10 June 2013

Spiegel: High Court considers ECB bond buys

On Tuesday and Wednesday of this week, Germany's Constitutional Court in Karlsruhe will rule on the euro crisis aid measure that Draghi announced last autumn. As Draghi and his monetary experts were told by their constitutional experts long ago, this court decision could have an enormous impact on the bank's policies - and potentially spell the end of the euro.

Leading authorities on this area of German law say that the European Central Bank's bond buying programme is barely covered by the ECB's mandate - and thus exceeds the constitutional limits established for Germany's role as a member of the eurozone. The critical view of the legal experts is largely shared by the German central bank, the Bundesbank, which says the ECB is overstepping its authority. According to one Bundesbank official, decisions to bail out EU states or even rescue the monetary union "are reserved for other actors, primarily governments and parliaments".

The fact that the three letters "ECB" play a central role in a decision by the German Constitutional Court is in itself a historical turning point for Europe. This is the first time that the constitutional judges are taking a critical look at the work of a key European institution. Previously, only the role of the German parliament or the German government had come under fire.

The fact that the announced bond-buying programme could involve hundreds of billions of euros for which - if things go wrong - German taxpayers could also be held accountable makes an examination of the independent central bank's actions unavoidable.

According to the EU treaties, it is not explicitly prohibited for the bank to purchase sovereign bonds as long as they are not bought directly from the issuing states themselves, but rather from financial service providers. But already back in its decision last September the Federal Constitutional Court declared: "An acquisition of government bonds on the secondary market by the European Central Bank aiming at financing the members' budgets independently of the capital markets" is "prohibited".

The European Court of Justice (ECJ) in Luxembourg, the European Union's high court, also recently ruled that monetary policy does not include supporting the budgets of ailing Member States - and monetary policy, not financial policy, is the domain of the ECB.

The ECB has appointed Frank Schorkopf, a professor of European law in the central German town of Göttingen, to present its view of the matter in Karlsruhe. He argues that the common currency has been established for an unlimited amount of time, and that this forms the basis of the objectives and mission of the ECB and the national central banks of the euro system. He goes on to say that the ECB's bond-buying programme merely aims to counteract disturbances on the financial markets. 

Bundesbank experts are highly critical of Draghi's by-any-means-necessary pledge. They say that merely suggesting a guarantee for the continued existence of the monetary union gives governments a certain potential to blackmail the euro system. The Bundesbank officials say that this could have a dramatic impact and jeopardise the independence of monetary policy.

Unlike the central banks in many countries, such as the United States and Japan, the ECB is allowed "to target the acquisition of bonds from countries with poor credit ratings". This leads to significant risks on the bank's balance sheets. Large losses by the ECB, though, would place a burden on the budgets of the Member States. The Bundesbank has already increased its level of risk provisioning, which will diminish the returns enjoyed by the German government.

Case likely to be referred to European Court

If the judges in Karlsruhe still have any doubts following this week's hearings, it's clear what is likely to happen next. To avoid risking any unnecessary conflict with their European colleagues in Luxembourg, the constitutional judges will have little choice but to refer the matter to the ECJ. This would be new. There has never been such a referral, but it is to be expected, and can be gleaned from the court's statements on previous decisions. 

It would be difficult for the Luxembourg court to decide in favour of the ECB, though. Karlsruhe has made it clear in diverse rulings that it intends to decide for itself what is compelling and what is not. It's possible that the decision of the European Court, which is known for its sweeping justifications and dogmatic rulings, could be rejected out of hand by Karlsruhe. Constitutional judges have already outlined what might happen in such a case. The constitutional court would have to determine that not only the ECB but also the ECJ is operating beyond the limits of the treaties, or ultra vires. This would entail a break between Karlsruhe and Luxembourg - an escalation that some experts are no longer prepared to rule out.

Full article

“In so far as the ECB is acting 'ultra vires’, and these violations are deemed prolonged and serious, the court must decide whether Germany can remain a member of monetary union on constitutional grounds”, Udo di Fabio, the constitutional court’s euro expert until last year, wrote in a report for the German Foundation for Family Businesses. Dr Di Fabio said the court does not have “procedural leverage” to force the ECB to change policy but it can issue a “declaratory” ultimatum. If the ECB carries on with bond purchases regardless, the court can and should then prohibit the Bundesbank from taking part.

Further reporting © Telegraph Media Group Limited

Fabio report (German only) © Stiftung Familienunternehmen

© Spiegel Online