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UPDATE 2-German judges refer ECB bond buy plan to European Court
February 7, 2014 / 9:07 AM / 4 years ago

UPDATE 2-German judges refer ECB bond buy plan to European Court

* German court refers complaint against OMT to European court

* But German court says OMT may well exceed ECB’s mandate

* ECB says OMT “falls within its mandate”

* European Court has a history of federalist rulings

By Norbert Demuth

KARLSRUHE, Germany, Feb 7 (Reuters) - Germany’s Constitutional Court will refer a complaint against the European Central Bank’s flagship bond-buying plan to the European Court of Justice, removing the prospect of it curbing the programme.

In an apparent attempt to set the terms of the European Court’s deliberations, the German court in Karlsruhe said on Friday there was good reason to think the plan exceeded the ECB’s mandate and violated a ban on it funding governments.

However, it said in a statement that it “also considers it possible that if the OMT decision were interpreted restrictively” it could conform with the law.

The history of the ECJ has not been to scupper such bloc-wide measures.

The ECB’s Outright Monetary Transactions (OMT) programme, announced by President Mario Draghi in September 2012 at the height of the sovereign debt crisis and as yet unused, is widely credited with stabilising the euro.

Its powers lies in the promise of potentially unlimited sovereign bond purchases - a prospect that calmed fears about the euro zone falling apart and backed up Draghi’s vow to do “whatever it takes” to save the bloc.

The ECB took note of the German court’s announcement and stood by its legality, saying in a statement: “The ECB reiterates that the OMT programme falls within its mandate”.

Legally, the German court has to offer its own preliminary interpretation of the case to the European Court. It in turn will use that as the initial basis for evaluation.

The ECJ has a reputation for giving forward-leaning federalist rulings that take a broad interpretation of European institutions’ powers, so analysts said there was less risk that it will obstruct the OMT policy.

“The (OMT‘s) chances are better in Luxembourg than in Karlsruhe,” said Bert Van Rossebeke of the Centre for European Politics (CEP) in Freiburg, calling the court’s decision to refer to the European Court for the first time “historic”.

University of London European Law expert Gunnar Beck agreed the ECJ would likely back the OMT. That could take up to two years, though, so uncertainty will linger for some time yet.

“Practically speaking, the Court of Justice is not an independent organization but is pre-disposed to interpret legal questions in the interest of the European Union,” he said.

“The court of justice doesn’t take account of national sensibilities ... there is no doubt of the outcome now.”


The German court’s decision is a defeat for the Bundesbank, whose president, Jens Weidmann, was the only member of the ECB Governing Council to oppose the plan.

The German central bank, which challenged the legality of the ECB decision in testimony given by Weidmann last year, declined to comment on the court’s decision on Friday.

The euro fell to a session low against the dollar in response to the court’s ruling while German government bond futures rose to day’s highs and Italian bond yields reversed earlier falls, suggesting some disquiet about the decision.

While the ECB has no immediate need to use the bond-buying plan, the lack of final clarity over its legality may still crimp its room for manoeuvre on other measures while it awaits a ruling.

The central bank has been considering the possibility of suspending operations to soak up money it spent buying sovereign bonds during the euro zone’s debt crisis under its now-terminated Securities Markets Programme.

Ending the so-called “sterilisation” operations would inject about 175 billion euros ($237.99 billion) of liquidity into the financial system, which would help ease strains in euro zone money markets.

One argument against doing so would be to avoid raising questions about ECB policy ahead of a ruling by the European court.

The ECB has already used other measures in its toolbox, such as interest rates cuts and liquidity injections with long-term funding operations, and could deploy them again.

Even if the European Court were to act on Karlsruhe’s strong doubts and restrict the power of the OMT, that could increase the likelihood of the ECB turning to full-blown quantitative easing, or money printing.

“The ECB has to quickly assess what repercussions the ruling will have for the range of tools available to calm markets,” said Christian Schulz at Berenberg bank, a former ECB economist.

“Ironically, depending on the exact decision, the court may have made a much more wide-ranging quantitative easing programme at the ECB more likely,” he said.

The German court said it will rule on the legality of the currency bloc’s permanent bailout scheme, the European Stability Mechanism (ESM), on March 18.

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