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Friday, February 07, 2014

German Constitutional Court believes ECB bond buying is illegal, but asks ECJ to rule first

Hanging up their robes? Ball is now in ECJ's court

As has been widely reported this morning there has been some surprising news out of Karlsruhe with regards to the ECB's bond  buying programme and its legality.

Our full take is here, with the summary below:
Summary: The German Constitutional Court (GCC) – Bundesverfassungsgericht – has referred several questions surrounding the ECB’s Outright Monetary Transactions (OMT) programme to the European Court of Justice (ECJ). It is evident that the Court believes the OMT is illegal and incompatible with EU and, therefore, German law. However, the Court only has jurisdiction to rule on matters of German domestic law. It therefore argues that it must refer the key questions to the ECJ – the body which interprets EU law – given that the ECB’s mandate and any overstepping of EU treaties is obviously a question about EU law.

The ECJ is likely to side with the EU institutions and rule that the OMT is compatible with EU law, with the GCC likely to therefore say its hands are tied. Still, the decision throws new uncertainty into the fragile eurozone economy and could hamper the recovery. The GCC may also, in its interpretation of the OMT’s compatibility with German law, insist in new red lines - potentially limiting the level of purchases. This itself would severely restrict the role of the ECB. 
Markets, while briefly spooked, seem to have broadly recovered, whilee the euro remains slightly weaker. This doesn't seem to have had much impact, with many coming round to the view that the OMT will remain practically usable until the ECJ almost inevitably fully approves it.

The broader fallout is interesting, as this case has often been cited as one of the remaining risks in the eurozone. Despite the GCC's strong objections to the OMT, this could end up actually bolstering the ECB's position.

More generally as well, it does raise questions about Germany's role in monetary policy and the GCC's role. On EU related issues it is ultimately bound by the ECJ's interpretation of EU law. Furthermore, we can't help but feel that the Court has tried to somewhat dodge this very difficult and politically sensitive decision. It also suggests Germany may be struggling to fulling impose its will over monetary policy - although it clearly remains very powerful and many would argue continues to hold action such as asset purchases at bay.

Nonetheless, plenty of food for thought and an interesting shift in the dynamic of the eurozone.

6 comments:

Rik said...

The cowards way out.

1. The legal logic is 'a bit' twisted imho. The Court should rule whether or not it is in line with the German constitution in the first place. We simply donot see an answer on that (have to admit didnot see the whole text (and am not planning to as well) btw).
This would mean that effectively when powers are transferred the GCC is out as highest judge on the Constitution. Effectively opening the way to that the ECB would become the highest authority to decide upon what should be German Constitutional law. Which looks simply not in accordance with the German constitution.
And is pretty weird seen the fact that the ECB is 'a bit unpredictable' as far as extending powers of European institutions goes.
You have never really a clue what you sign up to, but after you have signed up the ECJ is the highest judiciary authority.

2. The proper way out for them would have been dumping the issue where it belongs. Which is with the German government. Say by simply given them 2 years (usual term) to get things in order. Either EU law is brought in line or German law is brought in line (which means a referendum).
Anyway looks legally rather incoherent.

3. Probably more Euro positive than could have been expected anyway. Looks pretty clear what the ECJ will do.
Hard to read the market reaction therefor. The image of an Uberostrich comes to mind re the earlier market expectations.
Simply makes no sense at all.

4. Things go pretty weird anyway at the GCC. Clearly substantial differences of opinion.
Pretty amateuristic to bring them this way in the open anyway.
Making it political and presenting subsequently as nearly certain being political is not great as well. It simply puts them more in the centre of the political discussion a place where no judge worth his/her salt should want to be.

Anonymous said...

The whole argument of EU/MananaZone monetary policy has been at a standstill since 2008.

It is now 2014 and the damage done to the MananaZone economy, through not having a flexible and coherent economic policy, will take decades to recover. That is if it can ever be recovered at all.

The structure of the Euro and the infrastructure behind it are greatly flawed so I expect more of the same. The authorities are just powerless to act.

2014 will see the return of the Euro-sovereign credit crisis and more (this time permanent) damage will be done.

SC

Jesper said...

Not unexpected and in fact something that can be used to justify changing the treaties.

The German public (and the rest of the world) has now seen how the German constitutional court believes the treaties should be interpreted. We'll get to see how a court (the ECJ), presumed by many to favour EU-institutions and the centralisation of power, interprets the same case.

My guess is that the ECJ will ignore the findings of the constitutional court and give a carte blanche to another EU-institution (the ECB).

The likely outcome is reduced support for the current EU setup and the calls for treaty change will get stronger.

Jesper said...

Also, the ECJ is unlikely to make a ruling after the eventual event that the ECB makes a loss on the purchase of Greek government bonds -> In all likelihood Greece will not (be allowed to?) default until the ECJ has made its ruling on the OMT.

Lots of credibility at stake here.

Rik said...

The summaries in the media are bloody awful. Also the one I used.

There were basically 2 legal issues to be decided upon:
-OMT EU-law conform and if not can CC decide by itself;
-Is the earlier transfer fron BuBa to ECB Constitutional seen the OMT.
And some German constitutional stuff not that relevant for this case at least for me.

Hardly anybody however keeps these 2 properly seperated. Summary I used, looks as if only one issue is dealt with. Which is likely not correct.
BTW very similar as the 2 times before. Donot understand why media donot hire proper expertise for this every time there has been confusion about the rulings.
Most reporting is simply done by people who donot have a clue at least it looks like that.

The most important underlying question is, is the referral part of the BuBa transfer of power question or the only issue dealt with and how.
Looks to be 'part of' at least the more knowledgeable reporting considers it that way. But the how is open with most.

OE Berlin sees it as 'part of' and with a logical description of how and what.
Probably best to use that one as said earlier but keep your eyes open if no other stuff comes up.
Anyway looks again like you have to go through 70 or so pages of utterly boring legal stuff and the Germans are always among the most boring, to get the full picture. Probably would have been more efficient anyway (again).

The whole issue is mixed together by most which is simply not correct. Best I have seen so far is the summary of OE Berlin as said. At least that guy seems to have some proper legal knowledge plus the reporting makes sense.

Rik said...

1. As I see it now relevant has become the question if the OMT is limited and for how much.

Taking the 'offensichtlich und strcturell bedeutsam test', an unlimited programm is in no way allowed.
However if I am not mistaken the ECB has declared in this case that effectively it is limited.
Looks clear what goes first the media hype (unlimited) or the declaration that it is limited. The latter (providing there is no way to escape these limitations).
Making a false statement in a court of law is an absolute no go and likley would trigger criminal sanctions (allthought he ECB might be protected from that, another complication).
Anyway if the amounts still possible according to the pressreleases at that time were not structural und bedeutsam what is?

From there it looks simply unnecessary to refer. The case is clear one way or the other. Which means the Gerries can decide themselves and donot need to refer.

So why the referral.
-The ECB finds itself competent. It could well be as that is an issue fully to be decided upon by EU law (with effectively the EU Wallabies deciding in last resort).
-However at the end of the day it is pretty irrelevant if that is only 1 of 2 tests and the outcome of the other test is clear.

So again why the referral?
makes only sense for other reasons than the ones the CC should decide upon. Like buying some time or passing the hot patato.
Buying time seems unlikley for the reason that it could also give a grace period to bring the laws in line with the mandate transferred.
Passing the hot patato. Also pretty funny as very likely it will come back and in a more complicated way (as the Beuteltier judges are likely to decide it is EU-law conform. So the CC will likely have to go against such explicit decision (which is simply more difficult than now).
Funny stuff.

However seen the uncertainty which will at the end of the day first be cleared up when the case is brought back again to Germany and the CC will give its definite ruling. Aka will take a lot of time.
During this period it is hard to see the ECB being able to use OMT. The moment they do a new case (as a fast procedure will be started, hard to see otherwise). With the CC having not much other choice than via the BuBa put a temporary stop to it.

And as said it makes the CC allowing it at the end very unlikely anyway.

Looks clear that it has made it own life very complicated. A ruling like below would have done a much better job in that respect:
-financing is being a creditor (period) (whether the original or a later one in case of a transfer) it is about running creditors risk, like in normal speech;
-This was part (limitation) of the mandate transfer;
-OMT is either unlimited or possibly seen earlier programms dealing with 100 Bn or likley even more (as larger countries will be involved). This is anyway dealing with budget relevant amounts on which the Bundestag should always have the last say.
- therefor OMT and similar programms are not covered by the mandate transfer.
Orders the German government to make the necessary adjustments within 2 years from now and forbid any cooperation until that is done. Either bring EU law in line with the Constitution and transfer of mandate based upon it
or amend the Constitution and the stuff based upon it (incl the mandate transfer).

Most important if these are proper summaries the OMT looks hardly viable.
Will be interesting to see what markets make of this.
First reaction was likely based upon the same thing I had a plain vanilla referral. This looks at this stage a lot more complicated and Euro negative.