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Outright Monetary Infractions

MUNICH – The German Constitutional Court has delivered its long-awaited decision on the European Central Bank’s “outright monetary transactions” program. Since its launch in 2012, the OMT program has allowed the ECB to buy, if necessary, unlimited amounts of troubled eurozone countries’ government bonds, provided the affected countries subscribe to the rules of Europe’s rescue fund, the European Stability Mechanism.

Thousands of Germans appealed to the Constitutional Court against the OMT program, arguing that it violates Article 123 of the Treaty on the Functioning of the European Union, which bars monetary financing of eurozone governments, and that it imposes substantial risks on German citizens as taxpayers. The Court has now declared that it fully endorses the plaintiffs’ arguments, and that the OMT program does indeed violate EU primary law.

But, rather than issuing a formal ruling that would constrain the Bundesbank and the German parliament, as it could have done, the Court asked the European Court of Justice for its opinion. At first sight, this might seem promising for markets, which most likely expect the ECJ to rubber-stamp the OMT program. But things are not so simple.

Germany’s Constitutional Court has not waived its right to the final word about whether European institutions’ actions are compatible with the German constitution. If it finds that the ECJ is interpreting the treaty in a way that violates the German constitution, it has the power to force the German government and parliament to renegotiate the treaty or ask for a referendum.