By Ioannis Glinavos (@iGlinavos), Senior Lecturer, University of Westminster
The German Constitutional Court (BVerfG) is set to make a significant decision on the European Union’s economic and monetary union on June 21st. The court will rule on the Gauweiler case, which concerns the legality of the European Central Bank’s (ECB) Outright Monetary Transactions (OMT) program. This program, designed to stabilize struggling Eurozone economies, was challenged by plaintiffs questioning its legal foundation. Notably, German Bundesbank President Jens Weidmann had previously opposed the OMT program and Eurozone Quantitative Easing (QE).
The BVerfG is reviewing whether the ECB overstepped its authority under EU treaties with the OMT program. The court is particularly interested in whether the program constitutes an economic measure, exceeding the ECB’s mandate, rather than a monetary one. Furthermore, the court will determine if the program breaches the prohibition against monetary financing of member states.
The BVerfG outlined specific conditions for the OMT program to align with the German constitution, including not undermining the conditions of existing bailout programs, acting solely as support for other economic policies, excluding debt restructuring, limiting government bond purchases, and minimizing market interference.
Critics of the OMT program, which involves purchasing short-term government bonds to improve liquidity for struggling nations, argue that it violates the ECB’s mandate and risks turning the Eurozone into a “transfer union” where stronger economies perpetually bail out weaker ones.
The ECB, however, asserts that the OMT program operates in conjunction with fiscal discipline measures in the affected countries. The program’s activation hinges on strict conditions attached to an accompanying European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) program. These programs ensure that the ECB’s intervention complements, rather than replaces, national reform efforts.
Benoît Cœuré from the ECB explains that the OMT program’s design respects the principle behind prohibiting monetary financing, which aims to prevent central banks from compensating for poor policy decisions in other areas. Cœuré emphasizes that the program’s link to policy conditionality ensures that central bank intervention remains complementary to national reforms, thus upholding the ECB’s monetary dominance as intended by the treaty.
In 2015, the European Court of Justice (ECJ) largely agreed with the ECB’s position, ruling that purchasing government bonds on secondary markets, even in unlimited quantities, was legal. The court concluded that the OMT program complied with EU law and did not constitute monetary financing of member states.
The ECJ recognized the ECB’s broad discretion in making intricate economic assessments and technical choices. The court emphasized procedural requirements and applied a less stringent review when evaluating the proportionality of the scheme, refraining from second-guessing the ECB’s policy decisions.
The ECJ ultimately found that the program’s conditions prevent it from being equivalent to direct purchases of government bonds from member states, ensuring it does not violate the prohibition against monetary financing.
The upcoming BVerfG decision is highly anticipated. While some anticipate a ruling aligning with the ECJ’s position, others foresee potential modifications or even a declaration of incompatibility with German law. A middle ground is considered more likely, potentially involving adjustments to address German concerns about unlimited liability for other Eurozone members. However, the BVerfG is expected to prioritize its role as a constitutional authority and avoid being drawn into political disputes over ECB decisions.
While the BVerfG is unlikely to completely overturn the OMT program, any outcome short of full endorsement could create uncertainty, especially considering the upcoming Brexit referendum.
Art credit: David Simonds
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