27 January 2014

GCC could delay its ruling on the OMT until April

The German Constitutional Court could delay its ruling on the OMT until April, due to serious disagreements in the second Senate of the court. However, former GCC judge Udo Di Fabio said it was unlikely the court would reject the entire scheme and cause a "firebrand in Europe".

Partially translated from the German

As reported by the Frankfurter Allgemeine Zeitung and the Frankfurter Rundschau, the German Constitutional Court (GCC) in Karlsruhe is not expected to announce his judgement as to whether the OMT bond purchase programme of the European Central Bank (ECB) is unconstitutional before April.

The reasons for the prolonged consultation were probably due to highly controversial opinions within the eight-member Second Senate of the court, according to the newspapers. CSU politician Peter Gauweiler, several euro-critical professors, the Left Party, a citizens' initiative and numerous individuals had independently filed constitutional complaints against the euro bailout fund ESM. Following the announcement by ECB President Mario Draghi to buy, if necessary, unlimited government bonds of euro countries within financial difficulties, some of the plaintiffs extended their complaints to Karlsruhe. A bond purchase programme would amount to financing of state budgets by the ECB, they argued. And this was banned by the Lisbon Treaty.

Chaired by Chief Justice Andreas Voßkuhle, a hearing of the complaints took place on 11 and 12 June, 2013. Since then, the Second Senate has been deliberating. A verdict was originally expected in late autumn of last year. "The process is very complex", said the press office of the court.

Gauweiler argued that with rescuing the euro, the German budget was faced with incalculable debt risks, meaning that the Bundestag could de facto no longer decide on the national budget. Hence the right to vote was becoming devoid of meaning and so rescuing the euro went against the democratic principle of the Basic Law.

At the hearing in the summer, Finance Minister Schäuble denied the impotence of the German people's representatives. The ECB's Board of Governors must always decide unanimously - and via the German representative on the Board, the Bundestag and the Federal Government would be able to influence the ECB. Schäuble also recalled that it was Germany that had always insisted on the independence of the central bank. 

The crucial question will be whether the majority of the eight judges will follow Gauweiler or Schäuble in their argumentation or find a middle ground. A further option would be to call on the European Court of Justice (ECJ) in Luxembourg. 

The Telegraph points out the risk that the GCC court will indeed force German institutions to withdraw support for EU operations, wrecking market credibility for the ECB's rescue policies.  Ambrose Evans-Pritchard argues that the longer the case goes, on the less likely it is that the court will rubber stamp requests from the German government for a ruling that underpins the agreed bail-out machinery. 

He cites the Bank of America who says there is a "relatively high" risk that the Court will rule that the OMT is illegal as designed. "The Bundesbank might be prohibited from participating", said the bank's German analyst Tobias Blattner in a report. Bank of America said the Court is unlikely to pull the plug altogether on the OMT, but a negative ruling would greatly strengthen the position of eurosceptics in Germany and risk a fresh bond sell-off. "Any market reaction will necessarily depend on the details. Even in an extreme scenario we would expect the ECB to calm the markets by announcing alternative tools", BoA said.

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Udo Di Fabio, who served as constitutional judge between 1999-2011, told an audience at the Berlin-based Stiftung fur Familienunterhmen on 29 January that the court is "deliberating at the moment if the ECB can buy bonds at all".

Di Fabio said it was unlikely for the court to reject the entire scheme and cause a "firebrand in Europe". But, as was the case with previous verdicts on the eurozone bailout fund and the Greek bailout, Karlsruhe is likely to boost the rights of the German Parliament were OMT to be activated. "The particular issue Karlsruhe will be looking at is national budget sovereignty, as enshrined in German law. Budgetary self-determination of a nation is fundamental and cannot be transferred", he said.

"Parliaments were put in place so monarchs cannot use people's money as they please. National parliaments have to be sovereign in controlling the use of taxpayers' money. If Rome decides on an expenditure, it cannot be that the Netherlands and Germany are held liable for it. If that were the case, then Dutch and Germans should also be able to vote in Italian elections for the parliament", he added.

Di Fabio said the current EU treaties also pose limitations on how many tasks the ECB can take on. "EU treaties don't foresee a common bank supervisor and even less for the ECB to be it," he said.

The former judge said the treaty needed to be added to in light of the ECB new future role of supervising the eurozone's largest banks. He also raised questions about the yet-to-be-established bank resolution fund, which foresees banks chipping in to a common pot to be used if one of them needs bailing out. "European banks are heterogeneous. In some countries, banks are aggresive and oversized. If there was joint liability, it would force the less risk-taking banks - like the ones in Germany offering low interest rates to their customers - to guarantee the other banks in other states where interest rates are higher because risks are higher", he said.

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