The referral of the case concerning the legality of the ECB’s recent actions from German to European level bears massive risks. No matter what the European court ruling will look like, its consequences will not be good. By Korbinian Rueger and Benjamin Zeeb
Last week for the first time in history, Germany’s highest court, the German constitutional court in Karlsruhe, handed a case over to the European Court of Justice. The hotly debated case concerns the legality of the European Central Bank’s outright monetary transactions program (OMT). OMT allows the ECB to buy unlimited amounts of government bonds to help ailing European governments. ECB president Mario Draghi announced OMT in 2012 but the program has never actually come to be used. Nonetheless, its announcement alone has very successfully helped to defuse the European debt crisis ever since.
Last year the German court started to question OMT, as it argues that “[t]here are important reasons to assume that [the OMT] exceeds the European Central Bank’s monetary policy mandate and thus infringes the powers of the member states and that it violates the prohibition of monetary financing of the budget”. The fact that Karlsruhe has now refrained from a direct ruling, but seemingly passed the buck to the European Court of Justice in Luxembourg raises important questions. Why has the German court for the first time referred a case to Luxembourg? What happens if the European Court gives OMT its green light, and what if it doesn’t?
Some commentators have interpreted the move by the German court as a sign of cultural change and improved relations within the EU’s legal system. This interpretation however seems flawed. Karlsruhe might not have ruled but it still claims the right to decide differently for case in which it disagrees with the European ruling. It seems therefore rather to be a way for the German court to see if Brussels goes along with German-style “yes, but…” decisions. Another interpretation is that the German court is convinced that OMT is against the law but simply doesn’t want to be the one to drop a bomb on the Eurozone. This of course raises the question whether a court should ever refrain from ruling even when it has reached a decision.
The most probable interpretation is that the court hopes the ECJ will not scrap OMT, but limit it. This would be a decision with which the court could live without having to get its hands dirty. The problem is this: the very reason why OMT works is precisely that it is unconditional and Draghi’s ability to do “everything it takes” when he thinks it necessary. If his ability to act was curbed, the entire strategy to announce big interventions in case things go south is rendered impossible.
But what happens if the European court rules differently? Well, if it scraps OMT, the consequences would likely be catastrophic. Since its announcement, OMT has re-established trust in the European markets and its announcement has been the single most effective instrument to slowly overcome the debt crisis. If this is taken away, markets will likely crash again.
On the other hand, if it gives OMT its unconditional green light, the highest European court would be at odds with the highest German court. This doesn’t seem a very attractive outcome either. So no matter what, the choice to refer the German case to Luxembourg has not been a lucky one and threatens to push the union back into crisis.
The fragile state of the European financial system can only be overcome if we get rid of these kinds of risks that threaten the currency and the Union. For long enough the ECB stood as the only institution actually doing its job; an undemocratic institution, granted, but at least an effective one. If one wants to take this power away, it has to be replaced with something else. It has to be replaced with a federal European institution that has the power and legitimacy to steer the union’s fiscal policy. Such things are called governments.
Image: “Richterroben am Bundesverfassungsgericht” by “Evilboy”. Published under Creative Commons 3.0 license.