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'

Life and Style
A teenager boy wakes up.
life
Arts and Entertainment
Critics say Kipling showed loathing for India's primitive villagers in The Jungle Book
filmChristopher Walken, Bill Murray, Scarlett Johanssen Idris Elba, Andy Serkis, Benedict Cumberbatch, Cate Blanchett and Christian Bale
Life and Style
food + drink
Life and Style
Playing to win: for Tanith Carey, pictured with Lily, right, and Clio, even simple games had to have an educational purpose
lifeTanith Carey explains what made her take her foot off the gas
PROMOTED VIDEO
Life and Style
tech
Arts and Entertainment
A still from Duncan Campbell's hour-long film 'It for Others'
Turner Prize 2014
News
i100
Arts and Entertainment
Tony Hadley in a scene from ‘Soul Boys Of The Western World’
musicSpandau Ballet are back together - on stage and screen
Arts and Entertainment
From left to right: Ed Stoppard as Brian Epstein, Sheridan Smith as Cilla Black and Elliott Cowan as George Martin in 'Cilla'
tvCilla review: A poignant ending to mini-series
News
i100
Life and Style
Bearing up: Sebastian Flyte with his teddy Aloysius in Brideshead Revisited
lifePhilippa Perry explains why a third of students take a bear to uni
Arts and Entertainment
Sir Alan Sugar appearing in a shot from Apprentice which was used in a Cassette Boy mashup
artsA judge will rule if pieces are funny enough to be classed as parodies
News
ebooksAn unforgettable anthology of contemporary reportage
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

Trust Accountant - Kent

NEGOTIABLE: Austen Lloyd: TRUST ACCOUNTANT - KENTIf you are a Chartered Accou...

Graduate Recruitment Consultant - 2013/14 Grads - No Exp Needed

£18000 - £20000 per annum + OTE £30000: SThree: SThree are a global FTSE 250 b...

Law Costs

Highly Competitive Salary: Austen Lloyd: CITY - Law Costs Draftsperson - NICHE...

SQL Developer (Stored Procedures) - Hertfordshire/Middlesex

£300 - £330 per day: Ashdown Group: SQL Developer (Stored Procedures) Watford...

Day In a Page

Isis is an hour from Baghdad, the Iraq army has little chance against it, and air strikes won't help

Isis an hour away from Baghdad -

and with no sign of Iraq army being able to make a successful counter-attack
Turner Prize 2014 is frustratingly timid

Turner Prize 2014 is frustratingly timid

The exhibition nods to rich and potentially brilliant ideas, but steps back
Last chance to see: Half the world’s animals have disappeared over the last 40 years

Last chance to see...

The Earth’s animal wildlife population has halved in 40 years
So here's why teenagers are always grumpy - and it's not what you think

Truth behind teens' grumpiness

Early school hours mess with their biological clocks
Why can no one stop hackers putting celebrities' private photos online?

Hacked photos: the third wave

Why can no one stop hackers putting celebrities' private photos online?
Royal Ballet star dubbed 'Charlize Theron in pointe shoes' takes on Manon

Homegrown ballerina is on the rise

Royal Ballet star Melissa Hamilton is about to tackle the role of Manon
Education, eduction, education? Our growing fascination with what really goes on in school

Education, education, education

TV documentaries filmed in classrooms are now a genre in their own right
It’s reasonable to negotiate with the likes of Isis, so why don’t we do it and save lives?

It’s perfectly reasonable to negotiate with villains like Isis

So why don’t we do it and save some lives?
This man just ran a marathon in under 2 hours 3 minutes. Is a 2-hour race in sight?

Is a sub-2-hour race now within sight?

Dennis Kimetto breaks marathon record
We shall not be moved, say Stratford's single parents fighting eviction

Inside the E15 'occupation'

We shall not be moved, say Stratford single parents
Air strikes alone will fail to stop Isis

Air strikes alone will fail to stop Isis

Talks between all touched by the crisis in Syria and Iraq can achieve as much as the Tornadoes, says Patrick Cockburn
Nadhim Zahawi: From a refugee on welfare to the heart of No 10

Nadhim Zahawi: From a refugee on welfare to the heart of No 10

The Tory MP speaks for the first time about the devastating effect of his father's bankruptcy
Witches: A history of misogyny

Witches: A history of misogyny

The sexist abuse that haunts modern life is nothing new: women have been 'trolled' in art for 500 years
Shona Rhimes interview: Meet the most powerful woman in US television

Meet the most powerful woman in US television

Writer and producer of shows like Grey's Anatomy, Shonda Rhimes now has her own evening of primetime TV – but she’s taking it in her stride
'Before They Pass Away': Endangered communities photographed 'like Kate Moss'

Endangered communities photographed 'like Kate Moss'

Jimmy Nelson travelled the world to photograph 35 threatened tribes in an unashamedly glamorous style