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Twin Tests for the EU

MUNICH – June is shaping up to be a fateful month for the European Union. On June 21, the German Constitutional Court will rule on a challenge to a bond-buying program that is central to the European Central Bank’s response to the continent’s debt crisis. Two days later, voters in the United Kingdom will decide whether the UK should exit the EU. Both decisions will have serious consequences for the EU’s long-term political and economic stability.

The judgment by the German court is the less spectacular of the two, but it addresses the heart of the ECB’s interpretation of the Maastricht Treaty. The plaintiffs, who include members of the Bundestag, have questioned whether the Bundesbank should be allowed to participate in the ECB’s outright monetary transactions (OMT) program, arguing that it violates Articles 123 and 125 of the EU Treaty, which they claim forbids government bailouts with the printing press. In particular, they have objected to the ECB’s unlimited commitment (“whatever it takes,” in ECB President Mario Draghi’s famous phrase) to the purchase of crisis-hit countries’ government securities.

Under the OMT program, investors who buy such securities no longer need to worry about a potential default. Before the risk of bankruptcy presents itself, the ECB will be available to buy the endangered securities off investors’ portfolios. All that is required is an application to the European Stability Mechanism, a fund capable of providing rapid financial assistance to all members of the eurozone. As a result, the risk of bankruptcy is transferred from the bondholders to taxpayers in economically healthy eurozone countries, who would permanently lose interest income on the government bonds.

The question before Germany’s Constitutional Court is whether that arrangement, which has already received the blessing of the European Court of Justice, is compatible with the country’s Basic Law – specifically, whether OMT undermines the Bundestag’s budgetary authority. This is not a question that the ECJ can decide.