Karlsruhe, ECB’s OMT or the turn of the screw

Back in 2012, the Court was approached on three counts:  complainants cast doubt on the ECB’s OMT program, with their commitment to do “whatever it takes” in support of member countries; on the establishment of the European Stability Mechanism, and on the act of assent to the treaty known as “Fiscal Compact”. Karlsruhe has separated matters that relate to the OMT decision, and on February 7 released a lengthy press note –mark, not a sentence yet- that has brought undisguised joy to Euro-sceptics as Prof Hans-Werner Sinn or Prof Bernd Lucke. It is therefore unavoidable to surmise that the Court must be preparing another turn of the screw, this time to the European Central Bank.

Why a press release, and not a final pronouncement? Well, the Court would obviously prefer to get rid of the OMT issue as contrary to primary European law, namely, the Treaties. But it is not for Karlsruhe to pass judgement on the conformity of acts of European institutions with European law. Only the European Court of Justice is competent.  The German Court, therefore, refers the issue to the Luxembourg Court (an unprecedented step). The terms of the referral are very unusual. Karlsruhe does not want to hand over the case to the ECJ, which would imply that “whatever you tell us will be the basis for our own final decision”. No way. The Court wastes no time in anticipating their own criterion:  the OMT program does not conform to the Treaties, full stop: in the decision adopted September 6, 2012, the ECB overextended itself and acted ultra vires. Karlsruhe lets the ECJ know that only a restrictive interpretation might possibly prove compatible with primary law and be acceptable to the German Court.

What are the grounds for the Court’s stance? Here is brief summary, for the benefit of those readers who would rather skip the technical prose of the 6-page-long press release.

First, the Court considers the plaintiffs’ point that individual rights under art 38-1 of the German fundamental law may have been infringed. According to this article, a free election is necessary to elect members of the Bundestag. This is a strong pillar of German democracy, but the reason why a number of alert citizens now feel it should be safeguarded from suspected ECB’s follies,  is not easy to understand. Little wonder –and some comfort- to read that one of the judges, in a dissenting opinion, explicitly rejects the contention that said article might serve as a basis to indirectly challenge the OMT. This, he says, “should have been rejected as inadmissible”.

Second, referral to the ECJ is justified, to the eyes of six (out of eight) judges, because the OMT program “does not appear to be covered by the (ECB’s) mandate”: under the cover of monetary policy, it is actually an act of assistance to member countries that pertains to the domain of economic policy. Assistance to members should be out of the question (according to art 123, 1, TFEU), and economic policy belongs to member countries. The Court curtly dismisses any flexibility in the interpretation of art 123,1,  and takes a leaf out of the Bundesbank’s dogmatic opposition to the program, as abundantly explained to the media and documented before the Court in June 2013.  As to monetary vs economic policy, it is good to recall that Art 127, 1, TFEU, states that monetary policy must support the general economic policies in the Union without prejudice to the primary objective of price stability. The Court expresses doubts, unsurprisingly, the same doubts as the Bundesbank, on the validity of the ECB’s contention that they had to step in and act in view of the breakdown of the monetary transmission mechanism in 2010-12. The question, asked by one of the dissenting judges, as well as by many professionals in Europe, is simply whether a judiciary institution has the competence to settle such non-legal matters as the boundaries between branches of applied economics, or between the different models –fundamentals vs expectations- used to explain the risk premium.

Third, the Court mentions and brushes aside a point made by the ECB about the nature of market spreads. They do not waste time in proving the ECB wrong. They just quote the contrary opinion of the Bundesbank, and that is it: the case is proven.

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WE have it, from Montesquieu’s wisdom, that the separate State powers must each be aware of its own limits and exercise caution accordingly. Needless to say, this also applies to the judiciary, even to courts adjudicating in constitutional matters.

The German Court is reviewing the conformity with European primary law of the intention, expressed by the President of the ECB, of implementing a program to purchase State bonds in the secondary market, subject to the conditionality set, on a case by case basis, by the ESM. Intention is a key word here. How can Karlsruhe decide on conformity with European law of an administrative decision which does not take the form of an act of law? The program is still in the realm of the “if and when”: not only has it not been applied yet, there is not even a formal regulation whose terms could be subject to legal review.  The case is brought by the plaintiffs against the mere possibility that the OMT would ever become reality, and be applied, under supposedly unacceptable conditions, in a specific case.  Against this background, the Court should not have admitted the complaint.

Where do we stand now? Well, pretty confused, to speak the truth.

By referring to the ECJ, the Court has generated something that Europe could well have done without, a regular amount of uncertainty. Let us see. Luxembourg is being asked to decide whether the OMT program is correct under European legality but, as mentioned above, the European court is told in unequivocal terms that Karlsruhe already has the answer. At the same time, the German Court could have requested, but has not, that the ECJ apply the accelerated procedure to respond. Following the normal procedure the ECJ’s response may take over twelve months.

Assume the ECJ’s ruling gave support to Karlsruhe’s view. Consequences are unfathomable at this point. The ECB and its President would suffer, to be sure, a severe blow.  Markets are unpredictable, as we well know by now, but at the very least, we are bound to expect an escalation of risk premia on vulnerable countries and the return to a self-feeding spiral of negative expectations once again.

There is however the possibility that ECJ could instead make an attempt to reconcile the Court’s misgivings with the OMT program. The Court indicates in the press release that if the OMT decision were interpreted restrictively in the light of the Treaties, conformity with primary law could be achieved.  This looks like a nod to the Luxemburg judges: a skilful drafting could possibly make the program look less open-ended. Let us underline it again: it is highly unusual for a referring court to anticipate its own opinion –after all, this is not a convenient exchange of views with colleagues, but a formal step where the non-competent organ, Karlsruhe, formally submits to the opinion of the organ that is competent. The ECJ may not like this peculiar approach, but having said that, there might be a possibility that the ECJ would hit on the right turn of phrase and thereby persuade the German Court to leave it at that.

And of course, the ECJ might just confirm the legality of ECB’s program. Further developments look then unpredictable. This is a confrontational scenario. The German establishment certainly would not want to have in their hands a European crisis set off in and by their own country: the notion goes against the grain of German politics in Europe since the IIWW.  We may wonder if this really matters to the Bundesbank, whose inflexibility vis-à-vis the ECB has certainly provided encouragement (and arguments) to some Eurosceptical individuals and organisations, that maybe were trying to test their own ability to throw a spanner in the works of the European integration process. It is most painful indeed to watch such a respectable institution as the German Constitutional Court lend itself to the experiment.

Pessimist forecasting is always an easy way out for analysts, but it is too early in the day to resign ourselves to the worst possible result of this institutional squaring-off. There are many variables involved and many months still ahead to review the current shock in more hopeful terms. In a few weeks, the German Court will decide on the two other issues mentioned above, the ESM and the Fiscal Compact. Given the known facts of both cases, the sentence is likely to give us some relief while we wait.