Tuesday, June 11, 2013

German Constitutional Court live blog: One of the most important cases in the Court's history?

The German Constitutional Court in Karlsruhe
The German Constitutional Court’s (GCC) hearings into the legality of the ECB’s actions to combat the eurozone crisis – and specifically the OMT bond buying programme – kicked off this morning. (See here for the background). In a front page leader, FAZ describes the case as one of the “most important” in the court’s history.

Public opinion in Germany is mixed, with a Forsa poll for Handelsblatt finding that 48% of Germans hope that the Court will put a stop to the OMT, while 31% believe that the complaint against the ECB is unjustified. As we noted in our flash anaylsis on the topic yesterday, the GCC can't actually stop the ECB. At worst, it could remove Germany from the ECB's bond buying programme and probably, therefore, from the eurozone itself. (A poorly phrased poll question, then, but a very telling result nonetheless).

With Schäuble, the German Finance Minister, and the ECB's positions already well known (that OMT is within the Central bank's mandate), we can safely say that the highlight of the day will come  from the opposing side, in testimony of Bundesbank President Jens Weidmann. In terms of their specific grievances, it will be the first time we will hear a detailed, public explanation of where the Bundesbank stands on this issue, while the tone of Weidmann's comments will also be interesting. Will there be any more Faust references we wonder?

Check our twitter feed for live updates from Karlsruhe throughout the day. We will also continue to update this blog as things develop.

17:45

Bundesbank President Jens Weidmann has now had his say - and again his points were very much as expected (his full statement is here but only in German for now).
  • Warned that ECB OMT blurs the line between monetary and fiscal policy - this makes it more difficult to achieve price stability and spreads solvency risks amongst eurozone countries, but does so without any parliamentary or democratic approval.
  • Pushed for a narrow interpretation of a central bank's primary mandate, with a complete focus on price stability.
  • Suggested that the OMT does represent potential losses for taxpayers, arguing that if the ECB took on significant amounts of risky debt, it may face large a loss which it cannot absorb and may require aid from member states.
  • Argued that even secondary market purchases can overturn the force of market discipline and undermine fiscal autonomy.
  • Issued a warning over the interpretation of the real-risk premiums for bonds, which he suggested was very subjective and dependent on future policies.
  • Accepted that the inflation outlook in the eurozone fits with price stability at the moment, but still expressed serious concern about comprising the ECB’s focus on this.
It seems to us that, of the two sides, Weidmann had the tougher case to make. Ultimately, as much of the above shows, he is forced to consider hypothetical scenarios and potential worst cases. These are undoubtedly risks that should be highlighted, but it does leave one feeling that his argument is slightly less clear cut than Asmussen’s.

Having heard the key testimony of both sides, we still expect the court to side with the ECB, but with some caveats (although how strict they will be is very much up in the air). Of course, this could still develop more tomorrow. 

16:20

Asmussen has now concluded his testimony and subsequent Q&A, and the ECB has also helpfully put a transcript on their website. Here are the key points he made:
  • the OMT will have the ability to sell bonds as well as buy them, and it will not take them off the market permanently, unlike its forerunner the SMP (in fact Asmussen repeatedly highlighted the differences between the two);
  • the OMT is pari passu (equal to) other creditors,
  • the OMT seeks only to reduce unwarranted interest rate spikes and is not aimed at harmonising financing conditions of member states,
  • the ECB would react if a country were to try to game the system by converting all its bond issues to a short maturity (of up to three years), but that in any case markets themselves would "see through and deny" such attempts,
  • the only risks associated with the programme stem from countries operating "un-sound" policies, but that those states that fail to comply with the OMT's conditionality could be faced with the prospect of having to leave the eurozone.
The comments were more or less as expected. However, there are a couple of interesting points. First, the fact that the bonds purchased under the OMT will be judged at market value suggests that, if they are purchased and then decline in value, the ECB could be facing losses on its balance sheet. A tricky technical and political issue. Second, the point about 'un-sound' policies leaves us feeling slightly uneasy. Its clear that even with an ESM bailout programme, implementation may not be up-to-scratch. Meanwhile, it also highlights the clear link that would be established between ECB policies and the fiscal (and other) policy of national governments. This surely raises questions about the ECB's independence.

Asmussen also admitted that the policy did have de-facto practical limits given that it will only purchase short term debt, as reported over the weekend.

15:10

Handeslblatt reports that Philip Rösler, the German Minister for Trade and Vice Chancellor is coming under increasing pressure from his own FDP party to take a stand against the ECB, following the Handelsblatt/Forsa poll showing that almost 50% of Germans hope that Karlsruhe will stop the ECB’s OMT programme (despite this actual course of action not being possible, see blog intro above on this).

Frank Schäffler, the financial expert of the FDP parliamentary group, told Handelsblatt Online that "Working towards a market-economy is widespread among the followers of the FDP. Liberals know that prosperity cannot be printed from the ECB.”

The irony of clinging on to central bank independence, while using political pressure to change the course of the ECB is not lost on us - nor on Rösler it seems, who said: “We must not allow this course toward stability to be broken up through the the attempt to exert influence on the European Central Bank.”

13:55

 These comments from ECB Executive Board member Yves Mersch seem to confirm our feelings that the ECB is trying to have it both ways over its refusal to publish the OMT documentation (see 13:30):
13:40

Germany's new anti-euro party Alternative für Deutschland has just put out a press release citing Professor Joachim Starbatty - one of the original plaintiffs in the case and now one of AfD's top candidates in September's elections - warning that under the OMT, German taxpayers will be responsible for liabilities that are "no longer the responsibility of any government or parliament". The party is clearly hoping the publicity around the hearings will boost its poll ratings.

13:30

Asmussen is clearly channelling Draghi in his comments below. The ECB's continuing refusal to simply publish the legal documents relating to the OMT is at best strange and at worst downright obstructive. It does beg the question: what are they trying to hide? Maybe nothing, but at the very least it seems they are trying to have the best of both worlds. By refusing to reveal the exact terms and conditions, the ECB can try to address German concerns over the extent of the OMT (as we have seen them doing in the run up to this case) while also being able to continuously reassure markets that the scheme is in fact "unlimited".

Such a balancing act is tough to pull off and may add to confusion if it breaks down. Some transparency would be welcomed. It needs to happen at some point, who's to say it would be better revealing the legal documentation just when the OMT is being tapped, surely by definition that would be a period of crisis?

13:05

The ECB's Jörg Asmussen is up now making the point that the ECB would actually adopt a legal ordinance before any bonds were purchased:

11:15

German Finance Minister Wolfgang Schäuble has spoken, and as expected, he backed the ECB:

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13 comments:

  1. Anonymous11/6/13 5:57 pm

    The ECB is not independent! That argument is nonsense and it only comes up when some lunatic Eurocrat takes the stage. The Central Bank is only allowed to act within a legal framework. And imho operations like SMP and OMT are forbidden because according to the Lisbon Treaty the ECB is not allowed to finance member states.

    And it's funny that Asmusen states that the ECB may also sell bonds. Because asaik they didn't sell a single bond that was bought under the SMP even though the market conditions were extremely good since Abe and Kuroda fired up the printing press.

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  2. Anonymous11/6/13 7:33 pm

    English translation of the Bundesbank's letter to the BVerfG: http://www.antehoc.com/2013/06/bundesbank-letter-to-german.html

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  3. Rik11/6/13 8:20 pm

    Most interesting is Schauble's statement imho.
    As first of all this will be Merkel's official position as well. And therefor the 'official' one of CDU and Government.

    Simply gives an excellent point of attack on Schauble for say AfD. Simply as S's statement means that there is no German control on this and no parliamentary control as well.
    The Euro/Euro-rescue has a lot of opponents, but the undemocratic way things go have as well. From earlier UK polls it seems to be around 20% of the electorate that is pro-EU but simply totally against the 'democratic' process.
    Same percentage can be derived from some Dutch polls. Percentage looks rather stable over Europe. Difficult to see why it should be completely different in Germany.
    Attack now is not really convincing, attacks Merkel who is the most rescue sceptic of the 3 larger parties. Not really makes complete sense.
    Democracy or better the lack thereof is almost as big an issue as the rescue itself. And Merkel and S hardly look great on this account/file.

    In other words this could give AfD a good point to attack Schauble on (and so indirectly Merkel). Much better than Merkel herself, she makes much less mistakes in the defence, S is pretty sloppy. Plus another issue to campaign upon.

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  4. Jesper12/6/13 9:48 am

    -the OMT is pari passu (equal to) other creditors?
    We saw how pair pasu with SMP worked out for Greece, the pari pasu was worked around on a technicality.....

    -OMT seeks only to reduce unwarranted interest rate spikes?
    Who decides what is 'unwarranted'? Are economists now able to accurately predict default risk?

    -states that fail to comply with the OMT's conditionality could be faced with the prospect of having to leave the eurozone?
    But a country can't be forced to leave the eurozone, treaties specify that countries cannot exit from the euro...

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  5. Anonymous12/6/13 12:59 pm

    Why is open Europe trying to hype this very pedestrian and pre-digested situation so much?

    Here's the truth:

    Germany = ECB = EUSSR.

    i.e. the German Court will continue to facilitate the maintenance of the EUSSR in any way it can, including with ridiculous show trials and pro-EUSSR "decisions" such as are being concocted right now.

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  6. Denis Cooper12/6/13 5:55 pm

    Anybody who reads the EU treaties with an impartial eye will doubt that the ECB is permitted to rig the market in the bonds issued by the government of an EU member state.

    There are repeated commitments to the principle of a free market economy, with efficient allocation of capital; and there is Article 124 TFEU prohibiting any measure to give (inter alia) a member state government privileged access to financial institutions - which is of course what happens when the ECB rigs the market so that a government can borrow from the participating financial institutions at a lower interest rate than would otherwise be the case.

    However while an impartial observer may tend to agree with Jens Weidmann that the ECB is contravening the EU treaties and its own statute by doing it, or even by announcing its willingness to do it, the legal reality is that the final interpretation of the EU treaties and laws rests not with that impartial observer nor with Weidmann and nor with the German constitutional court but with the EU's Court of Justice, a bunch of eurofederalists in Luxembourg who will always weight their decisions towards the pursuit of "ever closer union".

    Arguably Weidmann should have taken his complaint about the actions and plans of the ECB direct to that EU court; which I believe he could have done under Article 263 TFEU, provided he had acted within two months.

    Instead it is quite possible that the German court will refer the question of the legality of the ECB actions and plans to the EU court for its final decision.

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  7. Jesper12/6/13 6:57 pm

    Can't article 263 still be applied?

    Proceedings have to begin within 2 months after the publication of measures but the ECB has not yet published, and is at the moment refusing to publish, the legal documents of the OMT.

    The measure does seem illegal but since the details of the measure are unknown it seems impossible to know.... Can there be rule of law when the laws are secret?

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  8. Rik12/6/13 10:53 pm

    @Denis
    You are missing the plot like a lot of commentators.
    This case is mainly about the question if the German constitution allows what is happening. If the earlier transfer of powers by the Buba to the ECB is allowed under the Constitution seen the fact that the ECB takes the broadest possibly interpretation of its mandate? A much broader one than assumed by effectively all when the transfer earlier took place. Nothing to do in that respect with EU law.

    Another point that half the analyst miss is the fact that the ECB is an independent CB. Which makes the Bundestag rubberstamping decisions in this field something that completely doesnot fit in with the set up of the ECB in the treaties. CB (modern) mandate is limited by laws simple as that.

    I miss the detils but has Voskuhl (or what is his name) really indicated that there should be a grand discussion on the ECB mandate.
    Would find that totally weird. he is no mediator. Highest judge in the land that simply has to decide if something is allowed by the constitution or not.

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  9. Denis Cooper13/6/13 11:04 am

    Jesper -

    I was thinking of two months after the vote on the ECB Governing Council when the Bundesbank was apparently the only opponent of the proposal.

    But maybe you're right, maybe there would be a fresh opportunity when the detailed measure is published.

    I note here:

    http://www.dw.de/germanys-constitutional-court-criticizes-ecb/a-16877427

    "Conservative MP Gunther Krichbaum, meanwhile, counters, "We, in this case the Bundestag and the government, believe the ECB acted within its mandate." If that had not been the case, maintains Krichbaum, chairman of the parliamentary committee on EU affairs, the government would have brought its own suit before the European Court of Justice."

    And NB, they would have gone to the ECJ, not the German court.

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  10. Denis Cooper13/6/13 11:09 am

    Rik -

    It is not, repeat not, for the German court to decide whether the ECB has exceeded its mandate under the EU treaties.

    The ECB is an EU institution governed by EU law, and the ECJ has the final word.

    I agree with what you say about it being anomalous to complain about either the ECB or the Bundesbank acting undemocratically when they have been specifically set up to be free from democratic influence.

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  11. johnlandseer13/6/13 11:30 am

    reported today by openeurope and ft...
    Meanwhile, Bundesbank President Jens Weidmann suggested that he would welcome clarification and limits to the ECB’s mandate.

    this is truly depressing....Weidmann is on the ecb executive board...

    now I am really worried..

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  12. Rik13/6/13 7:38 pm

    @Denis
    You are mixing 2 things up, like most btw:
    There are 2 issues:
    -123 (or something close), whether or not ECB has violated that (the anti-bail out). Which is EU law. On which the GCC can decide itself if it thinks the rules are clear btw. It not even has to refer to the ECJ if it doesnot see it fit, providing of course it is competent.
    -88 German Constitution. At the end of the day the transfer of powers to the ECB under the present conditions (extended interpratation by the ECB of its mandate) is permitted. Pure German law. The only thing the GCC cannot do if it rules on this is directly forbiding the ECB to do things. But it can easily do it indirectly by say ordering the Buba to stop cooperating or even worse reverse the earlier transfer of powers.
    Basically it is 123 but via 88 if you like.

    Comments mix the 2 most of the time, however legally they are 2 completely seperate issues.
    For 123 EU the court might actually not be competent. You can put a questionmark there probably. However via 88 GG it certainly is.

    That is why Schauble's remark on that is simply moronic. Never defend points you are nearly certain to lose.
    It simply makes him from a political pov look (a bit of) an idiot as well (not for the simpletons btw). A German minister completely missing the German Constitution (on his top of the agenda issue). Which, the GG, should be by far his most important guideline.

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  13. Denis Cooper14/6/13 9:20 am

    Rik -

    If the German court expressed the view that the ECB bond buying was a breach of EU law then the ECB would go to the ECJ and that court would decide one way or another, almost certainly in favour of the ECB; whereupon the German court would itself be in breach of EU law if it continued with attempts to prevent the Bundesbank from discharging its responsibilities under EU law, and the Bundesbank would have no choice but to comply with the ECJ ruling in defiance of the German court.

    Some people in Germany seem to think that they can insist on imposing the primacy of EU law on people in other countries but not be subject to it themselves.

    ReplyDelete