- OMT program underpins Draghi vow to do ‘whatever it takes’
- Judges tell German government, Bundesbank to monitor limits
German judges reluctantly rejected challenges to one of the European Central Bank’s most powerful tools just two days before a potential Brexit vote could unleash economic turmoil across the euro area.
Germany’s highest court dismissed five suits seeking to stop the Bundesbank 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 Union’s Court of Justice, which decided the plan includes sufficient safeguards.
The German court has delivered a “yes, but” ruling that amounts to “a half-green light for OMT,” said Carsten Brzeski, chief economist of ING-Diba AG in Frankfurt.
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.
With the outcome of the British vote on EU membership too close to call, central bankers may need to reach for measures honed during the last financial crisis. OMT could be one of those -- a tailor-made solution for calming nervous investors should they start to push up spreads on bond yields in weaker nations.
The German court laid out the same six conditions for approval it says that the EU tribunal also ordered last year. The German parliament and government would need to monitor the volume and risk structure of the bonds to avert any “concrete risk” to the budget, according to Tuesday’s ruling.
The judges said Germany’s government institutions, including the Bundesbank, must monitor the implementation and review whether the OMT program keeps these limits if it is ever put in action, according to the judges.
"You can’t overestimate the significance of the central insight” of the lawsuits, said court president Andreas Vosskuhle. "The European Central Bank is subject to rules limiting its competences which can be controlled by the courts -- just like any other European institution.”
The German judges criticized the EU’s top court for accepting the ECB’s claim that the OMT is covered by its mandate of monetary policy "without scrutinizing the factual hypothesis" and weighing the "indicators blatantly speaking against its monetary-policy character."
Nevertheless, the program can be accepted because the EU court cited six conditions that the German judges now interpret as binding legal rules allowing them to clear the OMT under the nation’s constitution.
The six limits the court cited include a ban on the ECB announcing the purchases in advance. The central bank must observe a minimum period between the issuance of the government bonds and their purchase, defined from the outset. Only securities of states with bond-market access can be bought and they can only in exceptional cases be held until maturity. Finally, purchases must cease as soon as the intervention is no longer necessary.
This judgment confirms the EU top court ruling, which said that the OMT program “is compatible with EU law and falls within our mandate,” Draghi said at a European Parliament hearing in Brussels on Tuesday.
Volker Kauder, the parliamentary leader of German Chancellor Angela Merkel’s party bloc in Berlin, said the ruling “taught a lesson to all those people who claimed” that the OMT program is unconstitutional. At the same time, the court “laid down conditions, and that’s as it should be,” he told reporters.
The lawsuits, part of a long-running national dispute over the ECB’s role, were filed the same year as Draghi’s famous pledge. A throng of German academics, politicians and ordinary citizens argued that the ECB overstepped its powers under the EU treaties when it came up with the OMT.
The court in Karlsruhe in early 2014 sent the suits to the ECJ, the EU’s highest tribunal. The German judges attached a list of demands to curb the OMT to make it compatible with the rules governing the ECB.
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,” said Clemens Fuest, president of the Munich-based Ifo Institute. “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.”
In its Tuesday decision, the judges upheld their power to intervene if an EU institution "blatantly" goes beyond its powers under the EU treaties. That’s in line with decades of past rulings in EU-related cases.
"It’s impressive that the court brought itself to basically follow the ECJ,” said Christoph Schalast, a professor of law at the Frankfurt School of Finance. “The ruling backs the legal architecture of the EU, while showing that the German court reserves to step in in cases of extreme transgression of powers.”
Peter Gauweiler, a lawmaker and plaintiff in this and many other EU-related cases, said the ruling gave the German parliament some homework to do. It will also boost new cases filed with the court against the QE program which doesn’t meet the test the judges outlined for the OMT, he said.
"It’s not the first time we meet here," he told reporters after Tuesday’s hearing. "And it won’t be the last time."
Tuesday’s cases are: BVerfG, 2 BvR 2728/13, 2 BvR 2729/13, 2 BvR 2730/13, 2 BvR 2731/13, 2 BvE 13/13.