29 May 2013

Deutsche Bank: Hearing in June unlikely to provide definitive answers on OMT

On June 11/12 the German Constitutional Court will conduct a public hearing on the various challenges to the ESM and OMT as well as the other unconventional monetary policy measures. Most observers expect the judgement to be held in late summer, possibly even before the German federal elections.

• The Court has stated many times that it will not make any economic assessment on the economic effects of the euro rescue and the measures of unconventional monetary policy in particular. At the same time, the Court faces the difficulty of having to rule (1) on the constitutionality of the ESCB’s unconventional monetary policy while (2) fully respecting the Bundesbank’s independence in order to comply with the constitution.
• In contrast to former judgements which mainly strengthened the role of the German Bundestag, the ongoing procedure could turn out to be a judgement that defines the scope and borderlines between the German Constitution and European Law.
• If the Court assesses that the ECB as a European institution had acted beyond its competences, it could refer the case to the European Court of Justice (ECJ). If any preliminary ruling from the European Court of Justice was to be solicited, it would most likely be supportive of the ECB.

On September 12, 2012, the German Constitutional Court (GCC) issued a preliminary judgement on six constitutional complaints that were filed against the German ratification of ESM, the Fiscal Compact and the unconventional measures of monetary policy by the ESCB. While the Court accepted the ratification of the Fiscal Compact and the establishment of the ESM and strengthened the role of the German Parliament, it announced that it would review the unconventional measures of monetary policy together with the full legal analysis of the ESM in the main proceedings. A public hearing for the main proceedings is now scheduled for June 11/12.

What will be the economic consequences of SMP, OMT, ELA and the Irish promissory notes deal?

In its preliminary judgement on September 12 2012, the Court recalled that any central bank bond purchases on secondary markets that aim at budgetary financing independent from capital markets were explicitly prohibited by European law. In this context, the Court solicited advisory opinions, including one each from the ECB and the Bundesbank as the two major players involved. The opinions that date from December were leaked to the press in April and were at the centre of public attention in Germany – even though these opinions are just two among others that will be considered by the GCC.

Do the ESCB’s unconventional policies undermine individual provisions of the German Constitution and thus change its character?

In previous judgements, the GCC has acknowledged that a permanent involvement of the parliament and the executive in decisions on European integration is inevitable. According to the Court, both parliament and executive take responsibility for the design of the European integration – that means that (1) they should be involved in major decisions in economic integration and (2) that they had to ensure that the Basic Law – the German Constitution – will not be changed in its character due to the integration process.

Is the ECB acting beyond its competences?

A third issue will be the assessment as to whether the ECB acted beyond the competences that were conferred on it by the German ratification of the European Treaties. If the GCC assesses that the ECB as a European institution had acted beyond its competences, it could refer the case to the European Court of Justice (ECJ). In previous judgements, the GCC has emphasised that acts by European institutions can only be challenged if they were obviously beyond competences and would lead to a substantial power shift from national parliaments to the ECB. Given the potential re-distributional effects of the unconventional monetary policy measures and the effective influence that the ECB’s secondary market interventions could have on the German budget via the Bundesbank’s balance sheet,  this argument might well gain importance. However, the chances that the ECJ would give a negative opinion on the ECB if being asked for a preliminary ruling are low – and the preliminary ruling by the ECJ is binding for the GCC. This, however, could be taken by claimants as a new incidence to file another complaint at the GCC asserting that the ECJ hat ruled beyond its competences. That would continue the long tradition of constitutional complaints against European issues in Germany.

Outlook

Most observers expect the judgement to be issued in late summer. Looking at the three aspects, the outcome of the ongoing proceedings cannot yet be fully assessed.

The most likely outcome is a mixed assessment by the GCC. In the absence of any inflationary tendencies in the short and medium run, the Court will most likely not comment on the effects of SMP and OMT on price stability. Also, given the legal independence of the Bundesbank and the ECB, it seems unlikely that the Court will set any explicit or implicit cap on secondary market interventions.

One option could be to give the Bundesbank a more prominent role in the course of the parliament’s opinion forming process. If any preliminary ruling from the European Court of Justice were to be solicited, it would most likely be supportive for the ECB.

While Deutsche Bank does not expect an outright suspension of OMT or other unconventional monetary measures covered by the complaints, the newsflow around the public hearing as well as the inherent uncertainty until the court’s final verdict might lead to some market nervousness. This might be all the more so as the timeline with the federal elections and the subsequent forming of a new government might well delay even non-critical political decisions to implement potential legal demands by the GCC.

Full press release

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