German Top Court Expected to Extend ‘Yes, But’ Doctrine

Germany's Federal Constitutional Court is reviewing European Central Bank programs to buy bonds from countries in crisis.

Germany’s top court probably won’t block the European Central Bank’s (ECB's) plan to buy bonds of crisis-torn countries, in line with previous cases involving European Union integration. The ECB’s Outright Monetary Transactions program and the European Stability Mechanism will be reviewed by the Federal Constitutional Court in Karlsruhe at hearings this week. While the judges may voice serious doubts about the central bank’s plans and attach some conditions, the court won’t stop it, said Christoph Ohler, a law professor at Jena University.

“It’s tough to say exactly how the court will handle this, but we can expect something close to the ’yes, but’ approach the judges have used before in European integration and euro-rescue operation cases,” said Ohler. “The court has never blocked anything on the European level, but in the ’strings-attached’ part, unusual and surprising details can always pop up.”

The dispute will pit the ECB against Bundesbank President Jens Weidmann, who voted against the OMT, in a case that could underline the limitations the ECB faces in its crisis policy. The court last year allowed Germany to ratify the 500 billion-euro ($660 billion) ESM bailout facility and the EU fiscal pact, while ruling the measures must include provisions that the country won’t be forced to assume higher liabilities without its consent.

The September ESM ruling was preliminary and didn’t cover the bond program. In one paragraph of the written opinion dealing with securities issued by the ESM, the court did mention rules for the ECB, saying the central bank may not buy bonds on the secondary market with the aim of financing euro member states independently of the capital markets.

The plaintiffs, including an opposition political party and a lawmaker from Chancellor Angela Merkel’s CSU Bavarian sister party, can address the central bank and some remaining ESM issues at a two-day hearing that starts tomorrow.

Shortly before the September decision, ECB President Mario Draghi announced that the central bank’s program would be unlimited and would focus on short-term government bonds of nations signed up to rescues from the ESM or European Financial Stability Facility. The plaintiffs have added challenges to the OMT.

Conceived as yields on Spanish and Italian 10-year bonds neared 7 percent, OMT hasn’t yet been used. The cost of borrowing for debt-strapped nations across the euro-area’s periphery has since fallen to levels not seen in more than two years.

Draghi said on June 6 that the OMT had brought stability to markets worldwide, “and has been the most successful monetary policy measure undertaken in recent times.”

Monetary Policies

Two members of the ECB Governing Council and German Finance Minister Wolfgang Schaeuble will all address the court during the hearings. Joerg Asmussen, an ECB executive board member, will represent the central bank, while Weidmann, who is also an ECB council member, will represent the Bundesbank at the court hearing. Schaeuble will defend the government’s policies.

“The ECB acts within its madante, handles it properly and has success,” Schaeuble said at a book presentation in Berlin today. “The government is of the opinion that the decision by the ECB is covered by its mandate and because of the independence of the central bank, no others can judge that.”

The Bundesbank submitted a brief critical of the ECB, saying unlimited bond purchases may worsen the crisis instead of solving it.

The ECB argued they are a legitimate part of the central bank’s monetary policies. Since they help stabilize the financial system, they also serve the ECB’s primary goal, price stability.

Asmussen told Bild-Zeitung in an interview that there would be serious consequences should the bond-buying program be withdrawn, according to the paper.

 

‘Difficult Case’

Neither the Bundesbank nor the ECB is party to the case; they submitted comments at the court’s request.

The case emphasizes “the fact that the ECB does have to operate within an institutional framework, which does make it difficult for the ECB to act,” said Nick Matthews, senior European economist at Nomura International Plc in London. “It has to be careful when it tailors its policy actions.”

While the hearing will touch on some aspects of the ESM treaty, the proceedings will center on bond purchasing programs, including the Securities Markets Program. The predecessor to the OMT ended last year after purchasing more than 200 billion euros of European government bonds. The program was started as an emergency measure in May 2010 when Greece received its first bailout. Governments had to make no binding commitments in return for purchases under the SMP.

The plaintiffs argue the ECB is acting outside the powers granted by European laws, which ban government financing by the central bank. The German government must attempt to cancel the programs, even if it means the country must sue the ECB at the European Court of Justice, they said.

Since the constitutional court only has jurisdiction over German institutions, the plaintiffs face high hurdles, said Christoph Herrmann, a law professor at Passau University. They would have to show that the ECB action is such a grave violation of EU treaties, or an “ultra vires act,” that it violates the principle of democracy because it makes Germany liable for debts it didn’t agree to and potentially overburdens its budget, said Herrmann.

“That’s an extremely difficult case to make,” said Herrmann. “I can’t really see that you could argue the OMT risks endangering our system of democracy.”

The court didn’t even consider the merits of a bid against the SMP in a 2011 case over the EFSF, saying plaintiffs couldn’t attempt to block the ECB measure in the national court. “It will be difficult for the judges to make a U-turn from that ruling, which they would have to do were they to intervene,” Herrmann said.

Strings Attached

From a legal perspective, both stances about the ECB’s action are viable, Ohler said.

“There are good arguments saying it transgresses its powers and there are good arguments saying it’s still covered by EU laws,” said Ohler. “It’s a gray area, and that’s why it doesn’t seem to amount to an ultra vires act. For that you’d need more than a grey area; you’d need the blazing light.”

The judges could send the case to the European Court of Justice for guidance on EU rules governing the ECB. The German top court so far has avoided such a step. Even if the judges sent the suit to the Luxembourg-based tribunal, the issue would return to Karlsruhe afterwards and the court would have to determine how to interpret the EU-level ruling under German constitutional principles.

The German judges will meticulously examine what the ECB can and can’t do under EU rules, and in the “strings-attached” part, they may work out a time limit for the program, said Ohler. They won’t try to settle what the best economic policy is, he said.

His colleague Herrmann agrees.

“In the ECB Governing Council, 22 of 23 members, all experts, voted for the measures,” Herrmann said. “Only Weidmann was against it. Now eight judges, who are pretty much lay people when it comes to monetary policy, should know it better? That would be absurd.”

The cases are BVerfG, 2 BvR 1390/12 et al.

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