The European Central Bank, or ECB’s mandate is to keep the euro stable and keep inflation low. But critics claim it has since strayed into policy making.
Germany’s Constitutional Court referred a decision on the question to the Luxembourg court which also has jurisdiction over the ECB.
On 14 January 2014, Germany’s Federal Constitutional Court made news when it determined that OMT or Outright Monetary Transactions is prima facie incompatible with the Treaty on the Functioning of the European Union (TFEU), the legal basis for the European Union.
However, before delivering its final judgment, the German Court chose – for the first time – to seek the opinion of the European Court of Justice (the ECJ). The eventual resolution of the questions raised will have wide-ranging implications for the economics and politics of the euro.
The European Court of Justice announced at the end of September that hearings in the case against the European Central Bank’s (ECB) bond-buying scheme known as Outright Monetary Transactions will begin in mid-October.
In highlighting the tensions between the TFEU and the OMT, the German Court is basically concerned that the OMT is a fiscal union by the backdoor.
The ECJ could validate the current design of the OMT, thereby locating the fiscal union in the central bank.
In such a case, the nature of the euro area will be fundamentally altered and the ECB will become a political institution.
Alternatively, if the ECJ were to determine that the German Court’s concerns need to be addressed by changes to the OMT – by imposing serious limits on purchases of sovereign bonds and requiring the ECB to claim seniority to private creditors – the OMT will be rendered ineffective.
With judgment due in mid-2015, the ruling will have serious implications for Germany and the rest of Europe.
An anti-euro party has meanwhile been making strides in the German political scene, limiting the government’s room for maneuver.
ECB President Mario Draghi has never actually had to step in to intervene in bond markets, but his promises to do so have convinced investors that eurozone countries would not be allowed to default.
Jens Weidmann, president of the German Bundesbank is a vocal critic of the plan to use the German taxpayer’s money to fund slow countries. His criticism has met with clear approval from voters too.
The Alternative for Germany (AfD), is a party founded in February 2013 by economics professor Bernd Lucke. It has made significant gains in elections across Germany. Founded as an anti-euro party, the party came very close to winning a seat in the Bundestag in the September 2013 general elections, a remarkable feat for a party founded just six months before.
It made even larger gains in 2014, winning 7.1 percent of the vote in European Parliament elections in May and between 9.7 and 12.2 percent in three regional elections in August and September.
Along with many Germans Weidmann thus believes the ECB is overstepping its jurisdictional boundaries, since EU treaties bar the bank from financing member states.
Worse, were OMT ever actually used, it essentially would be spending German money to bail out what many Germans considered profligate Southern Europeans.
In early 2013, a group of economics and constitutional law professors from German universities collected around 35 000 signatures and brought OMT before the German Constitutional Court.
In February 2014, the court delivered an unexpected verdict, ruling 6-2 that the central bank had in fact overstepped its boundaries, though it also referred the matter to the European Court of Justice. Recognizing the profound importance of this issue, the court acknowledged that a more restrictive interpretation of OMT by the European Court of Justice could make it legal.
The German judgment suggested that alterations to OMT would satisfy the Constitutional Court that the mechanism was lawful.
One alteration would limit the ECB to senior debt, a change that would protect it against the default of the sovereign in question. The second alteration would make bond buying no longer “unlimited”.
Center parties across Europe have seen Euroskeptics emerge to their right, gnawing into their traditional voter platforms with popular anti-immigration and pro-sovereignty issues on the political menu.
The anti-ECB sentiment in Germany has swelled noticably during 2014, as German conservatives have greeted each new policy with utmost displeasure.
The German media has called negative interest rates “penalty rates,” clearly not liking the fact that they redistribute billions of euros from German savers to Southern European spenders.
German Finance Minister Wolfgang Schauble spoke in the Bundestag of his horror with Draghi’s program to buy asset-backed securities.
Judging from the German hostility to “quantitative easing-lite” measures, the ECB’s attempts to rope Germany into American style money printing economic policy could prove to be a disaster.
Financial markets love quantitative easing, a broad-based program of buying sovereign bonds in order to inject a large quantity of money into the market, slurping up taxpayers’ money in peripheral economies.
Any declaration that OMT is illegal would severely inhibit Draghi’s room for undertaking full quantitative easing and thus joining the American banking team.
If the European Court of Justice rules that OMT is legal, a sizable inhibitor to quantitative easing will have been removed, and the possibility of a fully fledged bond-buying campaign will enthuse the German voter to turn against Merkel and her pro-American policies.
The contrast between Germany, which has low unemployment and modest economic growth, and France, which has high unemployment will continue to grow. Pro-Atlanticist politicians like Nicolas Sarkozy in France will furthermore try to exploit the growing division.