Last February [13], when relations between the ECB and the Bundesbank were comparable to those currently between the US and Russia (and then something dramatically changed for reasons still unknown but likely having to do with a deeper look inside the derivative books of Deutsche Bank [14], leading to a major backing down by Jens Weidmann), the German Constitutional Court took an aggressive approach with the ECB when 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. 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."
However, instead of issuing a binding ruling, at that point the court 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.
This is what we said over a year ago: "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."
And, just as expected, earlier today the pro-ECB top European Union court found that Draghi's impromptu announcement of an OMT, which was basically the wrapping of his "whatever it takes" policy from 2012 to prevent the collapse of the Eurozone when peripheral bond yields were hitting daily records, was perfectly legal. From Dow Jones:
In its judgment on Tuesday, the ECJ said "this program for the purchase of government bonds on secondary markets does not exceed the powers of the ECB in relation to monetary policy and does not contravene the prohibition of monetary financing of member states."
The ruling isn't surprising, as a nonbinding opinion by one of the court's judges in January also said OMT was legal.
"This is a clear sign that the ECJ supports and defends the ECB's independence. This allows the ECB to continue on the real important things: quantitative easing and the Greek crisis," said Carsten Brzeski, chief economist with ING-DiBa.
As also expected, the ruling is set to rekindle tensions between Germany and Brussels, not to mention the ECB, over the implicit question that has always been the key one: "who decides the fate of Europe." From Reuters [15]:
Hans-Werner Sinn, the head of Germany's IFO think tank and long-standing critic of the ECB, attacked the court for its "regrettable mistake".
Others, including Lutz Goebel, president of a German association for family-owned companies, were also critical of the ruling. "Through its actions, the ECB is going far beyond its mandate," he said.
The pro-ECB line could now set the European and German courts on a collision course.
Germany's Constitutional Court, asked to rule on complaints by the German group, had said there was good reason to believe the OMT broke rules forbidding the ECB from funding governments.
And then Bloomberg reported that Peter Gauweiler, a former German lawmaker who’s a plaintiff in a case against the ECB’s OMT bond-buying program, said he’s convinced that he can still block the measure in Germany’s Constitutional Court.
Gauweiler says he wants German top court to prohibit the Bundesbank from participating in the execution of the OMT program. "The ECJ even falls short of the opinion of the Advocate General, who at least viewed the linkage between the OMT program and the conditionality of the EFSF or ESM as an encroachment of the economic policy competencies of the member states."
So will this this vivid reminder that not all is well in the relations between Frankfurt and, well, Frankfurt, cast a pall of indecision over Europe at precisely the worst time, just as Greece is increasingly expected to Grexit, and when a united European response to the inevitable contagion and volatility will be so very critical to preserve the doomed monetary experiment? We may know the answer as soon as this weekend, when a repeat of the Lehman weekend, only this time in favor of Greece, is now looming.
