With traders already on edge in illiquid markets ahead of the Breferendum, one potential risk to sentiment today was the long-awaited decision by Germany’s powerful constitutional court whether Mario Draghi's OMT, or Outright Monetary Transactions, was constitutional. However, any lingering concerns were swept away when the Kardinals of Karlsruhe "reluctantly" ruled in favor of the one of the European Central Bank’s most important tools to fight financial crises, which however was caveated with six specific conditions.
Specifically, Germany’s highest court dismissed five suits seeking to stop the country from participating in a controversial bond-buying plan that underpinned European Central Bank President Mario Draghi’s 2012 vow to do “whatever it takes” to save the euro. While they voiced concerns, the German judges said they were bound by last year’s ruling on the Outright Monetary Transactions program by the European Court of Justice, which said it includes sufficient safeguards to prevent the bond purchases from being disproportionate, which would violate EU rules governing the ECB.
The ECB's landmark bond-buying programme, launched at the height of the eurozone’s debt crisis in 2012 well ahead of the ECB's subsequent launch of QE, despite having never been used is widely credited with bringing the currency area back from the brink of collapse.
In the final ruling issued on Tuesday, the Karlsruhe-based court said should the scope of OMT be limited and other conditions for purchases met, the scheme would “not currently impair the Bundestag’s overall budgetary responsibility” or “‘manifestly’ exceed the competences attributed to the European Central Bank”. As the FT adds, after four years of judicial battles, the decision now clears the last remaining stumbling block to the deployment of the policy, under which the central bank can buy bonds of distressed member states.
Previously, a group of more than 37,000 German academics, businessmen and politicians had objected to the scheme, arguing it violated German federal law through the illegal monetary financing of eurozone governments. But ahead of the German decision, the European Court of Justice ruled in June last year that OMT was in accordance with EU treaty law.
In line with that decision, the German court said should all six of the conditions laid out by the ECJ be met, OMT would not constitute an “ultra vires act” in breach of German federal law. These include making sure the volume of any bond buying is “limited from the outset”, “purchases are not announced” and the ECB only holds securities until maturity in “exceptional cases”.
The ruling was promptly criticized by some such as Clemens Fuest, president of the Munich-based Ifo Institute, who said "the judges have made a U-turn on their original ruling, and haven’t dared to to restrain the ECB’s bond buying further than the ECJ. It’s a pity, as it is obvious that the OMT program primarily follows the fiscal goal of retaining the access of highly-indebted states to credit.”
While OMT has never been called upon, a negative ruling would have been a blow to the ECB. The program gives it a tool to address a breakdown in monetary-policy transmission in specific countries. In contrast, its current program of quantitative easing buys debt across the entire currency bloc in proportion to the size of each nation’s economy.
The German court laid out six conditions for approval of ECB’s OMT plan, noting that the Bundestag and government need to monitor volume and risk structure of bonds to avert any “concrete risk” to German budget. The conditions were the following:
- Bond purchases may not be announced beforehand
- Volume of purchases must be limited in advance
- There must be a minimum time between issuance of bonds by states and purchase by ECB
- Bonds can only be purchased from states that have access to financial markets
- As a rule, bonds are not held until maturity, only in exceptional cases they can be held until maturity
- Bonds must be sold back to markets when intervention no longer necessary
Needless to say, a negative judgement could have seriously curbed the German Bundesbank’s role in OMT and spooked financial markets ahead of the UK’s increasingly tight EU referendum. The court’s ruling said: “If interpreted in accordance with the Court of Justice’s judgment, the OMT programme does not present a constitutionally relevant threat to the Bundestag’s right to decide on the budget. Therefore, it can currently also not be established that implementation of the OMT programme would pose a threat to the overall budgetary responsibility.”
The decision was largely symbolic: the unused OMT has since been overtaken by the ECB’s quantitative easing measures, in which the central bank is purchasing government, corporate and asset-backed bonds across all member states in a bid to revive growth and inflation in the bloc. However, even these stimulus measures, launched in March last year, have also met legal challenge with four current outstanding cases against the QE scheme. Today's decision will likely weaken any future German challenges against ECB policies.
The German judges said the Luxembourg-based European Court of Justice had “provided no answer” to the question of the ECB’s independence which it argues has led to “a noticeable reduction in the level of democratic legitimation of its actions”. However, it did not deem these objections sufficient to reject the ECB’s measures.
“The German Court’s ruling had the potential to shake the European Union or at least the monetary union to its very foundations”, said Carsten Brzeski at ING. However, as the FT concludes, “Fortunately, it did not”.