Wolfgang Münchau worries about OMT

by on February 9, 2014 at 4:27 pm in Current Affairs, Law, Political Science | Permalink

The German court left no doubt that the Bundesbank and other German institutions were bound by the constitution. They also made clear they were not letting go of this case. The ruling gives the distinct impression that the judges are referring the case not up to a higher court but down to a lower court…

So what would happen if the ECB wanted to trigger the scheme? Following this ruling, I am not sure the Bundesbank could participate. That would be an inconvenience, no more. I would also expect, though with less certainty, that the German government would torpedo OMT through a technical lever. The scheme requires potential beneficiaries first to apply for a conditional credit line from the European Stability Mechanism. This is where the governments come in: they have to approve any ESM programme by unanimity.

What if the government and parliament voted in favour of a credit line? You could count on an immediate legal challenge at the constitutional court. This is the point when the ruling will matter. The court would then either eat its words or trigger a crisis. It will not refer another case to the ECJ.

The FT piece is here.  Developing…

Addendum: Here is commentary from Hans-Werner Sinn.

1 Yancey Ward February 9, 2014 at 5:15 pm

Courts are ultimately toothless. The only question is whether or not Merkel and her coalition would allow OMT. If they allow it, the court will be ignored or, more likely, change its own tune to acceptance.

2 Michael G Heller February 9, 2014 at 8:17 pm

“Courts are ultimately toothless.” You must live in the Wild West where many people went toothless too. All the greatest cowboy films I ever seen were about enforcing the law in the Wild West, running quack dentists out of town, and creating a happy federation (which is what the best courts in Europe are sincerely attempting in a region with a wild toothless fringe).

3 Ray Lopez agrees with Yancey Ward February 9, 2014 at 8:24 pm

I am not a lawyer but familiar with law, much more than most of you here, and what Yancey Ward says is so so true: the weakest branch of government, by far in the USA and all over the world, is the judicial branch. Courts, for major decisions, almost always defer to the other two branches of government. For example, in patent law, for a truly breakthrough invention, courts have said that governments can seize the intellectual property under the US constitution (Fifth Amendment) and pay what they deem is reasonable (always less than the true value). In other areas of the law, if you read carefully the stem case of Marbury v. Madison, “http://en.wikipedia.org/wiki/Marbury_v._Madison”, which established the limits of judicial power, you will note the Sup. Ct. in the USA went out of their way not to offend Congress or the President. The limits of court activism was not the Warren E. Burger court of the 1960s but Lochner v. New York (1905), Google this for more info.

One sentence summary: unless you are dealing with a routine matter, courts are lame for truly important stuff.

4 Michael G Heller February 9, 2014 at 8:15 pm

Wolfgang Münchau is moaning ‘n groaning as has become his habit. A far better more positive analysis by Hans-Werner Sinn has just been published at Project Syndicate.

“Rather than issuing a formal ruling that would constrain the Bundesbank and the German parliament, as it could have done, the Court handed the case over to the European Court of Justice for a final decision. At first sight, this might seem promising for markets, which most likely expect the ECJ to rubber-stamp the OMT program. But things are not so simple. Germany’s Constitutional Court has not waived its right to the final word about whether European institutions’ actions are compatible with the German constitution. If it finds that the ECJ is interpreting the treaty in a way that violates the German constitution, it has the power to force the German government and parliament to renegotiate the treaty or ask for a referendum …”

Read more at http://www.project-syndicate.org/commentary/hans-werner-sinn-applauds-the-german-constitutional-court-s-ruling-on-the-ecb-s-bond-purchase-scheme#jEtIDglbX0jEMIGP.99

5 genauer February 9, 2014 at 9:01 pm

The decision of the Bundesverfassungsgericht (German Supreme Court) is very wise, as on most cases.

While they spell out serious missgivings about OMT, even after the ECJ spelt out “strict conditionality” a dozen times in the Pringle case, they carefully refrained from drawin up any rules by themselves, or ruling it totally.

For unforeseen cases this tool must be available.

But it must not been used for state financing, pushing the debt of one country onto others (the “no bail out” clause in the Maastricht treaty)

People like Münchau, Krugman, de Grauwe, Soros and others have long advocated the crime to break this treaty, to abuse the ECB for wealth transfer explicitely denied.

And those attempts are now coming to naught.

The rule of law works in Europe : – )

6 Tom February 9, 2014 at 10:39 pm

A delicate dodge, I think. I think the OMT was a symbolic move, not designed to be implemented, but to demonstrate the domination of doves on the ECB council. It’s not much of a problem that OMT probably can’t really ever be implemented, as markets seem to trust that in the event big ECB bailouts are “needed”, where there’s the will there will be some way.

7 Donald Pretari February 9, 2014 at 10:43 pm

Here is the Ruling:
I think that a Fair Reading of the ECB’s Mandate is to say that Saving the Monetary System of the ECB is within the scope of Using Monetary Policy Equitably. What the Fiscal Consequences are to Each Member State is Irrelevant since No State is Being Singled Out Per Se. As well, Each State still retains control of its Fiscal Policy, and can, for example, Raise Taxes to maintain a Fiscal Balance. Plus, Any Decision will Impact the Fiscal Status of the Members, for good or ill. Germany cannot plausibly argue in a Union that only its Fiscal Policy not be affected negatively. It can only object when the ECB is being seen as directly and specifically targeting German Fiscal Policy. I don’t see that.

8 Dan S February 9, 2014 at 11:52 pm

Great point, and more importantly to me at least, the EU is not a suicide pact. Find a way and get it done, Draghi, and your grandkids can argue about whether it was legal or not. If you’re not willing to ensure that the ECB can effectively manage demand in the eurozone, then you might as well just toss the EU into the scrap heap of history right now and get it over with.

9 Rahul February 10, 2014 at 6:29 am

Thanks. Tangential comment, but the ruling sounded rather drab, technical & boring as opposed to many American Supreme Court rulings I’ve read.

Is it just me or is it a trend? Or a translation artifact? Or reflects the boringness of the particular subject matter?

10 prior_approval February 10, 2014 at 12:45 am

So close to eurogeddon – then one of Germany’s leading opponents of EZB policy writes something showing that we will all still need to wait a bit longer.

11 KenF February 10, 2014 at 2:09 am

Whenever I read articles like this on this site I look at this:
and I giggle.

12 Lurking Lawyer February 10, 2014 at 12:07 pm

Doesn’t matter what the court thinks. The ECB has whatever power it wants/needs to stem the next crisis. No different than the Federal Reserve exercising its emergency powers with Maiden Lane, etc. Central Banks generally answer to no one.

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