Wednesday, 12 February 2014

German Constitutional court vs. ECB - The final reckoning

On 7 February, the German Constitutional court stated that the European central bank's program to save the euro is contrary to the European law and referred the case onward to the European Court of Justice, in Luxembourg.

Buying ailing countries' treasure bonds from the secondary market — an operation called Outright Monetary Transaction (OMT) — "exceeds the mandate" of the ECB and "encroaches on the responsibility of the member states for economic policy." Furthermore, it finds that the purchasing of sovereign bonds on secondary markets represents a "circumvention" of the prohibition against direct state financing, reports Spiegel International.

The German news site adds that —
Sending the case to Luxembourg only appears to be an act of European conviction at first glance. In truth, it is nothing less than a final reckoning with the crisis-management strategy pursued by the ECB. There can be no doubt about it: The Constitutional Court is threatening to cause trouble.
The German justices insist that the German constitution sets limits on the ECB's strategy in the crisis. And that could have consequences that go far beyond the jurisdiction of the court in Karlsruhe. In a worst-case scenario, the Constitutional Court could forbid Berlin from contributing to efforts to save the euro or even force Germany to leave the currency zone entirely.
At first, however, the ECB reacted with relief on Friday when the German ruling was announced. It is what they had hoped for, said many within the Frankfurt-based bank. The European court is seen as being much more conciliatory than the German court and most believe that a complete cancellation of the bond-buy program […] is unlikely. […]
But the relief might be premature. Even if the ECB wins the battle in the Luxembourg courtroom, it remains to be seen if the German court would be satisfied. A thorough reading of the decision reveals that, after spending months looking into the OMT program, a majority of the German justices have come to the conclusion for the first time that Draghi's bond purchases are unconstitutional. Only massive changes could make it acceptable.

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