ECB’s OMT: The trick in German Constitutional Court’s sentence

German court<p>German court</p>

Other political commentators have noticed that German anti-euro groups popped the cork of a champagne bottle because the sentence’s sense is opposite to those Spanish optimistic, who only take into consideration events moving in the same direction that their beliefs. And the strongest belief in Spain now is the euro.

Draghi’s words saying he had a tool prepared to save the euro at all costs, produced a thaumaturgical effect not seen before in all central banks’ history. The simple fact that ECB announced it would buy any amount of troubled sovereign debt in order to avoid an eventual breakdown was trusted blindly by markets. These words never carried out reduced premium risks to the lowest level since the crisis began.

Good for Draghi. He probably did not expected to be so efficient without moving a finger, just by threating those who sold bonds they could end up dissapointed. The problem is that Germany did not agree and filed a law suit before the country’s constitutional court on the grounds that the OMT endangered sacred German sovereignity. It is expected a sentence by April in which the constitucional court said any German institution could participate in OMT program if is finally performed. Therefore, the Bundesbank, which is an ECB’s member, would reject to acquire other countries’ bonds since it would be considered an eventual sovereign debt’ monetization. This does not like Germany. Furthermore, it is forbidden by EU’ Treaties according to the express will of Germany.

What German constitucional court has recently done is washing their hands like Pontius Pilate and transferring the problem to the European Court of Justice, located at Luxembourg.

The time bomb is within the sentence’s fifteen pages. The ECB considers the OMT is necessary because monetary connections among countries are broken. Politely, the German court answer that is the normal thing in a crisis’ scenario and is not a concern of the European Central Bank. In fact, as FT’s columnist Wolfgang Münchau reports, the question is not a lower court sending a case to other higher, but a higher court, the German one, asking other lower, the European, to explain some points regarding ECB’s role and its limitations. Of course, Germany’s court takes this opportunity to say they are contrary to the program.

Consequently, in the case the Outright Monetary Transactions’ plan was started, the Bundesbank would not participate, which is not an insurmountable obstacle, however (except for the image of division). The trouble is that the OMT is only to favour countries in bailing- out circumstances. This involves a loan from the ESM. But who decides the loan?  Euro zone governments unanimously. So, if one coutry, let’s say Germany, says no, then the OMT program is aborted. It is also possible that all countries vote yes to the bail-out, but then as expected, anti -euro German groups appealed to the constitutional court again… At the end it has their arguments prepared.

Therefore, no. It is not a positive sentence. It is a final sentence, which does not reinforce the euro, but to drive a coach and horses through it.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.

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