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
Satyajit Das writes the Das Capital Column in the Independent. He has worked in financial markets for over 35 years, as a banker, a corporate treasurer and now as a consultant to banks, fund managers, governments, companies and regulators around the world. He is also the author of Traders Guns and Money and Extreme Money as well as a number of reference books on derivatives and risk-management, which double as 'door stops'. He became a banker because he wasn't good enough to be a professional cricketer, but would give up finance if anyone offered him a job as a cricket commentator or allowed him to pursue his other passion- wildlife (he is the co-author with Jade Novakovic of In Search of The Pangolin: The Accidental Eco-Tourist). He lives in Sydney, Australia.
Tuesday 18 February 2014
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'
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