. And Germans will eventually be displaced further out as has happened in the UK.

Ghordius's picture

Occident, don't mix the narratives. "Lend and Pretend" is hardly the case, with OMT

And your view of migrational flows inside Europe is also hardly supported by facts. Meanwhile ask the young Spaniards, Italians and Greeks what their opinion is about the EUR and the possibility of getting a job in a different european country

you are talking about the eurozone, to which the UK famously does not belong and it's currency would not qualify for entry. and inside the eurozone, you'll find that support for all four freedoms is very, very high. particularly for the fourth, that of free movement of people. and that freedom is what Britons are currently bitching about, to which I can only say: stop complaining with the others, and leave the club if it does not suit you

ATM's picture

Europe is just one step closer to Federalizing. That has always been the end game scenario and the Euro itself makes it certain.


Europe needs it's own Washington DC. A hell hole of racial segregation, crime, black market, death and that's just the government part. Wait until you see the rest of the place! 

Oldwood's picture

Bankers don't need no stinkin laws. The only law for bankers is PROFIT and now that they have convinced the world's leaders that for the leader's world to survive, the banker's world must not be allowed to fail, bankers make the rules. We are only left to obey or perish.

Dubaibanker's picture

Meanwhile, there is a revolving door in the UK as well where the vampire squid is quietly spreading its tentacles while spreading the word of the lord!

FCA hires ex-Goldmans MD for investment arm

Blythe Masters on the one hand and UK on the other, seems quite appropriate that the criminals should actually be allowed to judge their own kind.

TheGoldMyth's picture

There is a solid QE gold case that is yet to be made that would instantly show that central banks have to buy vast inventories of gold to maintain its scarcity in a depressed environment where there is solid gold in the streets. For example, reposeses bricks and mortar, street prices for rainforests, dead fish, empty cities, high quality debt slaves and so on...The list of intrinsically valuable metaphorical gold is huge, not including dead fish poisoned by fiat emissions.

The biggest gold PR in human history.

How ironic, and perfect at the same time.

TheGoldMyth's picture

Dubaibanker  ..

Fri , 02/ 07/ 2014  -  08:00  |  4411082

... 'while spreading the word of the lord Gold'.
The cult/religion would fall appart without belief in this particular lord.

Oldwood's picture

They cannot survive with independent though and outsider influence. They have built this world and it must be maintained.We all know its corrupt, and they know it better than anyone else. Corruption is more fragile than a non corrupt system as it demands strict adherence to be maintained. fall in line or be suicided.

q99x2's picture

At least they were appropriately dressed to make such a decision.

ParkAveFlasher's picture

I, for one, never set out to interpret grammar without first donning brightly colored silk finery and retiring to my hidden chambers for a spell, as a rule.

MFLTucson's picture

They fail to mention that Govt Sacks and JP Morgan dont care and will do whatever they wish with the stooge they put in place at the EU.

Sudden Debt's picture

Nothing that says "GOOD RELATIONSHIPS" as a day in court together...

The fact that countries prosecute each other on actions in court says enough that Europe can't be in a united currency.


Ghordius's picture

Sudden Debt, I really like your style, but when it comes to such comments you regularly have me shaking my head

your second sentence makes no sense whatsoever. in this case it's not countries prosecuting each other, but the German Federal Court judging if OMTs are inside the scope of treaty or not. and the rest is a non sequitur. the whole thing about the EUR - besides a size advantage - is that it isn't a national currency

meanwhile your problem with the EUR is... that is not making your PMs shine brighter. well, it's not making my PMs shine brighter, too. yet as long as this state persists, you can't claim that the EUR is not fulfilling it's main job. of being just stable. watch what is happening with other currencies left and right

Poor Grogman's picture

Sudden Debt avatar wins "kids favorite" 3 years running.
A big "Well done"! from the kids.

TheGoldMyth's picture

Sudden DebtFri, 02/07/2014 08;04 

They were bonding.

Jayda1850's picture

Does it really matter? These people have proven over and over that laws don`t apply to them. We have reached a time in our society that laws are OPENLY being broken by the very people who are writing the laws for the rest of us and nothing is done. Who cares what one country's court has to say? The EU bureaucracy is too big now, it will not go down peacefully.

Ghordius's picture

the EU bureaucracy has a staff of 30'000. make an international comparison and you'll see that this is not much. meanwhile it was the German court that waited for this verdict. hardly a case of "laws don't apply to them"

BandGap's picture

Waiting is part of the modus operendi in cases like this. It gives the powers that be time to massage the message when initially most of the parties involved (if not all of them) knew this program was wrong/illegal.

Same tune world wide, just different lyrics and languages.

"We will not monetize the debt".

Jayda1850's picture

I'm not suggesting in Germany in particular, but you have an EU commission that has repeatedly squelched many democratic attempts to rein in their power to the point of installing technocratic leaders to ensure their objectives are achieved. Not to mention forcing the confiscation of deposits, which is now the new template after it was first a one time event. All I'm saying is that Germany is trapped just like everybody else for the moment, but it seems with every step that whatever direction the commission wants to go, everyone is begrudgingly gonna follow for fear of what might happen if there was a euro collapse.

Ghordius's picture

that's similar to the narrative that "the EU commission is fomenting riots in Ukraine", isn't it? look what senior US officials have to say about that

I was a Berlusconi supporter, for example. plenty of my defenses of the old boy on record on ZH. yet I suggest you look a bit into the details and note that it was the Italian Parliament that gave him the boot, and the Italian Prez that appointed Monti. this just to your "technocratic" comment...

Jayda1850's picture

That's like sayin that Papandreous simply decided to do a complete 180 after calling for a referendum and resigns. Yes, many greeks were seeking to have him replaced, but you can't tell me that the EU wasn't using aid as leverage to force that outcome.

Ghordius's picture

and what did the Greek parliament about it? what evidence do you have that the EU was involved, specifically?

Jayda1850's picture

So you're saying the installation of monti, the stepping down of papandreous and the confiscation of deposits in cyprus were decision made by the country's governments in the best of their own people rather than the best interests of the paymasters who is funding the governments? Greece and Cyprus, for intents and purposes, were locked out of the credit markets. It was the ECB or bust. And you believe the EU, having all this leverage, wouldn't use it?

Ghordius's picture

you are talking about the EU

I'm saying that Monti was an Italian Affair and Papandreous was a Greek Affair

look again what their parliaments did

Cyprus? the Cypriot parliament pre-approved three laws for the bail-in

Joe A's picture

Imagine then how powerful this EU bureaucracy is.

Sixdeuce062's picture

and what say you ECB?

ECB: "So? we are going to keep on keeping on oh and by the way our next plan will totally be far moar unconstitutionial than OMT, just a heads up"

and the serfs are none the wiser

Ghordius's picture

a treaty is not a constitution, btw. I'm quite content with the fact that we europeans don't have a European Constitution. Our national ones are more than sufficient, imho

Joe A's picture

In the Netherlands we all know that a treaty is not a constitution but in fact it is. The people of NL voted against the EU constitution. Then they made some cosmetic changes to it, called it a treaty and our then PM said "ah, it is a treaty not a constitution so there is no need to put it to a referendum again". Ever since then support for the EU has been declining in NL. Strange huh?

Democratic level in the EU is very poor. The EC does what it wants -correction, what the lobbyists want (see also and the EP is really a bought off bunch of corrupt nepotists, usually played out former MPs or government people in the respective member states.

Ghordius's picture

and I thank the Dutch people for rejecting that referendum. now you just have to elect a parliament that takes you out of the EU

Joe A's picture

Interestly enough, 54% of voters support leaving the EU if that would entail more jobs and more GDP. Well, duh of course. Geert Wilders came with a report that says that leaving the EU would economically benefit NL. Other of course say it won't.

Ghordius's picture

and what do you think?

Joe A's picture

I am all for European cooperation and freedom of movement for countries that proven themselves to be reliable democracies that don't cheat and fraud. If there is going to be a single currency then there should be a strong core and only countries that have proven themselves to be honest and stable enough can join.

Ghordius's picture

all in all a very common (and moderate) stance, in the EU. as in all unions, willingness to positive attitudes depends on the other's attitudes, too

you are not alone. as to the question "would the Netherlands profit or lose from exiting the EU". well, it depends. from the others, too

no, I'm not saying that the "stay-behind" countries would bash a leaver. yet they would ask for a fair bargain. i.e. lots of possibly politically painful trade-offs

meanwhile the Netherlands have a special position in european trade, being practically "at the gates of europe" with Rotterdam

the Netherlands could opt to a globally open position. in practice, like extending Rotterdam's duty-free zone to it's national borders

LawsofPhysics's picture

Accountability?  What's that?

Iam Yue2's picture

"Still, the decision throws new uncertainty into the fragile eurozone economy and could hamper the recovery. "

Nonsense. OMT does not exist. It is a "Magic Wand."

By the time the ECJ gets around to dealing with the matter, the caravan will have left town.

The problems for Europe are; lack of German domestic demand; lack of German investment; collapse in German industrial orders and industrial output, brought about by strong euro/weak yen, and a collapse in demand from EM. The chickens will come home to roost later this year, by which time one expects that the tame and compliant media, who were so happy to tell us in 2010;

"Strong Yen Helps to Fuel Germany’s Export Boom."

Will have caught up with the story.

Other countries are of course admitting that their exports are being impacted by the weak Yen;

"Weak Yen Takes a Toll on Hyundai Sales Forecast."

The writing is very much on the wall vis a vis EZ recovery, but it has nothing to do with this OMT charade.

Don't blame it on the sunshine.

Paper CRUSHer's picture

They were reminded that only a few(5) tons of bullion was returned,they bowed their heads in shame as the possibility of the nation returning to a gold backed german mark lay almost a half-century away.

RaceToTheBottom's picture

And they would not let Rudolf play in any of the raindeer games.....

And so it continues

AynRandFan's picture

So, Germany has no jurisdiction to decide if treaties to which it subscribes are being performed as written?  Talk about losing your sovereignty.  It's gone already.  Funny that nobody in Germany seemed to know this before.

Ghordius's picture

oh, let me guess: another American using that word, sovereignty

that word describes the Ultimate Right. of going to war if deemed necessary. or to break a treaty, if deemed necessary

It does not mean doing what you think is right. It implies agency. In this case this court made a decision to pass it over to another

DOT's picture

Gee wiz, Gordi, we "Americans" will steal any word from any language if it adds to our precision or coolness.

On the issue of agency, I believe you have emphasized the wrong component of the courts authority. The implied agency is a product of the Court's primary responsibility which cumbers it to act when the interest of the National Law is in opposition to any International obligation (implicit or explicit).

Joe A's picture

"In this case this court made a decision to pass it over to another"

Yes, to a court to which it subjected itself to so therefore they gave up their sovereignty.

Tell, how much does the EU pay you to play spindoctor?

Ghordius's picture

tut tut tut... note my avatar. I'm not a fan of the EU, I'm a fan of the eurozone. if you want to imply I'm paid for spinning, than you choose the wrong club

Joe A's picture

Listen Ghordius, if you are not so much in favor of the EU how can you then be in favor of the Euro? It was designed by politicians and is used as a political tool, not so much as an economical tool. Many economists were against the current setup of the Euro which prevents countries from leaving the currency safely (for both the countries involved as well as the rest of the Eurozone) so that they can go back to their own currency, devalue and use other economic tools such as raising interest rates to curb inflation. Now countries must internally devalue in order to raise competetiveness. Instead of uniting countries it has divided countries. And some countries had no business being in the Eurozone -or the EU for that matter- in the first place.

Ghordius's picture

that's not how I see it

Quaderratic Probing's picture

Bloomberg was covering Go Daddy super bowl adds as I read this article, so pretty sure it is unimportant.

Rising Sun's picture

This is normal for Europe and has been for centuries.


Actually, the level of bullshit and corruption has probably been at its lowest today in Europe's sickening history.