Is ECB chief Mario Draghi shielding his eyes from the dazzling red robes worn by Germany’s constitutional court justices? Source: Hannelore Foerster/Getty Images.
Germany’s Federal Constitutional court will hear testimony this week regarding whether the European Central Bank’s (ECB) implementation of certain monetary policies is within their mandate. And already, some are fretting they might rule against the measures, rekindling eurozone-splintering panic anew. But before getting too caught up in speculating about the potential outcomes, let’s consider that this is mostly politically motivated and may not have much market impact at all.
At issue are the ECB’s bond purchases under the Outright Monetary Transactions (OMT) program. Originally created to promote bond-price stability in the volatile European debt markets, the OMT program allows the central bank to purchase bailed-out member-states’ bonds on the secondary market. The plaintiffs, led by noted euroskeptic parliamentarian Peter Gauweiler, argue the OMT is unconstitutional under German law, since its parliament has little say in the nation’s potential financial risk exposure from participating in the rescue program. Additionally, the plaintiffs note current European laws—which German politicians seem to occasionally consider when it serves their political end—ban government financing by the central bank, calling the OMT into question, in their view.
Neither the ECB nor the Bundesbank are parties to the case, but Bundesbank President Jens Weidmann and ECB Board member Jörg Asmussen will be providing expert testimony for the opposing sides. Weidmann has been a vocal opponent of the bond buying program since its announcement last September, noting it could worsen the crisis rather than help it by potentially increasing inflation risk.
So far, the court has ruled all previous bailout programs constitutional, which would seemingly allude to the probability being rather high they support this one, too. For example, the OMT follows another short-term bond buying program implemented in 2010 after Greece’s first bailout (Securities Markets Program). At the time, the court opted not to hear opposing arguments, citing the plaintiffs couldn’t attempt to block the ECB’s effort in a national court. Now plaintiffs argue the OMT is akin to the ECB monetizing individual nations’ debt and ties the hands of sovereign parliaments when trying to control their individual financial risks. The court seems to have asked more questions in preparations for Tuesday’s hearings, which has a few folks speculating the OMT case might be different.
But what’s more, the Constitutional Court has no jurisdiction over the ECB, which means even if the OMT is, in fact, ruled unconstitutional, Germany would still likely be obligated to participate in future bailouts of neighboring countries. And if the court refers the case to the European Court of Justice (the EU’s top court), chances are it would rule in favor of the ECB. A likelier scenario, in our view, would be the court deeming the OMT constitutional but requiring changes to existing rules to assuage Germany’s concerns. Above all, this is seemingly just a political battle for Germany’s Chancellor Angela Merkel as she supports the program, despite protests from constituents and criticism from the Bundesbank.
And that seems to be the crux of the matter: Politics. The cases’ outcome won’t be known until September—conveniently after German elections. So Gauweiler gets to promote his anti-euro image and curry favor from his base all the way through the voting. And this isn’t the first time Gauweiler has challenged Brussels. As far back as 2005 Gauweiler was challenging the eurozone’s founding treaties. And since the crisis, it’s similarly supported the euro.
For now, the program has yet to be utilized and it likely won’t be needed for some time. Financially troubled countries like Spain and Italy are receiving affordable financing via debt markets (yields have even fallen to two year lows) and evaded bailouts—further detracting from the urgency of a decision. Market impact is likely minimal as investors shrug off yet more eurozone bailout bickers.