Testing the Eurozone’s Safety Net

On October 14, the European Court of Justice convened to begin assessing the German Constitutional Court’s ruling that the European Central Bank's “outright monetary transactions” scheme is illegal. This is a dangerous time for OMT – the eurozone’s most potent crisis-management tool – to be called into question.

PRINCETON – On October 14, as yet another financial storm gathered over Europe, the European Court of Justice convened in Luxembourg. In the coming months, the ECJ will assess the German Constitutional Court’s ruling that the European Central Bank’s “outright monetary transactions” (OMT) scheme – which allows the ECB to purchase weaker eurozone countries’ government bonds, in exchange for compliance with the rules of the European Stability Mechanism (ESM) – is illegal.

The mere announcement of OMT – the eurozone’s most potent crisis-management tool – immediately calmed panicked markets in the summer of 2012, prompting ECB President Mario Draghi to describe it as “the most successful monetary-policy measure undertaken in recent time[s].” That is why the German court’s ruling earlier this year that OMT oversteps the ECB’s authority under the Lisbon Treaty was met with consternation.

The German court did, however, pause to ask the “Europe-friendly” ECJ – the ultimate arbiter of European law – for its opinion. And, once the 2012 financial-market panic subsided, it seemed possible that OMT may have served its purpose, without ever having to be called to duty.

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