Germany will have to leave the Eurozone should the German Constitutional Court find the ECB’s Outright Monetary Transactions illegal. The Court in Karlsruhe will decide whether the European Central Bank’s (ECB) Outright Monetary Transactions (OMT) is in the line with the Bank’s mandate, following the ECB’s President, Mario Draghi’s, announcement in summer 2012 that he will do “whatever it takes” to save the euro.
Under the OMT programme, the ECB can purchase Eurozone-issued bonds in secondary, sovereign bond markets, assuming certain conditions in the country are met. The aim was to increase investors’ confidence in the Euro. No country has applied for the OMT yet, because it comes with attached conditions, which the states are eager to avoid. However, the announcement of the OMT alone has calmed the financial markets and helped to reduce interest rates for government bonds.
The ECB’s readiness to step in has created controversy among many in Germany, particularly because Germany is the largest shareholder in the ECB via the Bundesbank, meaning that German taxpayers will assume others’ liabilities in case of a default. German politicians, academics and a pressure group, More Democracy, have brought the case to the Court due to their concerns over the instruments used to fight the Eurozone crisis.
Mario Draghi claimed that it has saved German taxpayers’ money, but some have also emphasised that the OMT has reduced the German balance sheet in the short term.
Jens Weidmann, the Budesbank’s President, has vehemently criticised the ECB’s actions. He has argued that the OMT could generate inflation in future, something that plays on the German psyche due to its experience of hyperinflation in 1923. Weidmann has also questioned whether the ECB has overstepped its legal mandate by providing “unlimited liquidity” to the distressed Eurozone Member States, thus breaching the Article 123 of the EU Treaty.
“The fact that I’ve taken this position on OMT signals that I am ready to limit this free room because I worry that the use of this free room eventually leads to credibility problems and stability risks,” Mr Weidmann said.
His opponent, Jőrg Asmussen, the ECB executive board member, said: “One should be careful what you wish for.” He continued: “Wishes for a change to Article 123 can open a Pandora’s box, as there will surely be many wishes regarding the ECB.” Mr Asmussen has challenged the Bundesbank’s President by supporting the ECB and explaining why the Bank resorted to the unorthodox measures in the unstable environment of 2012, in which companies were preparing for a potential breakup of the Euro area.
The Court is examining whether the ECB has exceeded its mandate of ensuring price stability, which has opened a debate what course the judges will choose. There are three potential outcomes of the deliberations. First, the judges in Karlsruhe might refer the case to the supranational authority of the European Court of Justice (ECJ) as the German Court cannot really influence the ECB’s decisions on the grounds of its independence and European dimension. Some have been inclined to suggest that the ECJ would rule in the ECB’s favour.
Second, the Court may find the ECB’s actions legal, but the decision will be attached with conditions in order to limit the bank’s scope, similar to the ruling on the European Stability Mechanism (ESM) in September 2012, whereby the Bundestag needs to approve all future bailouts by having a vote. This resolution would keep the Eurozone intact and financial markets would be aware of the fact that the ECB could step in at anytime. However, it may neither prevent crisis nor reduce risk as the bank would need to wait until the German government complied with the newly laid requirements, resulting in delays.
Interestingly, limiting the ECB by imposing conditions would infringe its independence, a rule demanded by Germany at the time of signing the Maastricht Treaty. Nonetheless, laying down conditions would make the German public feel that they have a say in the Eurozone affairs, although it may not reduce the German aversion to assuming others’ liabilities and being blamed for insisting on austerity abroad. German politicians would need to keep convincing the German people that the Court’s decision will have served the national interest reflected in cheaper exports.
Third, the Court may declare the OMT illegal, the most drastic scenario, in which case Germany would need to exit the Eurozone and European integration would be thrown onto a negative path. This would create panic in the financial markets and the Member States could easily find themselves under pressure, which is the last thing they currently need. Deeper recession would follow across the Euro land. The breakup would also generate deeper animosity among the Eurozone partners and people, which could explode to something uncontrollable across the continent.
Observers expect the outcome of the Court’s examination to be one which prevents the Euro area from breaking up and keeps the financial markets as calm as possible. The Court is very unlikely to prohibit the OMT, but it will be a question of what requirements it would impose.
The judges in Karlsruhe are fully aware of potential consequences their decision could bring. Let us give the German Constitutional Court the benefit of the doubt because it has been previously supportive of European integration, for example at the time of singing the Maastricht Treaty in 1992 or ratifying the ESM in 2012.
The decision may be announced later in the year, probably after the German national elections in September 2013, which would allow the German political parties to avoid further tension on the domestic front, although discussions may heat up.
Considering all the factors, the Court faces a difficult task and is aware of the implications. It may not prevent making errors and risks even though it tried, but it will consider the future of many on the continent. Ultimately, the German Constitutional Court will support the primary German national interest and foreign policy, which is to preserve the euro.