ECB’s ‘Whatever It Takes’ Questioned by Top German Court

The European Central Bank’s bond-buying plan will be reviewed by the European Union’s highest court as German judges temporarily put aside their doubts about the program credited with quelling the region’s debt crisis.

Germany’s Federal Constitutional Court sought guidance from the top EU tribunal after signaling opposition to ECB President Mario Draghi’s initiative in a six to two vote. Today’s decision will likely leave the ECB’s Outright Monetary Transactions program unhindered until 2015.

“We think that this is very good news and expect that the OMT remains fully in place,” Andreas Rees, chief German economist at UniCredit MIB in Munich, said in an e-mail. The European Court of Justice “can be regarded as very euro-friendly. It is therefore unlikely that the OMT will be rejected or watered down.”

The Frankfurt-based ECB announced the details of its unprecedented bond-purchase plan in September 2012 as bets multiplied that the euro area would break apart and after Draghi pledged to do “whatever it takes” to save the currency. The calming of financial markets that the still-untapped program produced helped the bloc emerge from its longest-ever recession in the middle of 2013.

Dissenting View

“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 tribunal said in a statement today. “Another assessment could, however, be warranted if the OMT decision could be interpreted in conformity with primary law.”

The two members of the Karlsruhe, Germany-based court who dissented said the case should have been dismissed as inadmissible.

The euro fell as much 0.3 percent against the dollar after today’s decision was announced, before paring losses and trading at $1.3597 at 4:16 p.m. in Brussels, up less than 0.1 percent on the day. The Stoxx Europe 600 Index was up 0.5 percent to 324.47.

The euro-area economy is recovering and governments are easing up on budget cuts after the bloc’s longest-ever recession. In the ultimate rejoinder to those who once predicted a splintering of the currency union, Latvia last month became the 18th euro nation.

‘Legal Limits’

Today’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,” Carsten Brzeski, an economist at ING Group NV in Brussels, said in an e-mailed statement. “As regards the short-term outlook, the announcement should clearly reduce the Karlsruhe fear factor for the ECB. But not entirely. It is not a given that the European Court of Justice will only rubber-stamp the OMT program.”

The German court said that the OMT is likely to violate EU rules because it amounts to economic policy that is outside the ECB’s mandate, which is limited to monetary policy.

The plan may also be seen as monetary financing of governments, which the EU treaties ban, according to the court. If the OMT were to be limited and placed under certain conditions, it could pass the test, the German judges said.

Within Mandate

“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,” the six judges wrote.

The OMT program “is in our opinion fully within our mandate,” ECB Executive Board member Yves Mersch said in Dublin today, echoing a statement by the central bank. “Even the German constitutional court has mentioned that the testimony of the representative of the ECB would lead to an interpretation that would be within the boundaries of our mandate.”

During the June 2013 hearing in the case, ECB representatives made statements suggesting a restrictive interpretation of EU rules the court adopted would most likely be in line with the “meaning and purpose of the OMT Decision,” the court said.

With this move, the German court “isn’t asking for an opinion, this is putting a gun to someone’s head,” Christoph Ohler, law professor at Jena University, said in an interview. “It all depends now on how the ECJ will be handling this. I think the EU judges will find a way to make their German colleagues put down that gun.”

March 18

The German court will issue a ruling on March 18 over the part of the case targeting Germany’s participation in the European Stability Mechanism. Most of the ESM was cleared in a preliminary opinion issued in 2012.

The issues concerning the OMT will return to the German court after the European Court of Justice has handed over its review. The German court will then make a final ruling.

Lawmaker Peter Gauweiler, one of the plaintiffs in the case, said the judges backed his assessment that the ECB is transgressing its powers.

The “court understood that Draghi tried to veil the fact that the ECB in reality is subsidizing the financing of debt-ridden states with taxpayers’ money,” he said in a statement on his website.

Today’s case isn’t the first time Gauweiler and a group of academics have asked the German court to block the country’s participation in an EU fire-fighting measure. The tribunal in 2011 threw out cases against the bail-out packages for Greece and the country’s participation in the European Financial Stability Facility, the predecessor of the ESM.

16 Months

The EU court usually takes about 16 months on average to handle such references from national courts, according to its latest annual report.

The Luxembourg-based court could decide to handle the case under a fast-track procedure, as it did with a case in 2012 after an Irish court asked questions on the legality of the ESM, the euro-area’s 500-billion euro ($680 billion) firewall.

A ruling in that case took less than four months. The Luxembourg-based ECJ declined to comment on the timing, saying that it hasn’t yet received the German referral.

German Chancellor Angela Merkel’s government will assess the decision “with interest,” spokeswoman Christiane Wirtz told reporters.

The German court’s decision “shows significant skepticism,” Till Mueller-Ibold, a partner in the Brussels office of Cleary Gottlieb Steen & Hamilton LLP, said by phone. Still, it “will have to come to terms with its concerns only after the ECJ has ruled, which suggests that there is no immediate threat to the ECB program.”

The cases are BVerfG, 2 BvR 1390/12 (2 BvR 2728/13) et al.

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