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Monday, June 10, 2013

ECB gears up for German Constitutional Court scrutiny

This is set to be an important week for the ECB and therefore the eurozone.

As we noted in a flash analysis this morning, the German Constitutional Court (GCC) will hold a hearing on the 11 and 12 June focusing on whether the ECB’s policies have infringed either its own or the Bundesbank’s mandate, and if these have created fiscal risks without democratic approval.

The focus of the case will be the OMT, the ECB’s flagship bond buying programme, the announcement of which is widely seen to have played an important role in easing the eurozone crisis.

Why is the case important?
  1. Highlights the tensions at the heart at the eurozone: the case is a microcosm of the wider debate as to whether Germany is willing and able (in terms of legal constraints) to do what is seen as necessary to save the eurozone. It also puts pay to the idea that once the German government has a fresh mandate following September’s election, there will be a swift move towards more eurozone integration – these legal questions will remain and will continue to crop up.
  2. Pits the ECB against the Bundesbank: linked to the point above but this is also a very awkward division within the eurozone architecture, as personified by the confrontation of the ECB's Jörg Asmussen on one hand and Bundesbank President Jens Weidmann on the other. The Bundesbank will likely have to keep implementing ECB policies despite it now being well known that it fundamentally disagrees with them. 
  3. Further constraints on crisis policies: in the end, the GCC will likely rule in favour of the ECB. However, as with previous rulings, it could set out red lines and restrictions to protect the German Constitution – this could throw a new element of risk into the crisis.
  4. Increased transparency on ECB actions: this is something which we, and others, have been calling for for some time. One benefit of the case is that it has increased scrutiny on the OMT with the ECB now admitting it may be forced to published the legal documents which will layout the practical functioning of the OMT. This could generally be beneficial, although if markets do not like what they hear then it could actually contribute to market jitters.
With this final point in mind, there was an interesting story in FAZ over the weekend, which suggested that the OMT is not in fact as “unlimited” as had first been thought. Indeed, FAZ claimed that it is limited to €524bn, since the ECB will only be allowed to purchase debt with maturity between one and three years.

This constraint was always known, as we noted when the programme was announced. The cap essentially arises because this is the total amount of debt from Italy, Spain, Ireland and Portugal (i.e. those countries most likely to access OMT). The cap doesn’t seem to be hard and fast then, since countries could simply issue more short term debt. However, this does come with its own risks (another point we raised at the time), and the ECB has suggested it would look to prevent such an approach, although it hasn't said how.

Handelsblatt goes even further, suggesting that there is an internal rule which limits the ownership of bonds by the ECB to 50% of the given market, suggesting this means the cap is even lower at €260bn.

But even if the cap isn't quite what it’s cracked up to be, it’s very interesting that the ECB itself is selling it to the GCC as a limit. Clearly, there is some concern about the outcome on its part.

Despite a definitive ruling not expected until the end of the summer at the earliest, and more likely after the September elections, there could well be plenty of interesting revelations and disputes aired over the next few days, which we will of course be covering in detail.

1 comment:

Rik said...

1. This hearing is very unlikely to give any proper indication. It never does. The comments by the analyst are mainly useful to see if they got that. Probably a lot of them won't.

2. In general analysts comments are extremely poor. AngloSaxon economists who donot even speak other German, than the Google translation one, commenting on German constitutional law. OE was one of the very few that had the only real expert comments mentioned.
Have a look here as well: http://blog.handelsblatt.com/handelsblog/2012/07/20/roman-herzog-zu-bundesbank-und-ezb/

3. It is much more likely than most assume that the GCC will cause problems. They might not want to pull the plug on the thing, but they also donot like at all to move away from earlier jurisprudence.
We got:
- the preliminary ruling (not possible summarised);
- 2 extended interviews saying this is about the limit (sort of semi-jurisprudence);
- ECB is in no way democratically controlled which makes Bundestag oversight basically impossible. Also the limit is ridiculous in this respect, as it is self-exposed. Basically showing that the ECB decides, which is the problem in the first place. Looks like last minute legal stuff, not the stringest point by the ECB.
- The next case will be in the pipeline if things are not stopped now. Merkel/EU is simply pushing the borderline further away with each step. And Merkel has a pretty negative reputation on this with the GCC (eg electoral districts).
Basically she has to hear one time 'no' in court via a newspaper interview apparently doesnot work with her.
No certainty by far, but also not the walk in the park most of the self-proclaimed experts say it is, more 50-50 or something near.

4. The GCC usually gives time to correct (probably 2 year) if it rules aginst. Which means as far as I understand:
-referendum to make the constitutional chances necessary. (Aka bye bye Euro); or
-ECB legislation gets in line. Basically the only realistic option in that case, seen Merkel's referenda-phobic nature.