German Verdict

ECB’s Crisis Actions Cleared

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Germany's high court has formally acknowledged that it needs to respect European court rulings for the first time.
  • Why it matters

    Why it matters

    The high court decision ends concerns of financial markets that the ECB’s 2012 backstop for the euro zone could be toppled by the judiciary.

  • Facts

    Facts

    • In September 2012, the ECB promised to buy unlimited government bonds of any euro-zone country plunged into crisis, thwarting speculators that were betting on a euro-zone collapse.
    • Germany’s top court on Tuesday said it would respect an earlier ruling by the European Court of Justice, which upheld the ECB’s rescue plan in 2015.
    • The rescue plan is separate from the ECB’s ongoing “quantitative easing” plan, a €1.5-trillion program to buy up the bonds of all euro zone nations to push down interest rates and raise inflation.
  • Audio

    Audio

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Mario Draghi’s most famous line, “whatever it takes,” has finally been declared legal.

Germany’s top court on Tuesday upheld the European Central Bank’s 2012 rescue plan for the 19-nation euro zone, ending one of the longest-running court cases against the ECB and staving off a possible constitutional crisis in the European Union.

“With today’s decision, a long and laborious case comes to an end,” Andreas Vosskuhle, who presided over the case at Germany’s Federal Constitutional Court in Karlsruhe, said in announcing the much-anticipated decision.

While Germany’s top court said it had “reservations” about the ECB’s actions, Mr. Vosskuhle said it would respect the ruling of the European Court of Justice, which upheld the central bank’s program last year.

It marks the first time that a top German court has said it will abide by a higher European court’s decision.

A decision by the German court to reject the European ruling could have plunged Europe into a constitutional crisis.

The case stems from ECB President Mario Draghi’s promise in the summer of 2012, at the height of the euro-zone’s debt crisis, to do “whatever it takes” within the central bank’s mandate to keep the euro alive and intact.

The central bank crystalized that promise in September of that year, promising to buy “unlimited” bonds from any troubled euro-zone countries that were being targeted by speculators.

The ECB plan was widely credited with bringing Europe back from the brink and easing concerns that the 16-year-old currency bloc could collapse. But it was sharply criticized in Germany, Europe’s largest economy, where many economists and even fellow central bankers argued it went far beyond the ECB’s mandate. Critics challenged the case in court.

The long-running court case has already had many twists and turns. The German Constitutional Court in 2014 chose to hand over the case to Europe’s top judges for the first time in its history, though it reserved the right to issue a final ruling once the European court had decided. At the time, the German court said it suspected the ECB’s actions may violate its mandate.

The European Court of Justice in Luxembourg last year upheld the ECB’s bond-buying plan to save the 19-nation euro zone, a plan that Mr. Draghi has never had to follow through with as it succeeded in calming financial markets at a critical juncture. The ECJ rejected the arguments from Germany that the purchases, if enacted, would have ended up costing euro taxpayers millions.

 

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Mario Draghi and the ECB can breathe a sigh of relief. Source: Arne Dedert / DPA

 

A decision by the German court to reject the European ruling could have plunged Europe into a constitutional crisis. It also could have forced Germany’s central bank, the Bundesbank, to not participate in any emergency bond-buying program if it were adopted by the ECB.

If the German court had rejected the program, “the EU would, in addition to all the other troubles, have an institutional crisis on its hands that is far more explosive than a Brexit,” Lars Feld, a professor who sits on a top economic advisory panel, told Handelsblatt ahead of Tuesday’s ruling.

Others in Germany nevertheless criticized the ruling. Clemens Fuest, head of the Munich-based Ifo institute,  said in a statement that the ECB’s program clearly had “fiscal goals” rather than monetary policy goals in mind. It was “a shame” that the court hadn’t dared challenge the European Court of Justice and put more handcuffs on the ECB’s actions, he added.

The program, called the Outright Monetary Transactions, or OMT, allows the ECB to buy the government bonds of distressed euro members such as Greece and, theoretically, Italy and Spain, to calm investors and prevent a collapse of the euro zone.

It is separate from the ECB’s so-called quantitative easing plan, a more traditional monetary-policy program launched last year that involves buying up the bonds of all countries in the euro zone to push down interest rates.

Tuesday’s ruling does not entirely mark the end of the ECB’s legal troubles, however. The quantitative easing plan is also being challenged in Germany’s courts.

The ruling suggests Germany’s ECB detractors are going to have a hard time toppling their foe, though.

 

Christopher Cermak is an editor with Handelsblatt Global Edition in Berlin, covering finance and economics. Jan Mallien of Handelsblatt in Frankfurt contributed to this story. To contact the author: cermak@handelsblatt.com 

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