The Consequences of German Constitutional Court Ruling on OMT

Confusion – that was the first effect of the decision by the German Constitutional Court on the OMT programme of the ECB. “Victory for the ECB” read the first headlines in the Financial Times. Initially it looked as though the court had delegated the decision on the OMT’s future to an amenable European Court of Justice (ECJ). Yet this is wrong. The German judges accuse the ECB of overstepping its mandate, and they dismiss the argument that the OMT is legitimate because it ensures that monetary policy works well. They also reject the idea that it is the job of monetary policy to avert euro exit. The ruling considers the OMT bond-buying scheme to be tantamount to ESM aid without parliamentary legitimation and control.

It is true that the court asked the ECJ to assess whether, according to European law, the ECB acts within its mandate. But this does not mean that the German court will follow the ECJ. Rather, the German judges made it very clear that they expect the ECJ to curb the OMT programme in three ways: limit the bond-buying volume, avoid changing risk premia for bonds whenever possible and block ECB participation in debt restructurings. In effect, this would strip the OMT programme of its impact.

What happens if the ECJ ignores the wishes of the German Constitutional Court and rubberstamps OMT? It is unlikely that the Constitutional Court would back down. If they had intended to let the ECJ have the final word they would not have criticised the program so heavily. How can they intervene if push comes to shove? Simply forbidding the Bundesbank from participating in the OMT scheme would be ineffective, as other central banks can step into the breach. The court would have to disallow the Bundestag from approving additional ESM aid programmes. But this would not only block the OMT programme. Paralysing the ESM would undermine the legitimate part of EU rescue policy as well, resulting in a European constitutional crisis.

Neither the ECJ nor the German Constitutional Court are interested in such an outcome. What they will likely do instead is seek a compromise by preserving the OMT scheme but restricting its scope and effectiveness. For instance, the ECB could be asked to reclaim its preferential creditor status. And this is just as well: keeping states above water via loans does not lie in the purview of monetary policy. The ECB shares this view in principle, and the German Constitutional Court will ultimately relieve the central bank, despite scolding it for exceeding its mandate. The political task now is to reform fiscal policy institutions in the eurozone so that they can handle the next crisis without saddling the ECB with the task of stabilising highly indebted member states.