Krzysztof Jerzy Gruszczyński

Can be EBC wrong - the OTM programAbstract

In February 2014 the German Federal Constitutionla Court decided to

ask the Court of Justice of European Union whether Artt. 119 and 127 of

the TFEU and Artt. 17 to 24 of the Protocol on the Statute of European

System of Central Banks /European Central Bank can be interpreted in such a

way that the adoption and the implementation of the Outright Monetary

Transaction (OMT)program would be deemed in conformity with European Union

law. In the German Constitutional Court’s view, the OMT program is not

covered by the monetary policy mandate of the ECB and it is simply an

economic policy measure aimed at reducing interest-rate spreads and at

fiscal redistribution among EU member States, without the necessary legal

legitimation. The case is sensitive for various reasons: although not yet

used, the mere announcement of the OMT scheme played an important role in

getting the euro area out of the acute phase of the crisis, and offers a

credible defense against similar future scenarios. A declaration of

illegality, or the placing of substantive limits on the programme, may

jeopardise post-crisis recovery. Additionally, the reference is the first

ever submitted by the German Constitutional Court, and its tone is quite

bold; there is clear potential for conflict between the two courts, with

consequences unknown for EMU. The German court’s concerns regarding the

legality of the OMT program can be summarized as follows: first, the

program is a measure of economic, not monetary policy, and as such beyond

the remit of the ECB. Second, a program of this kind amounts to monetary

financing of a Member State, which Art 123 TFEU prohibits. It would allow

the ECB to become lender of last resort to a country in financial

difficulties, and it would transform EMU into a transfer union—something

not foreseen in the current Treaties

An advisor for the EU Court of Justice issued an opinion on

legality of the OMT (Outright Monetary Transaction) program the ECB1

introduce back in 2012 to reinforce the vow made to do whatever was

necessary to ensure the region’s financial and economic stability. Though

non-binding, the ECJ tend to follow the assessment; and this opinion can

undermine a significant safety net and shape the central bank’s next big

step on a path of heavy policy easing.. Alternatively, an ‘all clear’ sign

on QE would embolden ECB expectations for next week

The European Central Bank announced on January 22 2015 a massive

purchase of sovereign debt for the next 18 month, boosting its monthly

purchases of public and private securities, including euro-denominated

securities issued by euro area governments and agencies, to 60 billion

euros.

Key words

German Federal Constitutional Court, preliminary ruling, Euroepan Central

Bank, CJEUof European Union, Outright Monetary Transaction, ultra vires

This paper will overview the content of latest decisions

of both the EBC announcement from January 22 2015 and German Federal

Constitutional Court (hereinafter: FCC) on the OMT Outright Monetary

Transactions (hereinafter OTM) program, with special emphasis on

representing position of both parties involved, it means European

Central Bank (hereinafter: ECB) and Bundesbank. The Court has

examined the Constitutional guarantee of private property and

several articles in the German Constitutional law which make clear

that the preservation of price stability is a precondition for

Germany taking part in the monetary union. In court’s opinion the

primary objective of the purchases was the reduction of the interest

rates the Member States that benefit have to pay on the capital

markets for new government bonds. Therefore the FCC considered the

OMT decision incompatible with Art. 119 and Art. 127 sec. 1 and 2

TFEU and Art. 17 of the European System of Central Banks

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(hereinafter: ESCB) Statute because it exceeded the mandate of the

ECB that is regulated in these provisions and encroaches upon the

responsibility of the European Union (hereinafter: EU) Member States

for economic policy. In the final remarks we will analyze the

potential consequences for financial market worldwide as well as

possible outcome of sending the case for further considerations by

the Europe highest tribunal CJEU Court of Justice (hereinafter:

CJEU). The question is whether Germany is willing and able (in

terms of legal constraints) to do what is seen as necessary to save

the Euro state members.1 In the end we shortly summarize the possible

outcome by the European court coming within one to two years.

The Decision

The Senate of the BVG- ‘Bundesverfassungsgericht’ – the GCC

with a majority of 6:2 of has issued its very important and long-

awaited decision on February 7 2014 focusing on whether the ECB

sovereign bond-buying program is “ultra vires”, (far beyond its legal

mandate) and on issue whether the ECB’s policies have infringed the

ECB’s or Bundesbank’s mandate and if any of them have created fiscal

risks without necessary approval.2 The German court stated it will

rule on the legality of the currency bloc's permanent bailout

scheme, the European Stability Mechanism (ESM), later this year on

March 18. The Court regards the decision to buy bonds as shifting

the distribution of c3ompetences towards the EU (an economic policy

is an MS competence (Article 120 TFEU), and thus violating the1 It also propose that once the German government has a fresh mandatefollowing September’s election, there will be a swift move towards moreeurozone integration.2 In 2012 the GCC held similar hearings over the ESM, the eurozone’s bailoutfund. In that case, the GCC ruled that the ESM is not in breach of theGerman constitution. The court did also lay down some requirements whichreaffirmed the role of the Bundestag in any ESM decision, which couldpotentially put limits on future actions such as a cap on Germancontributions, an ESM banking licence and/or Eurobonds.

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budgetary responsibility of the Germany and as consequence the

German voters’ right of political participation in would be rendered

ineffective. Therefore, the ECB decision amounts to an ultra vires act,

i.e. an act overstepping EU competence. The FCC several times has

held that in case of an ultra vires act, it is competent to rule not

only on the constitutionality of acts of German authorities but also

those of EU institutions.

Germany's Constitutional Court postponed judgment on the OMT

and 4 referred the complaint against the European Central Bank's

bond-buying scheme to the CJEU5 to rule on the legality of the OMT

under European law before it rules on whether the OMT is

constitutional under German law. 6 Based on the CJEU ruling, the GCC

will then for the second time considered the case and assess how the

ECB’s OMT conforms with the German basic law. Very properly the FCC

has chosen the CJEU as a proper institution for ruling with regard

to the OMT program which will make it possible to avoid a violation

of EU law by the ECB.7

The FCC decision to refer the question of the conformity of

the OMT decision with primary EU law, for a preliminary ruling under

3 Further see another cases Solange I Case, 37 BVerfGE 271 (1974); SolnageII Case, 73 BVerfGE 339 (1986); Maastricht Treaty Case, 89 BVerfGE 155(1993); Banana Market Regulation Case, 102 BVerfGE 147 (2000); LisbonTreaty Case, 123 BVerfG 267 (2009); EFSF Case, 129 BVerfGE 124 (2011); ESMTemporary Injunction Case, BVerfG, 2 BvR 1390/12 from 12.9.2012, 4 pursuant to Article 19 section 3 letter b of the Treaty on European Unionand Article 267 section 1 letters a and b of the Treaty on the Functioningof the European Union”.5

6 German conservative lawmaker Peter Gauweiler, one of the most prominentplaintiffs in the case, said the court decision was an "interim success inour fight against infringements of our constitutional democracy viasupranational institutions".7 The German court ruled 20 years ago that it can reject any EU law thatbreaches German "basic law". It went further in its ruling on the LisbonTreaty, reminding EU officials that the sovereign states are the "mastersof the EU treaties", not vice versa

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Article 267 TFEU, to the CJEU was widely excepted. It must be

pointed out that this is the first such referral by the BVerfG to

the CJEU. Since there is no precedent in Germany for such a

referral to the European court, we are unsure how the Constitutional

Court would feel bound by the prospective CJEU's answers.

It seems that the ECJ would find OMT in compliance with

existing European law likely back the OMT, which could increase the

likelihood of the ECB moving to money printing, by this same time.8

The CJEU prospective unfavorable verdict would create quasi

constitutional crisis whereby German constitutional law directly

contradicts EU law, and would risks a political backlash in Germany

if it goes too far behind the merits of the decision. The GCC

regarded the ECB decision to purchase an unlimited amount of

government bonds of selected UE Member States (EUMS) to be in breach

of the ban on monetary financing of MS budgets according to Article

123(1) TFEU, because the OMT decision does not fall under the ECB

mandate for monetary policy (Article 127 TFEU), and is an economic

measure seeking to provide relief for financial crisis in Europe.9

It seems that the German court left no doubt that the Bundesbank

and other German institutions were bound by the constitution, and in

aftermath of wrong CJEU’s verdict the GCC would subsequently find

the OMT constitutional under German law.

The CJEU might as well dismiss some parts of the question as

inadmissible, as it cannot rule on the validity of treaty

provisions10. Ignoring the GCC decision by the European court may8 This could lead to similar reasoning like those in case Melloni (C-399/11)9The Federal Constitutional Court (Bundesverfassungsgericht, BVerfG)Principal Proceedings ESM/ECB: Pronouncement of the Judgment and Referral for aPreliminary Ruling to the Court of Justice of the European Union 02/07/201410 it ruled that fiscal policy was not part of the Union’s policy in thePringle case Judgment of the Court (Full Court) of 27 November 2012. ThomasPringle v Governement of Ireland, Ireland and The Attorney General

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trigger a direct confrontation with the German government because

OMT is conditional on granting ESM support (and we need to check if

the forthcoming ruling of the GCC on 18 March on ESM does not create

additional conditions), and the German government could block the

entire mechanism.11

The Senate, which regarded the OMT decision as an ultra vires act,

stated that there are important reasons to assume that OTM program

exceeds the ECB's monetary policy mandate and therefore infringes

the powers of the Member States and violates the prohibition of

monetary financing of the budget.12 The senate’s majority opinion

expressed its view that essentially due to its unlimited nature the

OMT program amounted a “structurally significant transgression of

powers” under EU Treaty law: According to the six judges, “there are

important reasons to assume that the OMT-program exceeds the ECB’s

monetary policy mandate and thus infringes the powers of the Member

States, and that it violates the prohibition of monetary financing

of the budget”

However there were the two dissenting opinions arguing that

the very point of the OMT program appears to have been lost on the

BVG’s majority opinion when it declared the OMT to be no longer a

form of monetary policy. The OMT program, in their view, was

11 The GCC decision may have some consequences in the short run forPortugal. Indeed, the German government is incentivized to oppose an ECCLfor the country upon exiting from the program (the decision is scheduledfor March/April), since a precautionary line would by construction open thedoor to OMT. We argued in Focus Europe last week that a “clean exit” wasrisky given the intrinsic fragility of Portugal (the private sector has notyet started to de-leverage, and general elections will have to be organizedin 2015). Still, Portugal is currently issuing in the market, buildinglarge cash reserves, which makes at least the beginning of a “clean exit”manageable.12 A European Central Bank official on Monday, February 10 2014 criticizedGermany's highest court for questioning the legality of the central bank'scurrent bond-buying program, saying national courts shouldn't have vetopower over European-wide issues.

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intended by the ECB to repair the broken transmission mechanisms

between monetary policy and the real economy—at a time when 6 per

cent yields on short term Italian or Spanish sovereign debt had

become a common sight in the market.13

The case’s history began with admission by the GCC six

complaints against the German ratification acts of the ESM14, and the

Fiscal Compact, or Treaty on Stability, Coordination and Governance

in the Economic & Monetary Union (TSCG). The applicants, amongst

which were the conservative Bavarian politician Peter Gauweiler, the

Linkspartei (Left Party) - group in the Bundestag, former justice

minister Herta Däubler-Gmelin, representing the association “More

Democracy e.V.“, supported by more than 37 000 citizens, requested a

temporary injunction of the ratification acts. Complains involved

also a decision of the Governing Council of the ECB of 6 September

2012 concerning OMT and the continued purchases of government bonds

on the basis of this decision and of the predecessor program for

Securities Markets (SMP).

Please note that Art. 123 sec. 1 TFEU ex Article 101 TEC

prohibits the ECB from purchasing government bonds directly from

the emitting Member States.15The complainants and the applicant13 justice Gerhard puts it Monetary and economic policies relate to oneanother and cannot be strictly separated. In an overall assessment, itseems to me that the claim that the objective of the OMT Decision is firstand foremost the re-establishment of the monetary transmission mechanism,cannot be contradicted with the unequivocalness to be required.14 The new Article 136(3) TFEU15 From the third stage of EMU, which began on 1 January 1999, the budgetarypolicies of the Member States are constrained by three rules: overdraftfacilities or any other type of credit facility from the ECB or nationalcentral banks to public authorities (European, national or regional) areprohibited (Article 123 TFEU, ex Article 101 TEC): Overdraft facilities orany other type of credit facility with the European Central Bank or withthe central banks of the Member States (hereinafter referred to as‘national central banks’) in favour of Union institutions, bodies, officesor agencies, central governments, regional, local or other publicauthorities, other bodies governed by public law, or public undertakings ofMember States shall be prohibited, as shall the purchase directly from them

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argued before the Court that the Federal Government and the German

Bundestag are obliged to work towards a repeal of the OMT decision,

or at least to prevent its implementation, and that the German

Bundesbank may not take part if the decision is put into effect.

They plaintiffs successfully argued that the OMT decision is a so-

called ultra vires act. was is not covered by the mandate of the ECB

pursuant and violated the prohibition of monetary financing

(Art. 123 TFEU) and the independence of the ECB. The Plaintiff

decided also to bring proceedings for annulment pursuant to Art. 263

sec. 1 and sec. 2 TFEU before the CJEU against the purchase of

government bonds of Member States of the euro area by the European

System of Central Banks and the ECB, and against the acceptance of

government bonds as collateral for Central Bank loans if those acts

serve the financing of states.

On 12 September 2012, the Court dismissed the majority of

applications for temporary injunction, stating that the instruments

in question were not likely to violate German constitutional law.

However, the signing of the Act bringing the ESM into German law was

accepted only under certain conditions. The Court stated that the

question of whether the ECB’s decision to buy bonds on the secondary

markets is an ultra vires act, going beyond the limits established by

the German act approving the ESM, would be examined in the main

proceedings, closed with the final decision from February 7th 2014.

In this 2014 opinion Court decided that the decision of the

Governing Council of the ECB of 6 September 2012 on Technical

Features of OMT is to be considered as a decision about purchases of

government bonds of individual Member States of the euro currency

area, which are not limited ex ante, and which are politically

motivated. In addition the mentioned above decision was founded

by the European Central Bank or national central banks of debt instruments.8

incompatible with Article 119 and Article 127 sections 1 and 2 of

the Treaty on the Functioning of the European Union, and with

Articles 17 to 24 of the Protocol on the Statute of the European

System of Central Banks and of the European Central Bank, because it

exceeds the European Central Bank’s monetary policy mandate, which

is regulated in the above-mentioned provisions, and infringes the

powers of the EU Member States.

The Bundesbank and the ECB during hearings last summer 2013 ,

presented forward contrasting views. Their argument was that the

financial risks caused by euro rescues will interfere with German

financial management in a way that deprives the Bundestag of

budgetary control and therefore infringes a fundamental principle of

the German constitution. Involved parties believed also that the

impasse over integrating European assistance for euro economies can

be resolved only by a change in the German constitution.

The German Federal Constitutional Court

According to the established case-law of the Federal Constitutional

Court16, the Court’s powers of review cover the examination of

16 The cases: On the Maastricht Treaty (October 1993). In essence, the Maastricht treaty iscompatible with democratic principles. However, substantial tasks andrights should remain with the Bundestag. Further European integrationtherefore needs the approval of the Bundestag. On Germany's participation in the eurozone (March 1998). The introduction of the eurodoes not violate German Basic Law, i.e. property rights due to (possible)inflation. On the Lisbon Treaty (June 2009). Further European integration does not violateGerman Basic Law. However, a future European federal state including theabandonment of national sovereignty would only be possible by introducing anew constitution on the basis of a referendum.On Greek loans and the EFSF (September 2011). German Basic Law is not violated.However, the Bundestag has to remain in control of fundamental budgetpolicy decisions (and not European institutions instead). Further financial

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whether acts of European institutions and agencies are based on

manifest transgressions of powers or affect the area of

constitutional identity of the Basic Law, which cannot be

transferred and is protected by Art. 79 sec. 3 of the Basic Law.

The FCC Court took into consideration very important constitutional

principle of democracy Demokratieprinzip covered by the art. 38 of

the German Constitution forbids the creation of new EU competences

that are not based on an explicit legal basis in the treaties (so-

called ‘ultra-vires’).17 Any fiscal risk without a democratic mandate

might be seen to violate either or both of these articles18 In

opinion of O. Gerstenberg, in the past any German citizen entitled

to vote, claiming an infringement of his or her right to vote, could

initiate a review by the BVG of the acts of EU institutions if, and

only if, the German constitutional identity—the constitutional essentials,

meaning the core of the substantive fundamental rights provisions of

the Grundgesetz—was at stake. The BVG did count the parliament’s

budgetary autonomy among those constitutional essentials, but it

respected the legislature’s margin of appreciation in that respect.

Under the BVG’s so-called solange-jurisprudence, the BVG would thus

claim constitutional guardianship very restrictively, that is, only

over the so-called competence-competence.19

assistance has to be approved by the Bundestag. Financial aid to eurozonecountries has to be temporary and conditional, i.e. in exchange for reformsand adjustment programs (no unconditional Eurobonds).17 Russell Miller, Germany vs. Europe: The Principle of Democracy in GermanConstitutional Law and the Struggle for European Integration, Washington & Lee PublicLegal Studies Research Paper Series 2013 – 14, p. 718 Former GCC judge Udo di Fabio published an expert opinion on this mattera few days ago, where he argued that if the ECB acts “ultra vires” (far beyondits legal mandate) and violates the principle of democratic self-responsibility of each state for its financial obligations, the GCC wouldhave to state this as a fact (Feststellungsurteil) and demand that theGerman government appeals to the ECB and other EU institutions to act onthe matter.19 Oliver Gerstenberg, An End to European Multilateralism: A Comment on the GermanBundesverfassungsgericht’s OMT Decision, Int’l J. Const. L. Blog, Feb. 19,

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For many years the FCC presented their point of view that the

German Parliament must play its democratic role in legitimating new

measures that lead to deeper European integration, and that the

Parliament’s failure to do so (as well as the Federal Government’s

failure to do so) likely constitutes a violation of the Basic Law.

It was stressed several times that there are outer-limits on the

extent of Germany’s participation in European integration and that

such limits are demarcated by the twin boundaries of Germany’s

constitutional identity and the kompetenz of European authority

established by the EU Member States in the Treaties and obviously

the European Central Bank’s OMT program does constitute a flagrant

violation of Germany’s constitutional provision and the establishing

Treaties. The FCC by issuing preliminary ruling has challenged the

CJEU to explain why the measures proposed by the ECB are not a

violation of European primary law20

The Outright Monetary Transaction Program OMT

In September 2012, ECB chief Mario Draghi announced the bank

would buy unlimited amounts of sovereign bonds from crisis-ridden

eurozone states under a measure called the Outright Monetary

Transaction (OMT). Draghi's move was promptly challenged by

Germany's central bank (Bundesbank) which argued the ECB was

overstepping its bounds.21 However far the ECB would lower its

2014, available at: http://www.iconnectblog.com/2014/02/an-end-to-european-multilateralism-a-comment-on-the-german-bundesverfassungsgerichts-omt-decision20 Russell A. Miller, The “Rumble in Karlsruhe”:  The German Federal Constitutional Court’sHistoric OMT Case (February 7, 2014), Int’l J. Const. L. Blog, February 11, 2014,available at: http://www.iconnectblog.com/2014/02/the-rumble-in-karlsruhe-the-german-federal-constitutional-courts-historic-omt-case-february-7-201421 The message from Mario Draghi yesterday was that the ECB did not act dueto the need for information and the uncertainty. He said ‘the reason for

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official interest rates, those interest rates would not trickle

through to company loans in PIGS countries. The OMT program, by

allowing the ECB to buy unlimited bonds, was apparently successful

in breaking the woeful entanglement à deux between busted banks and

governments in dragging each other down. The unlimited nature of the

OMT program combined with the fact that it was never triggered

already rendered the OMT effective—indeed the program may already

have run its course and served its purpose: there is no further

formalisation (e.g. an EU Directive) in the cards The ECB's OMT(OMT)

program, announced by President Mario Draghi in September 2012 at

the height of the sovereign debt crisis and as yet unused, was

credited with pulling the euro zone back from the brink. As

announced on 2 August 2012, the Governing Council of the ECB has

today taken decisions on a number of technical features regarding

the Eurosystem’s outright transactions in secondary sovereign bond

markets that aim at safeguarding an appropriate monetary policy

transmission and the singleness of the monetary policy.

Under the OMT programme, the ECB and the the Eurosystem

National Central Banks (NCB) were to engage in outright transactions

in secondary sovereign bond markets with the aim of safeguarding an

appropriate monetary policy transmission and the singleness of the

monetary policy. No ex ante quantitative limits were set on the size

of OMTs, but only bonds with a maturity of one to three years will

be purchased. interventions by the ECB on the secondary market will

be carried out only for countries that have requested European

Financial Stabilization Mechanism (EFSF)/European Stability

today’s decision not to act is really to do with the complexity of thesituation’. We stick to our call that the ECB will ease again although weacknowledge that it is a close call. Draghi’s focus on the lack ofinformation and high uncertainty seemed to be a way for him to buy sometime before making any decision

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Mechanism (ESM) support and provided that the request is approved by

the Eurogroup. Conditionality will be defined in the context of an

EFSF/ESM macroeconomic adjustment programme. 22The ECB would purchase

bonds on the secondary market if and until the country complies with

the conditions attached to the EFSF/ESM support. The OMT Decision

envisaged that government bonds of selected Member States can be

purchased up to an unlimited amount if, and as long as, these Member

States, at the same time, participate in a reform program as agreed

upon with the European Financial Stability Facility or the European

Stability Mechanism. The stated aim of the OMTwas to safeguard an

appropriate monetary policy transmission and the consistency or

“singleness” of the monetary policy.

Pursuant to the OMT Decision, a purchase of government bonds

shall only be undertaken under the condition that the Member State

that benefits fully complies with the obligations of an assistance

program of the European Financial Stability Facility or the European

Stability Mechanism, which envisages the purchase of government

bonds of that Member State on the primary market

The OMT Decision was not covered by the mandate of the European

Central Bank. Based on an overall assessment of the delimitation

criteria that the FCC considered relevant, it does not constitute an

act of monetary policy, but a predominantly economic-policy act and

the OMT Decision can also not be justified as an act to support the

Union's economic policy. The purchase of government bonds from

selected EU Member States only is a further indication of the OMT

decision being an act of economic policy because the monetary

22 See more Jacques Mazier, A Detailed Representation of the Eurosystem and the CurrentCrisis in the Eurozone ,CEPN 2014 - 02 www.univ-paris13.fr/CEPN/IMG/.../wp2014_02.pdf

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policy framework of the ESCB does generally not have an approach

which would differentiate between individual Member States.

The European Central Bank ECB

The primary objective of the European System of Central Banks

is to maintain price stability (Art. 127 sec. 1 sentence 1, Art. 282

sec. 2 sentence 2 TFEU). The basic tasks of the System are, pursuant

to Art. 127 sec. 2 TFEU, to define and implement the monetary policy

of the Union (first indent), to conduct foreign-exchange operations

(second indent), to hold and manage the official foreign reserves of

the Member States (third indent), and to promote the smooth

operation of payment systems (fourth indent). The Statute of the

ESCB and the ECB specifies, in Chapter IV, the monetary functions

and operations of the European System of Central Banks and

authorises it to open accounts (Art. 17 ESCB Statute), to conduct

open market and credit operations (Art. 18 ESCB Statute), to define

minimum reserves (Art. 19 ESCB Statute), and to use other

instruments of monetary control (Art. 20 ESCB Statute). 23

The mandate of the ECB is limited in the Treaties to the

field of monetary policy (Art. 119 and 127 et seq. TFEU, Art. 17 et

seq. ESCB Statute). It is not authorised to pursue its own economic

policy but may only support the general economic policies in the EU.24The OMT Decision as being an independent act of economic policy,23 Pursuant to Art. 22 ESCB Statute, the ECB and the national central banksmay also provide facilities, and the ECB may issue regulations, to ensureefficient and sound clearing and payment systems within the Union and withother countries. Art. 23 ESCB Statute authorises them to enter intoexternal operations with other countries and international organisations,and Art. 24 ESCB Statute authorises them to enter into other auxiliaryfiscal operations24 (Art. 119 sec. 2, Art. 127 sec. 1 sentence 2 TFEU; Art. 2 sentence 2ESCB Statute).

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clearly violates this distribution of powers. Such a shifting of

powers would also be structurally significant, because the OMT

Decision could be superimposed onto assistance measures which are

part of the “Euro rescue policy” and which belong to the core

aspects of the EU Member States’ economic policy responsibilities

(cf. Art. 136 sec. 3 TFEU). The program in question can lead to a

considerable redistribution between the EU Member States, and can

thus gain effects of a system of fiscal redistribution, which is

not allowed by the European Treaties.

According to the ECB , the OMT decision was covered by its

mandate and does not violate the prohibition of monetary financing.

Its monetary policy is no longer appropriately implemented in the

Member States of the euro currency area because the so-called

monetary policy transmission mechanism is disrupted. In particular,

the link between the key interest rate and the bank interest rates

is impaired. Unfounded fears of investors with regard to the

reversibility of the euro have resulted in unjustified interest

spreads. The OMT, in the ECB view, were intended to neutralise these

spreads. The requirement for the purchase of government bonds on the

basis of the OMT Decision is that the benefitting Member State has

entered into agreements with the European Financial Stability

Facility or with the European Stability Mechanism on macroeconomic,

structural, budgetary and financial policy reforms, and complies

with the agreements. The OMTwere only intended to cut off

unjustified interest rate hikes. If a Member State does not comply

with its obligations, the purchases were to be stopped, even if this

will result in major economic difficulties for the Member State

concerned. Another condition is that the Member State has, or

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regains, access to the bond market so that the fiscally disciplining

effect of the interest rate mechanism is upheld25

The ECB unsuccessfully argued that the OMT decision can be based on

Art. 18.1. of the Protocol on the Statute of the European System of

Central Banks and of the ECB statuteThe purchase of government bonds

on the secondary market does not serve to finance the budgets of the

respective Member States independent from the financial markets, and

it is not aimed at rendering market incentives ineffective; it is

aimed at adapting interest rate levels to normal market activities.

Moreover, the European System of Central Banks is called upon to

support the general economic policies in the EUto the extent that

this does not conflict with maintaining price stability. However,

the ECB is independent in this respect (Art. 130 TFEU, Art. 7 ESCB

Statute) and will always undertake an autonomous analysis of the

overall situation26

The SMP/OMT programmes were adopted to counter the exceptional

circumstances in the financial markets which were hampering the

monetary policy transmission mechanism in the euro area and thereby

the effective conduct of monetary policy oriented towards price

stability. In other words, the divergence in government bond yields

was hampering the mechanism through which the ECB aims to influence

prices in the entire euro area via its interest rates. Under the

OMT, should this mechanism be disrupted by dysfunctional market

segments and the ECB’s rate signal not be transmitted evenly to all

25 Considering the Spanish, Italian, Irish and Portuguese bonds on themarket, the potential volume of purchases on the basis of the OMT Decisionwould currently amount to approximately EUR 524 000 000 000 (status of7 December 2012). The European System of Central Banks does not, however,intend to purchase the maximum possible amount of these bonds, but cannotpublish the envisaged amount for tactical reasons.26 The ECB's opinion paper was written by Frank Schorkopf, a Germanlegal expert.

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parts of the euro area, the ECB could intervene by buying, on the

secondary market (i.e. from banks and against market prices), the

securities that it normally accepts as collateral. Even if the

purchase of bonds will concern only selected countries receiving

EFSF/ESM support, the singleness of the monetary policy will be

safeguarded. Therefore, selectivity does not change the nature of

the instrument.

The Bundesbank

The Bundesbank was opposed to the OMT. Substantial purchases of

government bonds contain the danger of government budgets being

financed by monetary policy. As a result, the central bank's

independence and the goal of price stability are threatened. The

Eurosystem runs the risk of being dominated by fiscal policy.

Diverging interest rates in the eurozone cannot unequivocally be

taken as empirical evidence of distortions in the monetary

transmission mechanism. The conditionality of the OMT is questioned

by referring to the case of Greece. Financial markets are

circumvented, thereby lowering the pressure for fiscal discipline in

a country. There is the risk of increasing German public debt, as

central banks purchase government bonds of less creditworthiness..

Bundesbank claims that many of the measures are legally questionable

and tantamount to monetary financing in some cases. 27Particularly

since the ECB is essentially pledging to be the eurozone lender of

last resort, meaning it could end up being the only source of

financing for some countries. The Bundesbank also fears that its

27Deutsche Bundesbank, Stellungnahme gegenüber dem Bundesverfassungsgerichtzu den Verfahren mit den Az. 2 BvR 1390/12, 2 BvR 1421/12, 2 BvR 1439/12, 2BvR 1824/12, 2 BvE 6/12

17

balance sheet could be loaded up with fiscal risks since it will

likely be required to buy some peripheral bonds if the OMT is ever

activated. This is also a concern for the Bundestag and a potential

violation of German Constitutional law. In the view of the German

Bundesbank, the assumption of a disruption to the monetary policy

transmission mechanism is questionable and does not justify the OMT

Decision. According to the German Bundesbank, interest spreads on

government bonds cannot be split into either justified or irrational

components. A poorer economic development in a Member State

justifies a higher interest spread. The fact that a disruption to

the monetary policy transmission mechanism shall be tolerated if a

Member State does not comply with its obligations under agreements

with the European Financial Stability Facility or the European

Stability Mechanism shows that the OMT Decision is in fact not about

the effectiveness of monetary policy. We must remember that as a

member of the Euro-system the Bundesbank is obliged to implement all

decisions of the ECB Council under EU law; as a German public

authority it is, however, also obliged to abide by German

constitutional law (which puts much emphasis on central bank

independence and the primacy of price stability).

The FCC supporting the central Bank position highlighted that

Art. 123 of the Lisbon Treaty (which forbids any monetisation of

public debt) implies that the ECB may not buy sovereign debt on the

primary market or look to be the sole financier through large

secondary bond market purchases. The German Bundesbank argued that

the purchase of government bonds on the secondary market can also

disconnect the benefitting state’s financing terms from the

financial market if the market participants can rely on being able

to sell their government bonds to the Eurosystem at any time. The

sooner such purchases are made after issuing, and the higher the

18

purchase volume, the lower the risk. Moreover, a large-scale

purchase of government bonds carries considerable risk and can lead

to an ever-increasing amount of a Member State’s debts being assumed

by the Eurosystem. Every loss it incurs burdens the German federal

budget, so that the risks ensuing from purchases of government bonds

by the Eurosystem are no different, in economic terms, from those of

the European Stability Mechanism. Unlike the European Stability

Mechanism, the Eurosystem, however, lacks parliamentary monitoring.

The OMT entails the purchase of bad bonds, by that it violates ECB

independence and entails a high risk of heavy losses in the not

unlikely event that debtor states are forced out of EMU.

Advocate – General interim assessment of ECB monetary policy

legality January 14 2015

On the 14th of January, AG Cruz Villalon delivered

his Opinion in Gauweiler (C-62/14) on the legality of the Outright

Monetary Transactions (OMT) scheme of the European Central Bank

(ECB).28 In his view, the OMT programme is, in principle, in

compliance with the Treaties, as long as certain conditions are

observed if the programme is activated in the future. The case has

important implications for the constitutional framework of EMU and

the role of the ECB, but also for the relationship between the

German Constitutional Court (theBundesverfassungsgericht) and the Court

of Justice of the EU. The European Court of Justice has issued an

interim-ruling stated that the European Central Bank's

(ECB) Outright Monetary Transactions (OMT) program is compatible28 The ECB is in charge of conducting monetary policy for the euro area andits role is very narrowly defined in the Treaties. This role, however, hasevolved and expanded substantially in recent years, as the ECB hasannounced or adopted various ‘non-standard’ measures in response to theeuro area sovereign debt crisis.

19

with EU laws. 29 After the preliminary ruling on Wednesday, the issue

will subsequently be discussed by ECJ judges for several months

before a final ruling is made. The decision does not have direct

implications for asset purchases related to the ECB's quantitative

easing (QE) plans.

The idea is that the ECB will buy government bonds from euro

countries in trouble, i.e., when nobody else buys these bonds, or

their yield is becoming so high that the Member State will not be

able to cover interest payments on newly issued bonds, thus having

no more access to credit and risking default. Crucially, the Treaty

prohibits the ECB from acquiring government bonds directly (Art 123

TFEU) as this would amount to monetary financing, or becoming a

direct lender of last resort to a Member State. Instead, the ECB

would buy government bonds in the secondary market—that is, from an

institution that has bought these bonds first from a Member State—

rather than from a Member State directly. While the ECB had already

done this before, with the OMT programme there would be a formal

element of conditionality as well, as the Member State in question

would need to obtain financial assistance from the European

Stability Mechanism or the EFSF and comply with its conditions (i.e.

macroeconomic reforms negotiated between the Member State and the

troika: the Commission, the ECB and the IMF). 30

AG Cruz Villalon delivered Opinion that, acknowledged the

significance of the exchange for the dialogue between the German

Constitutional Court and31 the Court of Justice, and, second,

considered all concerns put forward by the national court. In doing29 "In his opinion today, Advocate General Pedro Cruz Villalón observes thatthe framing andimplementation of monetary policy are the exclusivecompetence of the ECB," the ECJ wrote in the accompanying press release.30 http://eulawanalysis.blogspot.com/2015/01/is-ecbs-omt-programme-legal-advocate.html

20

so, the AG came to the conclusion that the ECB is free to create and

implement a scheme like OMT, as long as it abides by certain limits

in doing so. Crucially, these limits are far more permissive than

those suggested by the German Court.

In Gauweiler, the case at stake, the German Court exercised

its ultra vires jurisdiction, coming to the interim conclusion that the

ECB’s actions went beyond the powers given to it in the Treaties.

Following its undertaking in Honeywell, the German Court referred the

matter to the Court of Justice before reaching a final decision.

Space precludes more careful consideration of this point, but it

should be noted that ultra vires and constitutional identity intertwine

in this case: first, because the German court used its conception of

democratic legitimacy to ‘sharpen’ its ultra vires jurisdiction, in the

sense that, for the first time, it was citizens’ right to vote that

gave them standing to challenge EU action for going beyond EU

primary law. And second, because the German Court went on to suggest

that further review on the basis of constitutional identity would or

may follow a Court of Justice’s decision that the OMT scheme is not

in fact ultra vires: whether the OMT scheme could violate the

constitutional identity of the Basic Law would depend on the Court

of Justice’s specific interpretation of the scheme in conformity

with EU primary law.

The AG emphasized the ‘functional difficulty’ of the reference:

in short, that the Court of Justice should not issue a preliminary

31 The case was brought to the court by a group of German citizens, and thepolitical party Die Linke. They claimed that the German government hadfailed to take sufficient action to the question the ECB's bond-buyingprogramme.

21

ruling requested by a national court if that request ‘already

includes, intrinsically or conceptually, the possibility that it

will in fact depart from the answer received’ [36]. This, the AG

continues, is not the intended or proper use of the preliminary

ruling procedure. But was this such a situation? In this respect, it

is problematic that the German Court may still conduct its own and

independent ‘identity review’ after the Court of Justice has

conducted its ultra vires review. Nevertheless, the AG relied on the

principle of sincere cooperation to argue that trust is required in

this situation: the Court of Justice should provide a constructive

ruling, ‘on the basis of a particular assumption regarding the

ultimate fate of its answer’ [66]. So there we have it: since both

courts are under a duty to cooperate sincerely and to trust each

other, the Court of Justice should give the requested ruling to the

German court, trusting that the latter will, in turn, ‘do the right

thing’. The AG was very clear as to what he considered that to be:

‘it seems to me an all but impossible task to preserve this Union,

as we know it today, if it is to be made subject to an absolute

reservation, ill-defined and virtually at the discretion of each of

the Member States, which takes the form of a category described as

‘constitutional identity’. That is particularly the case if that

‘constitutional identity’ is stated to be different from the

‘national identity’ referred to in Article 4(2) TEU.’

The applicants had argued that the scheme should be classified

as an economic policy measure with the aim of saving the euro by

changing certain flaws in the design of monetary union, i.e. by

pooling the debt of euro countries. They also emphasized the effects

of the attached conditionality on Member States’ economic policies.

All this, they argued, placed the OMT scheme beyond the merely

supporting role that the ECB may have in economic policy, according22

to the Treaties. The German Constitutional Court agreed, based on

various features of the OMT scheme: its conditionality and

parallelism with ESM and EFSF financial assistance programmes (as

well as its ability to circumvent them) and its selectivity (in that

OMT bond-buying would only apply to select countries, whereas

measures of monetary policy typically apply to the whole currency

area).

The OMT in AG opinion program is an incomplete measure (as not

all its features were specified in the ECB press release, and the

program has never been implemented). The AG considered that the

programs basic features were known and could be put through an

initial proportionality assessment, but that a full review of

proportionality will only be possible once or if the OMT program is

ever fully regulated. The result of that initial proportionality

assessment was positive: the basic configuration of the OMT program

passed the tests of suitability, necessity (the AG considered that

the limitations suggested by the referring court would likely render

the program ineffective) and proportionality stricto sensu. The broad

discretion granted to the ECB had a bearing on the application of

the proportionality test. In sum, the programme was considered

proportionate in principle, subject to the ECB complying with the

requirements of proportionality (among them the duty to give

reasons) if the program is ever implemented.

The AG considered that the prohibition of monetary financing

(as a manifestation of fiscal discipline) was one of the features of

the constitutional framework of EMU that contributes to the

attainment of a higher objective, the financial stability of the

monetary union (Pringle). Exceptions to this prohibition must thus be

interpreted restrictively, and a formalistic approach must be

23

avoided: the focus must be on the substance of the measure, and not

on whether the bond-buying occurs directly or in the secondary

market.

The referring court had identified various technical features

of the OMT scheme as running counter to this prohibition: the ECB’s

lack of preferential creditor status and waiver of rights, its

exposure to excessive risk, the disruptive effects of holding the

bonds until maturity, the fact that bond-buying in the secondary

market would take place on a large scale and only a short time after

their issue (making it too similar in its effects to buying bonds

directly from the state) and that the ECB’s action would encourage

new investors to buy newly issued bonds. In very broad terms, the

German court’s view was that these features amounted to a

circumvention of the prohibition of monetary financing because, even

though the bond-buying would take place in the secondary market, it

would disrupt the market and undermine fiscal discipline to an

intolerable degree

The ECJ counsel takes the view that "the objectives of the

programme are in principle legitimate and consonant with monetary

policy...The ECB must have a broad discretion when framing and

implementing the EU’s monetary policy, and the courts must exercise

a considerable degree of caution when reviewing the ECB’s activity,

since they lack the expertise and experience which the ECB has in

this area." Also, the Advocate General said that "the ECB must give

a proper account of the reasons for adopting an unconventional

measure such as the OMT programme, identifying clearly and precisely

the extraordinary circumstances that justify the measure.

24

This interim ruling represents a victory for ECB president

Mario Draghi. He introduced the OMT program in 2012. The mechanism

involves the ECB buying the bonds of euro zone countries that are in

bailout programs. The OMT program is different to quantitative

easing (QE), which sees a central bank expanding its money supply by

buying up assets with new money. Although a full QE program would be

on a broader scale than OMT, the provisional ruling clears the way

for the use of the unconventional economic tool. Speculation is

mounting that a QE program could be introduced when the ECB's

governing council meets in Frankfurt on January 22nd 2015.32

Mario Draghi has commented on criticisms of him, particularly

from Germans. He warned that the ECB has to act in the best interest

of 19 countries, not just one, adding: Significantly the ECB

statement says: "The ECB must have a broad discretion when framing

and implementing the EU’s monetary policy, and the courts must

exercise a considerable degree of caution when reviewing the ECB’s

activity, since they lack the expertise and experience which the ECB

has in this area." This is a non-binding ruling, the final decision

is expected in the next four to six months - but it is likely that

the ECJ will uphold the decision

EBC decision January 22 2015

The European Central Bank (ECB) on January 22nd 2015 announced a

quantitative easing (QE) program based on the contributions made

from national central banks and the central bank is planning to

design a sovereign debt purchase program based on the paid-in

32 A number of German officials, including Bundesbank president JensWeidmann, have argued that the ECB does not have the legal power to use QE.

25

capital contributions made by euro zone central banks. 33The bank’s

president, Mario Draghi, said the central bank would begin buying

bonds worth 60 billion euros, or about $69.7 billion, a month. That

is more spending than the €50 billion a month that many analysts had

been expecting. The long-awaited program, known as quantitative

easing, is meant to spur growth in the listless eurozone economy and

to raise inflation to healthier levels. In December, inflation in

the 19 countries of the eurozone fell below zero and raised the

specter of deflation, a sustained decline in prices that can lead to

higher unemployment and that is notoriously difficult to reverse.34

The policy announced on Thursday comes more than six years after the

Federal Reserve undertook its first quantitative easing program in

2008. Indeed, in what has long been seen as a major blunder that33 Every national central bank pays a certain amount of capital into theECB. For example Germany pays in 17.9 percent of the total contributions,while France contributes 14.2 percent. Cyrpus, meanwhile, pays the leastwith 0.15 percent of the total34 Financial markets greeted the news favorably. The benchmark Euro Stoxx 50index was up 1.6 percent, with financial firms’ shares among the gainers,on hopes that the bond buying will spur growth and lending. Bond yields insome eurozone countries hit new lows, including countries that mightbenefit most from the central bank’s program. The yields on 10-yeargovernment bonds in Italy dropped to 1.56 percent and in Spain to 1.39percent.

26

worsened the problem, the European Central Bank actually raised

interest rates in 2011.

Programs of quantitative easing by the Federal Reserve in the

United States and by the Bank of England in Britain have helped the

economies of those two countries recover from the global financial

crisis more successfully than the eurozone has been able to. If

successful, quantitative easing would push down market interest

rates in the eurozone and make it easier for businesses and

consumers to borrow money, helping to stimulate the economy and

restore inflation. Quantitative easing could also have a

psychological impact, helping to raise expectations that inflation

will begin to rise and thus encourage people to spend now rather

than wait.35 The European Central Bank will coordinate the buying,

Mr. Draghi said, but will delegate some of it to the central banks

of national central banks. In a further compromise, some of the risk

from bond buying will be taken by the European Central Bank and some

by national central banks.

The central bank would begin buying government bonds based on

each country’s share of the central bank’s capital, which is

commensurate with their population and gross domestic products. The

central bank would not buy more than 33 percent of any country’s

outstanding bonds, nor more than 25 percent of any bond issue. The

central bank will buy the bonds on the open market, he said, to

allow the market to set the price. Those conditions appear intended

35  the bond buying would continue through September 2016 or “until we see asustained adjustment in the path of inflation which is consistent with ouraim of achieving inflation rates below, but close to, 2 percent over themedium term.http://www.nytimes.com/2015/01/23/business/european-central-bank-bond-buying.html?_r=0

27

to address legal challenges to bond buying by the central bank.36 The

bank would have equal status to other bond holders — rather than

holding itself above other investors and expecting to be paid back

first in the event of problems. That will be important to private

investors, because if the central bank held itself out as a

privileged bondholder, effectively passing more risk on to other

bond holders, other buyers might undermine the stimulus program by

demanding higher interest rates.

Shortly after the ECB meeting, a legislative election took

place in Greece on 25 January 2015 to elect all 300 members to the

Hellenic Parliament in accordance with the constitution 37 The most

pressing issue regardless of which government is elected will be the

conclusion of the final review of the second bailout program and

negotiation of the third assistance package/credit line to secure

Greece’s sovereign funding for 2015 onward. The Troika programme

ends at the end of March 2015 , so the time pressure for a deal will

be very high regardless of which party is in power.

A SYRIZA-led government too would likely ask for an extension

to give it some time before presenting alternative proposals to its

36 Greece, he said, would have to continue adhering to the terms of itsbailout program, which is also being administered by the InternationalMonetary Fund and the European Commission. That adherence is currentlyuncertain, as Greece awaits national elections this weekend that couldresult in a new government seeking to revise the terms of the bailout. Inaddition, the European Central Bank already owns a large proportion ofGreek bonds and would not hold more than 33 percent of the tota

37 Having topped last year’s European parliament elections, the radical leftand anti-austerity party Syriza is ahead in the polls. Syriza wants torenegotiate the terms of Greece’s bailout deal. Many analysts believe theelection, which outgoing prime minister Antonis Samaras of the centre-rightparty New Democracy (ND) has described as a referendum on Europe, coulddrag the eurozone back into a crisis.http://www.theguardian.com/news/datablog/2015/jan/20/greece-election-2015-the-politics-and-economics-in-numbers

28

European partners and avoiding the Troika deadline acting as a

Damocles sword over the negotiations, which would likely weaken its

stance. Whether any such extension is granted will be a strong

indication how Europe will look to deal with Greece. The E.C.B.

explained that it would buy no more than 33 percent of a country’s

outstanding bonds. For countries that have issued lots of government

bonds, like Italy and France, the impact of the program could be

significant since it would take quite some time to hit that

benchmark. For Greece, that has experienced bailouts and, as a

result, have less debt trading in the market, the opposite could be

true and the E.C.B. could reach that target quickly, pushing those

countries out of the program. Greece has the highest interest rates

in Europe and has been hurt the most by deflation, so such an

outcome could be disastrous..

Important concessions have been offered to the German

Bundesbank to facilitate an announcement on sovereign-debt purchases

after the ECB’s meeting on Thursday. But those concessions could

open further divisions within the 19-member economic and monetary

union, without guaranteeing the effectiveness of the attempt to

overcome the eurozone’s low inflation and rebuild political

cohesiveness.38 Bundesbank President Jens Weidmanhas has argued there

is no need for more monetary stimulus. The German central bank chief

recently said that falling oil prices are already providing an

economic boost, and that further monetary stimulus could undermine

the incentive for governments to make necessary structural reforms.

38 A significant additional factor in the complex ECB discussions on full-scale quantitative easing is last week’s Swiss National Bank decision toend its unilateral peg, in force since September 2011, between the Swissfranc CHFEUR, +0.84%  and the euro EURUSD, -1.75% That decision led to asharp revaluation of the Swiss currency.http://www.marketwatch.com/story/german-opt-out-could-fatally-weaken-eurozone-quantitative-easing-2015-01-20

29

Weidmann has long been vocal about his concerns that the single

currency area's central bank could miss its mandate to keep prices

stable and end up rescuing the governments in the countries plagued

with economic problems.

QE could present risks for taxpayers of euro zone economies

"unless the purchases would be limited to countries with the highest

credit-worthiness or each central bank bought bonds of its own

government at their own risk,"39 Weidmann's position has been echoed

by the other German member of the ECB’s decision-making body,

Executive Board member Sabine Lautenschlaeger, who thinks that

purchases of government debt should be the “last resort” of monetary

policy; at least seven of the 25 Governing Council members are

leaning against QE, including Executive Board member Yves Mersch.40

The effective German opt-out from comprehensive support for

other EMU countries rekindles memories of the Bundesbank’s surprise

revelation in September 1992, when it said it would no longer

intervene to shore up the Italian lira in the exchange-rate

mechanism of the European Monetary System, the EMU’s forerunner.

This loophole had been agreed in a secret document (‘the Emminger

letter’) between Bundesbank President Otmar Emminger and West German

Chancellor Helmut Schmidt in November 1978. Draghi’s QE concessions

may not assure the program’s size and effectiveness. As well as the

details of the risk-sharing mechanism, the ECB needs to decide a39"Such purchases might create new incentives to run up debt, besides addingto the reform fatigue in a number of countries," he cautioned. Nor is thereany guarantee that quantitative easing would indeed have the intendedimpact on the economy, Weidmann pointed out. http://wbponline.com/Articles/View/41413/preview-buba-chief-weidmann-speaks-before-crucial-ecb-meeting40 The German position could get a positive response from Klaas Knot, theDutch central bank governor, and Ardo Hansson, Head of Estonia’s centralban

30

quota system for individual countries’ purchases, which will no

doubt set a ceiling on overall transaction volumes.

This will be complicated by the insistence of the Bundesbank

and possibly of other central banks that QE transactions should

neither include bonds yielding negative interest rates, nor should

have a direct effect on interest rate-setting on the primary market.

Both of these additional conditions will have an impact on the ECB’s

intention to raise its balance sheet by 1 trillion euros in the next

two years.

Conclusion

Some experts express their position that the GCC ruling exposed

a gaping flaw in the Euro area as an institutional construct. If

national courts have precedence over federal courts in interpreting

the "federal constitution", i.e. the EU treaty, this proclaims that

Europe is definitely not a federation, but a hybrid, loose

construct.41 We agree with the Courts reasoning that the ECB not

only overstepped its competence for monetary policy, but also

interfered with the sovereignty of euro member states and

additionally OMT violated the European Treaty’s prohibition of

monetary financing of government debt (Article 123 TFEU).42 In the

light of art. 123 TFEU a ECB “voluntary” participation in a debt

restructuring or rescheduling could amount to monetary financing,

and therefore the ECB should be prevented from accepting losses

41http://www.ft.com/cms/s/0/8a64e3ac-8f25-11e3-be85-00144feab7de.html#ixzz2u3VDMuTG

42 The court decision will have a secondary effect by making even lesslikely that the ECB will move to across-the-board quantitative easing (QE)of the sort carried out in the US, UK and Japan in recent years.

31

deriving from the restructuring of Member States’ sovereign bonds in

its portfolio. However there is some option for further European

court possible interpretation of the ECB’s OMT that would conform

with the primary law of the European Union, the present GCC ruling

states that the OMT might not be objectionable, if it would not

undermine the conditionality of the assistance programs of the EFSF and the ESM, and would

indeed only be of supportive nature with regard to the economic policies in the Union. In

light of Art 123 TFEU, this would probably require that the acceptance of a debt cut must be

excluded,” and that “government bonds of selected Member States are not purchased up to

unlimited amounts.

One benefit of the case is that it has increased scrutiny on

the OMT with the ECB which might be forced to published the legal

documents which will layout the practical functioning of the OMT.

The decision of the ECB from 2012 in safeguarding the composition

of the euro currency was wrong, because this is not a task of

monetary policy but one of economic policy, which remains a sole

responsibility of the UE Member States. The Lisbon Treaty clearly

states that the decisions on the composition of the euro currency

area are the responsibility of the Council, the European Parliament,

the Commission and the Member States and the ECB can only express

its opinion in the decision making process concerning the abrogation

of the derogations 43

The GCC has a legal stand for such harsh judgments by the

virtue of being empowered with the protection of the constitutional

identity and of the limits of the transfer of sovereign powers to

the European Union44 The GCC is obliged under German law to work43 Pursuant to Art. 140 TFEU, pursuant to Art. 139 TFEU, i.e. for theaccession of new Member States to the euro currency area (Art. 140 sec. 3TFEU).44There are several interesting cases, for instance for the Republic ofEstonia: Riigikohus, Judgment of 12 July 2012 – 3-4-1-6-12 –, sec. no. 128,223; for the French Republic: Conseil constitutionnel, Decision no. 2006-540 DC of 27 July 2006, 19th recital; Decision no. 2011-631 DC of 9 June

32

towards the revocation of acts of the EU if they are not covered by

the integration program, and to limit domestic consequences entailed

by such acts. It seems that the GCC sided with the Germany’s

central bank assessment by announcing that the OMT plan45 exceeds

the ECB's monetary policy mandate and therefore circumvents the

powers of the member states. Such program violates the prohibition

of monetary financing of the budget. Further the court underlined

specific condition under which only the OMT could be redeemed as

meeting legal requirements with the most fundamental that the

acceptance of a debt cut must be excluded. and government bonds of

EU Member States will be not purchased up to unlimited quantities.

As a result any program not meeting these would no longer count as

monetary policy, permissible under the Treaty, but amount to

encroachment on the Member State prerogative for pursuing economic

policy and thus depriving the Bundestag of its fiscal sovereignty.46

The FCC reserves the right for reviewing the applicability and

binding effect of acts of EU institutions and other agencies in

Germany insofar as these acts provide the basis of actions taken by

German authorities.

2011, 45th recital; for the Republic of Poland: Trybunal Konstytucyjny,Judgments of 11 May 2005 – K 18/04 –, n. 4.1., 10.2., of 24 November 2010 –K 32/09 –, n. 2.1. et seq.; of 16 November 2011 – SK 45/09 –, n. 2.4.,2.5., with further references; for the Kingdom of Sweden: Chapter 10 Art. 6sentence 1, Form of government; for the Czech Republic: Ústavni Soud,Judgment of 31 January 2012 – 2012/01/31 – Pl. ÚS 5/12 –, para. VII.).45 The OMT decision envisaged a targeted purchase of government bonds ofselected Member States, however, the spreads on government bonds issued bythese states are levelled by changes in market conditions, and thegovernment bonds of other Member States are eventually placed at adisadvantage. The Bundesbank will likely have to keep implementing ECBpolicies despite it now being well known that it fundamentally disagreeswith them46http://www.iconnectblog.com/2014/02/an-end-to-european-multilateralism-a-comment-on-the-german-bundesverfassungsgerichts-omt-decision/

33

The GCC when referreing the cae to the CJEU for a preliminary

ruling on whether the ECB had acted beyond the competences assigned

by the European treaties was fully aware of the fact that the CJEU

might judge in favour of the ECB and that this would imply

subsequent constitutional complaints that would assert that the ECJ

had ruled beyond its competences. The ruling helps the Court from in

cleaning suspicion of judicial activism and infringement on the

right of the German parliament to exercise discretion in its

policymaking.47

47 The German court decision helps Chancellor Angela Merkel draw some morecredible red lines for what Germany can accept in the EU and strengthensher negotiating hand with another member states; see Jacob FunkKirkegaard, The German Establishment - Principled butPragmatichttp://rhg.com/notes/the-german-establishment-principled-but-pragmatic

34

The decision to send the case to Luxembourg was actually good

for the euro, because the ECJ as a European body was unlikely

to overturn an anti-crisis measure which has been instrumental

in restoring calm to the markets.

35

36