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The euro crisis
The question before the court
Jun 18th 2013,20:18 by Helmut Siekmann and Volker Wieland
Last July Mario Draghi,president of the European Central Bank,
spoke of the ECB's intent to do "whatever it takes" to hold the euro
area together.In the months after his comment,the ECB unveiled its
Outright Monetary Transactions programme,in which it pledged to make
unlimited purchases of troubled government bonds under certain
conditions.No policy has been as important in bringing down government
borrowing costs around the periphery.OMT now faces scrutiny in
Germany's constitutional court.We have invited Helmut Siekmann,
professor at the Institute for Monetary and Financial Stability (IMFS)
at Goethe University of Frankfurt,and Volker Wieland,professor at the
IMFS and a Member of the German Council of Economic Experts,to discuss
the case
THE case pending at Germany鈥檚 federal constitutional court was initially focused on three legal acts of the German legislature:
(i)
Consent to creating a basis for a support mechanism in the primary law
of the Union with an amendment to Article 136 of the Treaty on the
Functioning of the European Union (TFEU)
(ii) Implementation of the compact on enhanced fiscal stability
(iii) Putting into effect of the agreement on the permanent European Stability Mechanism (ESM)
Petitioners
requested a preliminary injunction to prevent the international acts
from becoming effective before a court decision.The court denied the
injunction on September 12,2012 under certain provisions.Its opinion
mentioned that ECB purchases of sovereign bonds on secondary markets
with the aim of financing government budgets independently from capital
markets would violate the prohibition of monetary financing.Yet,it
left open whether this prohibition applies to the ECB鈥檚 past Securities
Market Programme (SMP) or potential future Outright Monetary
Transactions (OMT).Petitions were then extended and the court asked the
ECB and Deutsche Bundesbank to deliver opinions and held a public
hearing on June 11/12.
The court was installed to enforce the
norms of the Basic Law,Germany鈥檚 federal constitution,and to review
the conformity of all German state actions.The conformity of actions
with the laws of the European Union and European Treaties (鈥減rimary
law鈥?does not fall into its competence.If it finds that the
interpretation of the Treaties or the acts of Union institutions is in
question,it has to refer to the European Court of Justice (ECJ) for a
ruling.
However,there are exceptions.
First,a referral is
only needed if a clarification by the ECJ is of substantial relevance
for the adjudication of the case by the German court.
Second,the
court has reserved the right to review itself whether a particular act
of an EU institution stays within the limits of the powers conferred on
the EU.Such a transgression is not covered by the consent of the German
parliament to the transfer of sovereign rights.
Third,the court
examines whether the transfer of sovereign rights maintains the
unalienable core of the constitutional identity of the Basic Law in view
of the democratic rights of the electorate.
Fourth,there exists a
direct way to a judicial review by using Article 88 of the Basic Law
concerning the transfer of monetary authority to EU level to judge the
measures.
The court has to decide whether an individual complaint
challenging the conformity of the measures of the monetary authorities
with Article 88 Basic Law is admissible.It would be necessary to
demonstrate a possible infringement of individual rights of the
petitioners.An infringement of property rights is unlikely.However,
democratic participation has been judged a sufficient cause for action
in recent cases.
Next the court has to decide whether the
infringements of the primary law of the Union by the European System of
Central Banks (ESCB) are so serious that they lead to a structural shift
in the design of competences at the expense of Member States.The other
leg of the court鈥檚 reservation,that is,the unalienable core of the
constitutional identity of the Basic Law is aimed at further transfers
of powers and not touched sufficiently in substance.
According to
the ECB鈥檚 Governing Council the purpose of OMT is to safeguard an
appropriate monetary policy transmission and the singleness of the
monetary policy.Specifically,it considered risk premia on sovereign
bonds that are related to fears of the reversibility of the euro as the
currency of the respective countries as unacceptable.Thus,it announced
that it would be willing to buy government debt until such risk premia
disappear.There would be no set limits and the ECB would forego
seniority status.
A case may be made that the OMT exceed the
European System of Central Banks鈥 (ECSB) competences and violate the
prohibition of monetary financing enshrined in EU primary law.While
standard open market operations are aimed at fine-tuning monetary
conditions in the whole area of the euro,OMT imply subsidies to
selected sovereigns by lowering risk premia demanded by the market.
Granted that the threat of deflation has led other central banks to
purchase government debt,this debt has been federal or national debt
rather than debt of regional authorities.The Federal Reserve has bought
federal debt but not mitigated financial problems of troubled states
such as California.Also,the Bundesbank has never tried to influence
debt costs of German member states.Finally,the current membership of
the euro zone cannot be guaranteed by the ECB as long as Member States
remain sovereign.
The ESCB has announced that strict and effective
conditionality attached to an appropriate EFSF/ESM programme is a
necessary condition for any OMT.This provision may be seen to indicate
that OMT fall outside the area of monetary policy,because these
conditions serve to achieve other economic policy objectives.
Furthermore,the linkage to ESM decisions may endanger the autonomy of
ESCB decision making.A mutual dependence of central bank action and
administrative decisions would not conform to primary EU law.Finally,
such conditionality may not safeguard against an inacceptable transfer
of risks to monetary institutions.Haircuts on government debt such as
previously applied to private investors in Greek debt would also involve
ESCB losses in the future.
If the court concludes that OMT do not
conform to Article 88 Basic Law or seriously transgress competences of
the Union,the Bundesbank would not be allowed to participate in such
measures.It might even be obliged to use all legal instruments to fend
them off.
If the court decides that a breach of primary law has
taken place and that an ECJ ruling is necessary for adjudication,it
would have to refer to the ECJ before making a final decision.Such a
referral would be a novelty.
It is rather unlikely that the court
will deny the admissibility of the individual complaints given its
detailed questions on OMT at last week鈥檚 hearing and the fact that part
of the court action has been petitioned in a procedure following reduced
admissibility requirements by members of parliament from the party 鈥淭he
Left鈥?
Looking at the overall system of the distribution of
competences,the transgression gets close to the line drawn in previous
decisions.However,it remains doubtful that the court will invoke its
reserved right to review an act of an EU institution.It may not
consider it a necessary prerequisite for a decision on the three
original subject matters and once more leave the questions of European
Union Law open as in previous cases.
More likely the court鈥檚
ruling will take the form of a 鈥測es,but鈥?Expressing its concerns it
could emphasise limits for ESCB actions rather than adjudicating the
measures as illegal.It could constrain future implementation of OMT by
stating which bonds cannot legally be purchased as they are not
marketable,or by setting limits in respect of duration and volume,or
by not allowing haircuts on the ECB鈥檚 sovereign debt portfolio.