Investors are watching with bated breath for the outcome of this week’s two-day round of hearings at the Federal Constitutional Court of Germany. In a case brought before the Court by the academic founders of the new “Alternative for Germany” political party among others, and whose petition was signed by 35,000 Germans , the Court has to judge on the compatibility of the ECB’s Outright Monetary Program with the German Constitution.
The plaintiffs argue that the OMT, a plan under which the ECB would use its balance sheet to purchase unlimited amounts of the sovereign bonds of a Eurozone member country in fiscal crisis and no longer able to access the private markets, is tantamount to a political commitment: the complainants also stress that ECB President Draghi had already publicly declared that he was prepared to do “all that is necessary to save the Euro”. They argue the purchases would be equivalent to debt monetization and that German taxpayers would be exposed to unfair fiscal burden: as the purchase is – by definition – potentially unlimited, it would be incompatible with the German constitution.
The ECB’s independence from political influence was ironically a major dogma for the Germans, who pushed for it when the Maastricht Treaty was drafted in 1992. They never imagined that such independence meant the ECB could one day indulge in such unorthodox practices. And whereas there is little doubt that the institution is technically and legally capable of taking such decisions, the complaint has political sense.
A decision is not expected until late September or early October, right after the federal elections. Timing is crucial: since the FCC is a very “political court” (its judges are appointed by political parties), it is unlikely to take a position before the new government is in place. Both Merkel and Steinbrueck – the two main candidates to the chancellery – are moderately pro-European and the German government has spoken in favor of the constitutionality of the OMT in the court hearing.
However, paramount questions on the future of the Eurozone will remain unsolved. Although the outcome of the judgment is likely to be positive for the common currency, there is the chance that the FCC will put a limit the bond purchase program. Yet, since the program makes sense precisely because it is unlimited – it is, de facto, a “declaration” to the markets that the ECB will defend the Euro no matter what – even the slightest conditionality to it would cause the resurfacing of fears amongst investors.
If the FCC decides that the OMT could only be compatible with the German constitution if a “limit” is set, this will put into serious question the intention of Eurozone countries to introduce a solidarity mechanism that could finally dismiss the dangers of a member’s default. The GCC is, however, more likely to reject the plaintiff case, possibly with a caveat that any future transfer of sovereignty (i.e. fiscal union) must be preceded by a referendum or, at minimum a major full Bundestag and Bundesrat debate or it would be ruled unconstitutional and blocked.
This solution might constitute a “landmark” for future decisions all over the EU, but it could also trigger the reaction of the CJEU who is – by definition – the competent court for acts of the European institutions.
The Euro is likely to survive this round of scrutiny by the German Constitutional Court. A strong backing of the OMT by the German government – which sided with the ECB in court – coupled with the influence that politics has on the judges should guarantee a smooth outcome. But if Eurozone members continue to rely on the central bank to do the “dirty work” and fail to come up with a project for a Eurozone economic government, the contradiction between what is economically right and what is democratically acceptable will hinder the future of the common currency.