BOND-BUYING PROGRAM

Karlsruhe Punts to Europe

Bundesverfassungsgericht verhandelt über EZB-Anleihenkäufe
Powerless to act, but not powerless to complain. Germany's constitutional court. Source: Picture Alliance / DPA

It’s a well-known fact that many German economists and policymakers aren’t exactly happy with the European Central Bank’s handling of the euro-zone debt crisis. While many outside Germany credit the ECB with saving the 19-nation euro zone from a possible collapse, many in Europe’s largest economy fear it may have violated the rules to do it.

Some of the most conservative groups have put their warnings into action – challenging the ECB’s actions before the courts. On Tuesday, for the second time in two years, Germany’s top constitutional court said that it, too, had concerns about what the ECB is doing – but passed the buck on to its European superiors, the European Court of Justice, for a ruling on the subject.

“Significant reasons indicate that the ECB decisions governing the asset-purchase program violate the prohibition of monetary financing and exceed the monetary policy mandate of the European Central Bank, thus encroaching upon the competences of the member states,” the Federal Constitutional Court, based in the southern city of Karlsruhe, said in a statement Tuesday.

It’s the kind of statement that serves to anger both sides of the debate in Germany. The ECB’s critics complain that the European Court of Justice will merely act as a rubber stamp for the central bank’s policies. If the Karlsruhe court took its concerns seriously, it should stop the ECB itself. For the ECB’s supporters, the German court is creating a storm in a teacup over something it doesn’t actually have the power to change. The repeated complaints and referrals, however, erode the central bank’s credibility and make its job harder.

“The court would have acted properly and correctly if it had simply rejected the challenge.”

Marcel Fratzscher, president, DIW

By deriding the ECB, but saying the decision is up to Europe’s top court, Karlsruhe’s decision “is a false compromise,” said Marcel Fratzscher, a former ECB official who generally supports the ECB’s policies and heads the Berlin-based DIW institute. “The court would have acted properly and correctly if it had simply rejected the challenge.”

Both sides have a point, but then there’s a reason the judges in Karlsruhe acted the way they did. In fact, the court arguably serves as a mirror for German society at large: Policymakers from Berlin to Frankfurt have been powerless to stop the ECB from acting – because the central bank takes its orders from 19 countries and much of the euro zone doesn’t agree with Germany’s position – but many still believe they have an obligation to highlight the risks they believe the ECB’s actions pose to the wider economy.

“The ECB has massively stretched its mandate with its buying policies. That is why it is sensible that its actions are questioned and legally examined,” said Ralph Brinkhaus, deputy floor leader of the Christian Democrats in parliament. Passing the case on to the European Court of Justice was the “right conclusion,” he added.

Germany’s constitutional court isn’t as powerful as it once was, since a number of rules and regulations these days are made at the European level. It recognized that fact for the first time in 2014, when it referred a case to the European Court of Justice for the first time in its history. That case, too, had to do with the European Central Bank.

Back in March 2014, the Karlsruhe court faced a decision on a different program by the ECB known as Outright Monetary Transactions, or OMT. That program was even more controversial – ECB President Mario Draghi had essentially promised to buy an unlimited number of bonds from any country that financial speculators tried to kick out of the euro zone at the height of the bloc’s debt crisis.

Just like on Tuesday, the Karlsruhe judges back then said they had serious concerns about the OMT program, but passed the decision to Luxembourg. Two years later, the European Court of Justice approved the OMT as “unconventional monetary policy,” imposing only limited restrictions on the ECB’s wiggle room. Rather than cause a constitutional crisis, the Karlsruhe court eventually gave up the fight and backed its Luxembourg superiors.

Will this time be any different? Most financial and legal analysts don’t think so. Especially since the ECB’s current bond-buying program, which has involved buying nearly €2 trillion in government bonds from all countries in the euro zone over the past two years – rather than just the struggling ones as the OMT would have done – is considered far less controversial.

“The big question is now whether the ECJ will remain true to its line that the ECB is free to choose its monetary policy weapons,” said Daniel Lenz, a bond strategist with Germany’s DZ Bank. It would be “unintuitive” for the court to clear the OMT program but block the ECB’s current bond-buying program instead.

Still, some experts think the challenge will at least have an effect in limiting the ECB’s wiggle room – and maybe even force the central bank to start winding down its bond-buying program earlier than it would like. Michael Schubert of Commerzbank says the courts could stop the ECB from bending more rules by, for example, raising the limit on the amount of bonds it’s allowed to buy from any one country.

“It is even more unlikely than ever that the ECB will again raise its issuer limit, which means that in 2018 it will be forced to start scaling down purchases,” Mr. Schubert said.

That’s hardly going to be enough to satisfy the ECB’s toughest critics, though it hasn’t stopped them from declaring victory on Tuesday. Gunnar Beck, who led the charge for the defense, called the decision a “major success. The court agreed with us on nearly all points.”

If only Karlsruhe could actually do something about it.

 

Christopher Cermak has covered the ECB and Federal Reserve from Frankfurt and Washington and is currently an editor for Handelsblatt Global in Berlin. Andrea Cünnen, Robert Landgraf, Jan Hildebrand, Frank Wiebe and Mathias Streit of Handelsblatt contributed to this piece. To contact the author: Cermak@handelsblatt.com

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