Germany’s supreme judges have decided to let Mario Draghi be the euro’s monetary judge, at least for now.
While doubting the legality of the European Central Bank’s 2012 bond-buying plan that defused the euro crisis, the top German court conceded yesterday that it is powerless to impose a veto. It bowed to a future judgment by the European Union’s high court, leaving Draghi’s pledge to do “whatever it takes” to save the euro unquestioned for a year or more.
“This German court, which everyone’s so frightened of, turns out to be a bit of a toothless tiger,” Charles Dumas, chairman of Lombard Street Research, a London-based consulting firm, said in a Bloomberg Television interview. “They’re copping out.”
The ruling captured the contradictory forces driving Germany’s response to the European economic crisis: a reluctance to provide aid to debt-swamped governments, coupled with the realization that a refusal to do so would imperil the currency, at an even greater cost for Germany.
Questions about Chancellor Angela Merkel’s credibility as a crisis manager, Germany’s domestic battles over aid for fiscal sinners like Greece, and the wrangling between Berlin and Brussels over who rules the European economy were all telescoped into the decision by the court in Karlsruhe.
By a vote of 6-2, the German judges sided with the Bundesbank -- which plays the role of an economic supreme court in the German imagination -- in arguing that Draghi’s ECB overstepped its authority in rolling out the bond-buying initiative known as Outright Monetary Transactions, or OMT.
At the same time, acknowledging that Europe’s largest economy is bound by EU laws, the court stopped short of overstepping its own authority and asked for a ruling from the European Court of Justice in Luxembourg, made up of judges from all 28 EU countries.
“While the legal risk has materialized to some extent, it has probably not done so to an extent that could restart the euro crisis,” Holger Schmieding, chief economist at Berenberg Bank in London, said in an e-mailed note. The EU court takes an average of 16 months to deal with cases relayed from national courts.
German opponents of the ECB’s “unlimited” bond-buying pledge, as yet unactivated, contend that it would provide an illegal subsidy to governments in southern Europe that have lost control of their finances, eventually sowing inflation in Germany as well.
Detractors have rallied under the banner of the Alternative for Germany party, which wants Germany to bail out of the currency it was instrumental in creating. The party denounced the ruling, saying it’s “as clear as daylight” that the European court won’t interfere with the ECB policy.
In an e-mailed statement, party leaders Hans-Olaf Henkel and Alexander Gauland regretted a “fatal signal” that Germany’s economic destiny will be decided by European judges, not German ones. The party fell short of the 5 percent minimum for getting into the German parliament in last September’s election. It has its sights set on European Parliament elections in May.
Officials from countries that have suffered during the debt crisis hailed the German court’s decision to stand back. Maria Cannata, head of the Italian debt agency, said in Rome that the announcement was “positive for Italy.” Italian bonds gained, pushing the 10-year yield down 5 basis points to 3.71 percent.
Finance Minister Michael Noonan of Ireland, the first country to be weaned off an aid program, called the ECB pledge “one of the key factors in stabilizing the euro zone.” Speaking to reporters in Dublin, Noonan welcomed the fact that the ECB policy “will be judged by overall European law and overall policy rather the under the laws of one particular sovereign state.”
Still, a European rubber stamp isn’t a foregone conclusion. Clemens Fuest, head of the ZEW Center for European Economic Research in Mannheim, Germany, said the European court could hem in the ECB’s room for maneuver by requiring its bonds to be redeemed first if a government has trouble paying.
Such a priority status for the ECB would render the program “ineffective because its objective of stabilizing bond markets can only be achieved if the ECB has no seniority status in case of a debt restructuring,” Fuest said by e-mail.
Since Draghi announced in July 2012 that the ECB would act as the ultimate guarantor of the euro system, bond yields have plummeted in debt-ravaged countries. Spain, for example, had paid 611 basis points more than Germany to borrow for 10 years; now, its extra costs are only 193 basis points.
Much as the West won the Cold War without firing a shot, Draghi has abated the euro crisis without buying a bond. The promise alone persuaded investors not to speculate against the survival of the euro, introduced in 1999 as the capstone of European economic integration.
Bond-market interventions are “in our opinion fully within our mandate,” ECB Executive Board Member Yves Mersch said in Dublin after the German verdict.
Defying her own central bank, Merkel did nothing to stop the ECB program. Her officials argued in the German court case that only the European high court could pass judgment on it, and felt vindicated by the ruling. The government “acknowledges with respect” the court’s decision, spokeswoman Christiane Wirtz told reporters in Berlin.
“I continue to be convinced that the ECB’s actions are covered by its mandate,” Norbert Barthle, the top budget lawmaker in Merkel’s parliamentary caucus, said in an e-mailed statement. “The ECB makes all of its decisions completely independently.”