The German Constitutional Court will hold hearings today and tomorrow on the ECB's Outright Market Transaction program announced last year, but yet to be implemented. In fact, documents to explain the precise procedures and operation of OMT have yet to be published.
The complaint has been registered by several politicians, include euroskeptic member of the German parliament who is in the CSU, the Bavarian sister party to the governing CDU and the Left Party, with the support of some 35,000 Germans, not least of whom is the Bundesbank President Weidmann, who has made no secret of his opposition. Weidmann will present before the Constitutional Court.
Yet, do not be mistaken. This is hardly a case of Germany vs the ECB. Asmussen, the German representative on the ECB's executive board will also speak before the Constitutional Court, defending the OMT.
The Constitutional Court conducts the hearing this week and a ruling is unlikely until later this summer or even in the fall. There is no guarantee that it will announce its decision before the September 22 German national election, though this is the hope.
Until now the Constitutional Court's rulings involved the role for the German parliament and government. Now it is being asked to look at one of the key European institutions. The court's rulings on EMU have largely been of the "yes, but..." variety. The court has consistently endorsed German participation and contributions, within certain limits and with a role for the German parliament.
Weidmann lost his initial argument opposing OMT within the ECB and in Europe as a whole. ECB President Draghi has claimed, with some rhetorical zeal, that OMT has been the most successful initiatives during the crisis. The financial markets themselves have celebrated the success.
Weidmann and OMT critics argue that the policy is tantamount to the central bank funding national governments, which is strictly prohibited. This is a powerful argument and gets to the heart of the issue that both the German Constitutional Court and the European Court of Justice have been sensitive to.
The German court has ruled that "An acquisition of government bonds in the secondary market by the ECB aim at financing members' budgets independently of the capital markets is prohibited." And the European Court of Justice has ruled that monetary policy does not include supporting the budgets of stressed members.
This brings the issue into the realm of motives. The motive of Draghi and the vast majority of the ECB in OMT is most certainly not deficit financing. The goal is to secure EMU by counteracting disruptions in the capital markets and resist the excessively high risk premia being demanded and associated with the risks of a member leaving.
Many observers will try to infer from the questions the judges ask to the numerous speakers how the court is disposed. The final decision is likely to be one of three broad categories.
First, the Constitutional Court can refer the decision to the European Court of Justice on the grounds that it does not have jurisdiction over the ECB. It would be up to the ECJ to decide if the ECB overstepped its authority.
Second, the German court can rule in favor of the plaintiffs that OMT is indeed debt funding. This would be the most far reaching and disruptive decision. It could, in effect repeal the OMT. Or, if the ECB, which is not under the German court's jurisdiction, kept the OMT, theoretically, in the extreme, it could mean Germany would have to leave monetary union. The euro would likely sell-off sharply and peripheral yields would rise. The Swiss franc could appreciate dramatically.
Third, the German court could make a narrow ruling on the relationship between the German constitution, the ECB and the European treaties. Under this scenario, it may or may not refer the issue of ECB's motivation and competence to the ECJ.
The second scenario is the least likely but carries the greatest impact. We are inclined to the third scenario on the grounds of consistency with spirit of past rulings. A referral of some aspect of the issue to the ECJ would be a new approach, but ruling on a European institution itself seems unprecedented. The German government, as it is currently configured and as it may be in any one of the likely scenarios for the outcome of the September election, obviously supports EMU. The German Constitutional Court is unlikely to issue a ruling that threatens its foundation. It could have, for example, granted a temporary injunction against the European Stability Mechanism last year, but did not.
The issue may indeed turn on the motivations, as the EU treaties doe not specifically ban sovereign bond purchases in the secondary market. There some non-acceptable reasons, like financing a government's debt. That was not the intent of OMT, even if it is of secondary consequence.