OMT’s German Trial

TILBURG – On June 12, the eyes of politicians, economists, analysts, and investors will alight briefly on the leafy German town of Karlsruhe, as the German Constitutional Court holds hearings on the legitimacy of the European Central Bank’s “outright monetary transactions.” The OMT scheme permits the ECB to purchase weaker eurozone countries’ government bonds, on the condition that these countries’ authorities implement European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programs. The court’s ruling is expected by the end of the summer.

Anti-euro groups, which have been proliferating across Europe, hope that the court will decide that the OMT program violates either the European Union treaties, the ECB’s statute, or Germany’s constitution. But, while OMT may well turn out to be a mistake, the court does not actually have the constitutional authority to forbid the ECB from pursuing it.

Given that judicial decisions are ex post, not ex ante, the court cannot prevent OMT before it is activated. The ECB has stated that it would initiate OMT when needed, and under strict conditions. While the ECB – like most other EU institutions – has a poor track record on adhering to rules, even its own, the assumption that OMT will be no different is insufficient to justify a ruling against it.

As it stands, the judges in Karlsruhe can assess only the established procedure governing how and when OMT would be activated. As long as OMT is perceived to be compatible with EU treaties and with the German constitution, which seems likely, the judges will not block the program.