Blog Post

A press review ahead of the German Constitutional Court decision

On 11 and 12 June, 2013 the German Federal Constitutional Court (FCC) will consider the legality and conformability of the European Stability Mechanism (ESM) and the ECB’s Outright Monetary Transaction programme (OMT) in particular. In this press review, we summarize the key issues.

By: Date: October 15, 2014 Topic: European Macroeconomics & Governance

On 11 and 12 June, 2013 the German Federal Constitutional Court (FCC) will consider the legality and conformability of the European Stability Mechanism (ESM) and the ECB’s Outright Monetary Transaction programme (OMT) in particular. In this press review, we summarize the key issues.

On 11 and 12 June, 2013 the German Federal Constitutional Court (FCC) will once again debate and consider the legality and conformability of the European Stability Mechanism (ESM) in general and the ECB’s Outright Monetary Transaction programme (OMT) in particular. In September last year, the court preliminarily approved the ESM on condition that German financial liabilities have to remain within the amount set by the German parliament (Court decision from September 2012 here). In the current hearing the FCC will consider several constitutional complaints (“Verfassungsbeschwerde”). According to the FCC’s press statement (here), the court will evaluate (1) scope and boundaries of the ECB’s monetary policy mandate, in particular the independence of the ECB and the OMT programme, (2) consequences of the OMT programme on the parliament’s budget right, (3) the role of the Bundesbank in the European System of Central Banks, and (4) possibilities of the parliament and the government react and respond to the ECB’s policies. The Court will invoke a joint assessment of whether or not the ECB acts ultra-vires and violates Germany’s constitutional identify. 

The focus of this hearing will be on the ECB’s rescue policies and specifically whether or not the ECB’s OMT is indirectly circumventing the prohibition of financing euro zone countries’ budgets. While the programme eases borrowing costs of struggling states, critics stress that it also eases pressure on governments to reform their fiscal policies and render the independent central bank dependent on governments’ policy choices. The ECB argues that its primary goal to safeguard price stability has to be accompanied by secondary goals, in particular maintaining the stability of financial markets.  The Bundesbank, by contrast, argues that OMT exceeds the boundaries set by the ECB’s mandate. In December last year, a statement by the Bundesbank in which the ECB’s OMT program is criticised was leaked and published by Handelsblatt.

The case is receiving wide coverage in the German press. The Welt writes that it is unlikely that the Court will deviate from its previous stance regarding the ESM, but that the constitutional complaints regarding the ECB’s OMT programme are a more delicate matter. The newspaper considers four potential decision scenarios: (1) The complaint is not admissible because the ECB is not subject to German but EU law and, hence, only the European Court of Justice (ECJ) has the competence to rule on the ECB’s policy. This scenario, however, is deemed highly unlikely because the FCC has already raised concerns that OMT might indirectly finance government deficits and because of the detailed structure of the hearing itself. (2) If the Court were to decide that the ECB is acting beyond its mandate, the ECB’s policies will no longer be covered by the German consent to EU treaties and OMT will violate German basic law. Such a decision, however, would necessitate the involvement of the ECJ, which in the past has always adopted a pro-European stance. But thus far the FCC has never referred a case to the ECJ. In extremis, the court may force the German government to complain against the OMT at the ECJ. (3) The FCC might consider ECB policies at odds with German basic law because they deprive the Bundestag of its budget right. In the eyes of the Handelsblatt such a verdict also seems unlikely because it is solely based on German law and therefore non-binding for the ECB and would essentially prohibit Germany’s participation in the common monetary policy. (4) Finally, the most likely outcome is that the FCC will turn down the appeal but still raise doubts and scepticism about OMT. Such a decision could potentially curb the scope of the programme and strengthen its critics in the Governing Council, most notably Bundesbank president Weidmann.

The Handelsblatt recently analysed the Bundesbank’s criticisms of the ECB’s policy. The Bundesbank’s main points of criticism are that the ECB’s Governing Council is not subject to parliamentary oversight and therefore should not be allowed to reach decisions that will lead to Germany having to take over financial liabilities. Stabilisation policies should rather be enacted through the ESM, while the ECB should restrict itself to the conduct of monetary policy. OMT also overstretches the ECB’s mandate of safeguarding price stability by supporting fiscal policies of heavily indebted countries and thereby threatening its institutional independence. While the ECB argues that OMT will also align interest rates across the euro zone and thereby keep monetary policy effective, the Bundesbank dismisses this justification because diverging level of interest rates across the euro zone only reflect different levels of economic strengths in the respective countries. Overall the Handelsblatt is confident that in the end the FCC will conditionally approve of the ECB’s rescue policies.

The Welt further quotes the German law professor Christoph Schalast who suggests that it seems unlikely that the FCC will stop the OMT and the complaint is rather “an act of despair of Euro sceptics”. Another law professor, Joachim Wieland, said that “if the FCC would rule that OMT is beyond the ECB’s mandate, not only the common monetary policy, but also the EU would be finished.” While most German law experts believe that OMT is at least problematic, they also share the view that the FCC will shy away from bluntly accusing the ECB of violating EU and German law. Still, according to the FAZ Udo Di Fabio, a former constitutional judge and professor of constitutional law, argues in a statement for the Stiftung Familienunternehmen, an interest group of family-owned companies, that if the ECB is indeed indirectly financing governments’ budget deficits through OMT, the FCC ultimately has to obligate the German government and the parliament to leave the euro zone should recommendations to change policies of the main German political institutions (“Einwirkungsaufträge”) remain unsuccessful. Other measures according to Di Fabio contain changes in the basic law as well as rules for a structured sovereign default in order to strengthen national governments’ fiscal responsibilities.

Most German newspapers, for example FAZ and Handelsblatt, portray the hearing before the FCC as a showdown between the Bundesbank and the ECB, where two Germans, Jörg Asmussen of the ECB and Jens Weidmann of the Bundesbank will defend the opposing views of the institutions they are representing. Asmussen and Weidmann shared a trust- and respectful working relationship due to their prior jobs, when Asmussen was working for the finance ministry and Weidmann for chancellor Merkel as an economic advisor. Regarding the ECB’s rescue policies, however, both now share diametrically opposed views. Mario Draghi’s choice to send Asmussen to justify the ECB’s policy instead of Yves Mersch, who was previously considered to testify before the Court, also reflects Asmussen’s knowledge of the Court’s procedures and peculiarities. Some members of the governing coalition, however, would still like to see Draghi testify before the Court. According to the FAZ, Rainer Brüderle, vice chairman of the Liberal parliamentary group (FDP) in the Bundestag and front runner for the party in the upcoming national elections, wrote a letter to Draghi requesting that he himself instead of Asmussen should testify before the FCC; the importance of the matter subject would require his attendance.

Read more on Outright Monetary Transactions

The ECB’s OMT Programme and German Constitutional Concerns

OMT ruling: Karlsruhe says no, refers to ECJ and suggests ECB should always be preferred creditor

Overview of the Karlsruhe Hearing on OMT – Summary

In defense of OMT ahead of Karlsruhe

Blogs review: OMT – Has the ECB solved the Euro Crisis?

The SMP is dead. Long live the OMT

The OMT programme was justified but the fiscal union question remains

Did the German court do Europe a favour?


Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.


Warning: Invalid argument supplied for foreach() in /home/bruegelo/public_html/wp-content/themes/bruegel/content.php on line 449
View comments
Read about event More on this topic

Past Event

Past Event

Perspectives on Universal Basic Income

At this event, we discussed the possible benefits but also the possible disadvantages of Universal Basic Income.

Speakers: Grégory Claeys, Olli Kangas, Professor Philippe Van Parijs and Prof. Dr. Hilmar Schneider Topic: European Macroeconomics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 12, 2017
Read article More on this topic More by this author

Blog Post

The forward guidance paradox

What’s at stake: the term “forward guidance” is used in economic jargon to describe central bank communications about the likely future path of policy rates. Standard monetary models imply that far future forward guidance has huge effects on current outcomes, and recent literature has been trying to reconcile this with reality.

By: Silvia Merler Topic: European Macroeconomics & Governance Date: July 10, 2017
Read about event

Past Event

Past Event

Is there a way out of non-performing loans in Europe?

At this event we looked at the issue of non-performing loans in Europe. The event also saw the launch of the latest issue of "European Economy – Banks, Regulation and the Real Sector."

Speakers: Emilios Avgouleas, Giorgio Barba Navaretti, Giacomo Calzolari, Maria Demertzis, Martin Hellwig, Helen Louri and Laura von Daniels Topic: European Macroeconomics & Governance, Finance & Financial Regulation Location: Bruegel, Rue de la Charité 33, 1210 Brussels Date: July 6, 2017
Read article Download PDF More on this topic

External Publication

Review of EU-third country cooperation on policies falling within the ITRE domain in relation to Brexit

What is the possible future relationship between the EU and the UK in light of Brexit? The report provides a critical assessment of the implications of existing models of cooperation between third countries and the European Union on energy, electronic communications, research policy and small business policy.

By: J. Scott Marcus, Georgios Petropoulos, André Sapir, Simone Tagliapietra, Alessio Terzi, Reinhilde Veugelers and Georg Zachmann Topic: European Macroeconomics & Governance Date: July 5, 2017
Read about event

Upcoming Event

Sep
7-8
09:00

Bruegel Annual Meetings 2017

The Annual Meetings are Bruegel’s flagship event. They offer a mixture of large public debates and small private sessions about key issues in European and global economics. In a series of high-level discussions, Bruegel’s scholars, members and stakeholders will address the economic policy challenges facing Europe.

Speakers: José Antonio Álvarez Álvarez, Agnès Bénassy-Quéré, Pervenche Béres, Jean Luc Demarty, Anna Ekström, Lowri Evans, Sandro Gozi, Peter Grünenfelder, Patrick Graichen, Reiner Hoffman, Levin Holle, Steffen Kampeter, Peter Kažimír, Emmanuel Lagarrigue, Steven Maijoor, Nathalie Moll, James Murray, Carlos Sallé Alonso, André Sapir, Dirk Schoenmaker, Mateusz Szczurek, Marianne Thyssen, Liviu Voinea, Johan Van Overtveldt, James Waterworth, Ida Wolden Bache and Guntram B. Wolff Topic: Energy & Climate, European Macroeconomics & Governance, Finance & Financial Regulation, Global Economics & Governance, Innovation & Competition Policy Location: Square - Brussels Meeting Centre
Read article More on this topic More by this author

Blog Post

Eurozone or EU budget? Confronting a complex political question

This week’s European Commission reflection paper is the latest document to ponder a distinction between EU and euro-area budgets. But do we need to split the two, and what would each budget be used for? In this post, I present an analytical framework for assessing this ultimately political question

By: Guntram B. Wolff Topic: European Macroeconomics & Governance Date: June 29, 2017
Read about event

Upcoming Event

Sep
28
12:30

Unfinished business: The unexplored causes of the financial crisis and the lessons yet to be learned

At this event Tamim Bayoumi will present his upcoming book on the financial crisis, showing how how the Euro crisis and U.S. housing crash were, in fact, parasitically intertwined.

Speakers: Tamim Bayoumi, Maria Demertzis and Aerdt Houben Topic: European Macroeconomics & Governance, Global Economics & Governance Location: Bruegel, Rue de la Charité 33, 1210 Brussels
Read article More on this topic More by this author

Blog Post

Raising the inflation target: a question of robustness

In an unexpected move, the Federal Reserve Chair Janet Yellen has recently brought up the issue of raising the inflation target. This blog argues that an increase in inflation targets may prove to be beneficial in achieving price stability in the long run. This would increase the credibility of central banks in achieving inflation goals and stave off the distortionary effects of deflation.

By: Maria Demertzis Topic: European Macroeconomics & Governance Date: June 22, 2017
Read article More on this topic

Blog Post

Can EU actors keep using common law after Brexit?

English common law is the choice of law for financial contracts, even for parties in EU members with civil law systems. This creates a lucrative legal sector in the UK, but Brexit could make UK court decisions difficult to enforce in the EU. Parties will be able to continue using English common law after Brexit, but how will these contracts be enforced? Some continental courts are preparing to make judicial decisions on common law cases in the English language.

By: Uuriintuya Batsaikhan and Dirk Schoenmaker Topic: European Macroeconomics & Governance Date: June 22, 2017
Read article More on this topic More by this author

Blog Post

The size and location of Europe’s defence industry

There is growing debate about a common European military policy and defence spending. Such moves would have major economic implications. We look at the supply side and summarise some key facts about the European defence sector: its size, structure, and ability to meet a possibly increased demand from EU member states.

By: Alexander Roth Topic: European Macroeconomics & Governance Date: June 22, 2017
Read article More by this author

Parliamentary Testimony

House of Commons

Exiting the European Union Committee

On 19 April 2017 Zsolt Darvas appeared as a witness at the Exiting the European Union Committee, the House of Commons, United Kingdom.

By: Zsolt Darvas Topic: European Macroeconomics & Governance, House of Commons, Testimonies Date: June 20, 2017
Read article More on this topic More by this author

Blog Post

Brexit and the future of the Irish border

The future of the Irish land border has been thrown into uncertainty by Brexit. The UK's confirmation that it will leave the EU's single market and customs union implies that customs checks will be needed. However, there is little desire for hard controls from any of the parties involved. This is especially true for Theresa May's potential partner, the DUP. Creative solutions are needed to reach a solution.

By: Filippo Biondi Topic: European Macroeconomics & Governance Date: June 19, 2017
Load more posts