Satyajit Das: German court's ruling could trigger a legal crisis in the eurozone

Das Capital: The court's decision may restrict the ability of the ECB to act

Interpreting the Karlsruhe-based German constitutional court's February 2014 ruling on the legality of the OMT (outright monetary transactions) programme requires knowledge of German, Germany's primary law and quantum physics.

Announced in 2012, the OMT would theoretically allow the European Central Bank (ECB) to make unlimited purchases of government bonds issued by eurozone members under specified conditions, providing funding and lower borrowing costs.

The constitutional court has "requested" that the European Court of Justice (ECJ) in Luxembourg clarify several issues: the legality of the conditions of the OMT, the absence of any limit on purchases, the European Central Bank's ability to selectively purchase bonds of only some members, the lack of consideration of the credit quality of the bonds, the ability to purchase in the primary market, the need to hold the bonds to maturity and the interaction between the OMT and other ECB and European Union programmes.

However, the court also stated that the OMT may be incompatible with German primary law. It argued that the programme exceeds the ECB's limited monetary policy mandate, infringes upon member states and also circumvents the prohibition of monetary financing of eurozone members. The court found that the programme was an act of economic policy, beyond the powers of the European Central Bank.

The referral creates an intriguing set of potential outcomes.

If the ECJ agrees with the court that the programme is illegal, then it could not be implemented.

However, the ECJ may agree with the German court that it is not legal in its current form, leaving the way open for a compromise left open by Karlsruhe. This would entail a more limited OMT programme with a limit on the quantity of bond purchases, no debt restructuring, imposing the same conditions applicable to European Stability Mechanism aid recipients on issuers benefiting from the bond purchases, and no interference with market prices where possible.

If the ECJ rules that the OMT is legal in its present form, then the programme would theoretically be legal under European but not German law.

Should the OMT be utilised, it is not clear if the Bundesbank, the German central bank, could participate.

The way the issue would arise is clear. Potential users of the OMT have to apply for a conditional credit line from the European Stability Mechanism, which requires government approval. If the German government and parliament approve the credit line, then a legal challenge is likely.

The constitutional court would probably declare the programme illegal, based on its current position. But the constitutional court would be in violation of EU treaties if it does not accept the ECJ ruling, although it is unclear whether this would lead to initiation of treaty infringement proceedings against Germany.

This would trigger a legal crisis, either preventing the Bundesbank from participating in the OMT, withdrawing German support for various rescue programmes or, theoretically, forcing Germany to exit the euro.

The decision is implicitly political. The constitutional court is protecting democratic rights, establishing "legal boundaries" to the powers of the ECB mandate and "strengthening the guarantees provided by [the German] constitution".

It reflects the court's increasing concern that the German government, parliament and the EU may not protect German citizens from the exposure created by the ECB and various policies to rescue beleaguered eurozone members. It also reflects concern about the abrogation of German voters' rights on economic and budgetary policy.

The court expressed concern about the secretive process underlying much of this decision-making. The court sought information regarding the ECB's OMT programmes but was rebuffed on the ground that details are "classified".

Financial markets have generally remained unmoved by the court's ruling. In part, this reflects the view that the OMT was never activated and may no longer be needed. But if the European debt problems re-emerge, then the court's decision may restrict the ability of the ECB to act.

In quantum physics, the complementarity principle posits that the behaviour of phenomena, such as light, exhibits both wave and particle properties at the quantum level. The related uncertainty principle states that it is impossible to exactly measure simultaneous values of the position and momentum of a physical system.

The court's decision embraces complementarity. OMT proponents claim that it supports the ability of the ECB to undertake the programme. Opponents claim that it actually prevents the ECB from engaging in such purchases. The decision also fits with the uncertainty principle as its effects are impossible to quantify, other than in a probabilistic manner.

Whatever happens, the debate about the scope of the ECB's powers, which underpins the euro and the fate of many deeply indebted European countries, has not been settled.

It also highlights the unstable confluence of politics, finance and law that lies at the heart of the eurozone crisis.

Satyajit Das is a former banker and author of 'Extreme Money' and 'Traders, Guns & Money'

Start your day with The Independent, sign up for daily news emails
ebooks
ebooksA special investigation by Andy McSmith
  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Financial Adviser

£20000 - £60000 per annum: Recruitment Genius: Are you recently QCA Level 4 qu...

SThree: Graduate Recruitment Resourcer

£20000 - £22500 per annum + OTE £30K: SThree: SThree Group have been well esta...

Guru Careers: Application Support Analyst / 1st Line Support

£25 - 30k: Guru Careers: We are seeking an Application Support Analyst / 1st L...

Guru Careers: .NET Developer / Web Developer

£45K - £55K (DOE) + Benefits: Guru Careers: We are seeking a full stack .NET D...

Day In a Page

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

Not even the 'putrid throat' could stop the Ross Poldark swoon-fest'

How a costume drama became a Sunday night staple
Miliband promises no stamp duty for first-time buyers as he pushes Tories on housing

Miliband promises no stamp duty for first-time buyers

Labour leader pushes Tories on housing
Aviation history is littered with grand failures - from the the Bristol Brabazon to Concorde - but what went wrong with the SuperJumbo?

Aviation history is littered with grand failures

But what went wrong with the SuperJumbo?
Fear of Putin, Islamists and immigration is giving rise to a new generation of Soviet-style 'iron curtains' right across Europe

Fortress Europe?

Fear of Putin, Islamists and immigration is giving rise to a new generation of 'iron curtains'
Never mind what you're wearing, it's what you're reclining on

Never mind what you're wearing

It's what you're reclining on that matters
General Election 2015: Chuka Umunna on the benefits of immigration, humility – and his leader Ed Miliband

Chuka Umunna: A virus of racism runs through Ukip

The shadow business secretary on the benefits of immigration, humility – and his leader Ed Miliband
Yemen crisis: This exotic war will soon become Europe's problem

Yemen's exotic war will soon affect Europe

Terrorism and boatloads of desperate migrants will be the outcome of the Saudi air campaign, says Patrick Cockburn
Marginal Streets project aims to document voters in the run-up to the General Election

Marginal Streets project documents voters

Independent photographers Joseph Fox and Orlando Gili are uploading two portraits of constituents to their website for each day of the campaign
Game of Thrones: Visit the real-life kingdom of Westeros to see where violent history ends and telly tourism begins

The real-life kingdom of Westeros

Is there something a little uncomfortable about Game of Thrones shooting in Northern Ireland?
How to survive a social-media mauling, by the tough women of Twitter

How to survive a Twitter mauling

Mary Beard, Caroline Criado-Perez, Louise Mensch, Bunny La Roche and Courtney Barrasford reveal how to trounce the trolls
Gallipoli centenary: At dawn, the young remember the young who perished in one of the First World War's bloodiest battles

At dawn, the young remember the young

A century ago, soldiers of the Empire – many no more than boys – spilt on to Gallipoli’s beaches. On this 100th Anzac Day, there are personal, poetic tributes to their sacrifice
Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves

Follow the money as never before

Dissent is slowly building against the billions spent on presidential campaigns – even among politicians themselves, reports Rupert Cornwell
Samuel West interview: The actor and director on austerity, unionisation, and not mentioning his famous parents

Samuel West interview

The actor and director on austerity, unionisation, and not mentioning his famous parents
General Election 2015: Imagine if the leading political parties were fashion labels

Imagine if the leading political parties were fashion labels

Fashion editor, Alexander Fury, on what the leaders' appearances tell us about them
Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

Phumzile Mlambo-Ngcuka: Home can be the unsafest place for women

The architect of the HeForShe movement and head of UN Women on the world's failure to combat domestic violence