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'

News
The surrealist comedian at the Q Awards in 2010
people
News
Russell Brand arriving for the book launch in East London
peopleRussell Brand cancels his book launch debate due to concerns about the make-up of the panel
Sport
Christiano Ronaldo enjoys his opening goal
champions leagueLiverpool 0 Real Madrid 3: Ronaldo and Benzema run Reds ragged to avenge thrashing from their last visit to Anfield
Arts and Entertainment
Awesome foursome: Sam Smith shows off his awards
music22-year-old confirms he is 2014’s breakout British music success
PROMOTED VIDEO
Life and Style
Six of the 76 Goats' cheese samples contained a significant amount of sheep's cheese
food + drink
Arts and Entertainment
Contestants during this summer's Celebrity Big Brother grand finale
tvBroadcaster attempts to change its image following sale to American media group
Extras
indybest
Arts and Entertainment
Sir Nicholas Serota has been a feature in the Power 100 top ten since its 2002 launch
art
Arts and Entertainment
Sarah Dales attempts to sell British Breeze in the luxury scent task
tvReview: 'Apprentice' candidate on the verge of tears as they were ejected from the boardroom
News
Call me Superman: one of many unusual names chosen by Chinese students
newsChinese state TV offers advice for citizens picking a Western moniker
News
ebooksAn unforgettable anthology of contemporary reportage
News
Wilko Johnson is currently on his farewell tour
people
Voices
New look: Zellweger at Elle's Women in Hollywood awards on Monday
voicesRenée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity, says Amanda Hess
News
Let’s pretend: KidZania in Tokyo
educationKidZania lets children try their hands at being a firefighter, doctor or factory worker for the day
Life and Style
CHARGE BOOSTER: Aeroplane mode doesn't sound very exciting, but it can be a (phone) hacker's friend. Turning on the option while charging your mobile will increase the speed at which your phone battery charges
techNew book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone
Arts and Entertainment
Julianne Moore and Ellen Page are starring together in civil rights drama Freeheld
film
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

IT Systems Business Analyst - Watford - £28k + bonus + benefits

£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

Trainee Recruitment Consultant - Birmingham - Real Staffing

£18000 - £23000 per annum + Commission: SThree: The SThree group is a world le...

Trainee Recruitment Consultant Birmingham

£18000 - £23000 per annum + Comission: SThree: The SThree group is a world lea...

Trainee Recruitment Consultants

£20000 - £25000 per annum + OTE £Competitive: SThree: SThree Group and have be...

Day In a Page

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

A crime that reveals London's dark heart

How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

Lost in translation: Western monikers

Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

Handy hacks that make life easier

New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

KidZania: It's a small world

The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker
Renée Zellweger's real crime has been to age in an industry that prizes women's youth over humanity

'Renée Zellweger's real crime was to age'

The actress's altered appearance raised eyebrows at Elle's Women in Hollywood awards on Monday
From Cinderella to The Jungle Book, Disney plans live-action remakes of animated classics

Disney plans live-action remakes of animated classics

From Cinderella to The Jungle Book, Patrick Grafton-Green wonders if they can ever recapture the old magic
Thousands of teenagers to visit battlefields of the First World War in new Government scheme

Pupils to visit First World War battlefields

A new Government scheme aims to bring the the horrors of the conflict to life over the next five years
The 10 best smartphone accessories

Make the most of your mobile: 10 best smartphone accessories

Try these add-ons for everything from secret charging to making sure you never lose your keys again
Mario Balotelli substituted at half-time against Real Madrid: Was this shirt swapping the real reason?

Liverpool v Real Madrid

Mario Balotelli substituted at half-time. Was shirt swapping the real reason?
West Indies tour of India: Hurricane set to sweep Windies into the shadows

Hurricane set to sweep Windies into the shadows

Decision to pull out of India tour leaves the WICB fighting for its existence with an off-field storm building
Indiana serial killer? Man arrested for murdering teenage prostitute confesses to six other murders - and police fear there could be many more

A new American serial killer?

Police fear man arrested for murder of teen prostitute could be responsible for killing spree dating back 20 years
Sweetie, the fake 10-year-old girl designed to catch online predators, claims her first scalp

Sting to trap paedophiles may not carry weight in UK courts

Computer image of ‘Sweetie’ represented entrapment, experts say
Fukushima nuclear crisis: Evacuees still stuck in cramped emergency housing three years on - and may never return home

Return to Fukushima – a land they will never call home again

Evacuees still stuck in cramped emergency housing three years on from nuclear disaster
Wildlife Photographer of the Year: Intimate image of resting lions claims top prize

Wildlife Photographer of the Year

Intimate image of resting lions claims top prize
Online petitions: Sign here to change the world

Want to change the world? Just sign here

The proliferation of online petitions allows us to register our protests at the touch of a button. But do they change anything?