Germany’s Case Against the ECB

MUNICH – Germany’s Constitutional Court is preparing what might become the most important decision in its history. Last September, the court allowed the German government to sign the Treaty Establishing the European Stability Mechanism (ESM), the eurozone’s permanent intergovernmental rescue facility. Now, however, it may try to stop the European Central Bank’s so-called outright monetary transactions (OMT) program (the ECB’s pledge to buy, without limit, the government bonds of troubled eurozone countries that subject themselves to the ESM’s conditions).

To be sure, the German court has no jurisdiction over the ECB – and thus has no power to judge its actions. The only institution that does have that power is the European Court of Justice in Luxembourg. But Germany’s Constitutional Court can judge whether the actions of EU institutions are compatible with its constitution and the European Union treaties.

If the court finds that the ECB’s actions are unlawful, it can constrain German institutions – even the German parliament. For example, it could forbid the Bundesbank from participating in the OMT program. Or it could rule that the German government’s participation in the ESM must be conditional on the ECB’s willingness to limit OMTs. Udo Di Fabio, a renowned former judge on the court, has argued that the tribunal could even force the German government to unwind the EU treaties if it does not succeed in curbing the OMT program.

The OMT program’s supporters point out that it has calmed the financial markets by affirming the ECB’s readiness to step in as a lender of last resort and buy sovereign debt before a country goes bust. By driving the market to a so-called “good” equilibrium, such a country’s yields remain low, and it can continue to borrow. They point out that central banks all over the world are undertaking similar actions to stabilize markets. The Federal Reserve, in particular, has bought huge quantities of US government bonds.