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Article / 07 February 2014 at 11:39 GMT

Germany refers decision to ECJ, drops monetary veto

Blogger / MoreLiver's Daily

• Germany's constitutional court decision on ESM in March
• Decision on OMT referred to the European Court of Justice
• Uncertainty to prevail, though tail risks non-existent

The German Constitutional Court (GCC) dropped a bomb today by referring the decision on the legality of the European Central Bank’s (ECB) Outright Monetary Transactions programme (OMT) to the European Court of Justice (ECJ). The GCC also stated that it will announce its decision on the legality of the European Stability Mechanism (ESM) on March 18.

Playing for time, taking forever

Perhaps it would be more accurate to say that the GCC dropped the ball by being unable to come up with a ruling by itself, after it had sat on the case for two years and delaying the decision. But maybe the dropping was half-intentional. By playing for time and referring the decision, the GCC in effect has allowed the OMT to exist and remain effective, without it ever being activated.

It is widely expected that the ECJ will eventually rule that the OMT is legal, but it will take a lot of time before that ruling is made. Certainly the decision will not happen before the European Parliament elections in May, which would suit the federalists.

The unintended side-effect of this is that Germany is giving away its implied and unofficial veto powers over European monetary policy, possibly opening the door for more unconventional measures from the ECB. Some commentators have speculated that getting a positive ruling from the ECJ would help to silence the German opponents of further federalisation. But others see the effect being the exact opposite, to quote Ambrose Evans-Pritchard:

Chief justice Andreas Vosskuhle says Germany has exhausted the scope for further EU integration under German constitutional law. If it wishes to take revolutionary steps towards fiscal union, it must equip itself with a “new constitution”. This would require a referendum.

GCC: No way to make an informed decision yet

The beef of the statement is in section four: the OMT is untested in practice and thus there is no way to make a ruling with the current facts alone. While the OMT exceeds the ECB’s mandate by directly financing member nations, conditionality and limited size could make it legal:

…the Federal Constitutional Court considers the OMT Decision incompatible with primary law; another assessment could, however, be warranted if the OMT Decision could be interpreted in conformity with primary law…the OMT Decision might not be objectionable if it could be interpreted or limited in its validity in conformity with primary law in such a way that it would not undermine the conditionality of the assistance programmes of the EFSF and the ESM, and would indeed only be of a supportive nature with regard to the economic policies in the Union.

ESM ruling coming up

The GCC will announce its ruling on the ESM on March 18. The court will certainly not rule against the ESM, but could demand that the German parliament will have to be kept informed of the rescue vehicle’s activities. If the Bundestag were to be receiving closed-door briefings from the ESM, but other member countries weren't, it could lead to bad blood among Eurozone members.  Unfortunately, the next ECB meeting will be on March 6, before the GCC’s ruling. This could move the much-expected monetary easing to the next ECB meeting on April 3.

Source: Saxo Trader

Further reading:

GCC Press release: Principal Proceedings ESM/ECB

Reuters: German judges refer ECB's bond-buying to European Court

Bloomberg: ECB’s ‘Whatever It Takes’ Questioned by Top German Court


Earlier on TradingFloor:

2013 June: Will Germany’s constitutional court end Draghi’s OMT?

2013 October: Verdict looms on legality of  ECB bond purchase programme


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