Decisive Days for Euro High Court Considers ECB Bond Buys
Germany's highest court is currently reviewing the European Central Bank's controversial bond-buying program to shore up euro-zone crisis countries. A decision in Karlsruhe could determine the common currency's fate.
Somebody at the European Central Bank (ECB) must have pressed the wrong button. A fire alarm went off at the bank's high-rise headquarters in Frankfurt, everything was shut down, including the elevators, and firefighters rushed to the scene.
The false alarm hit the monetary watchdogs last September shortly before ECB President Mario Draghi made the dramatic announcement that he would purchase sovereign bonds in "unlimited quantities" to help debt-ridden countries like Italy, Spain and Greece.
Now, alarm bells are again ringing inside the ECB tower -- only this time it's no drill. On Tuesday and Wednesday of this week, Germany's Constitutional Court in Karlsruhe will rule on the euro crisis aid measure that Draghi announced last fall. As Draghi and his monetary experts on the executive floor of the bank were told by their constitutional experts long ago, this court decision could have an enormous impact on the bank's policies -- and potentially spell the end of the euro.
Over the past few months, Draghi and the heads of government in the European capitals have felt confident about the outcome of the impending ruling. After all, the judges in Karlsruhe have always ultimately endorsed Germany's contributions to euro-zone bailout programs. Nevertheless, the list of questions compiled by the judges for this week's deliberations indicates that everything may be at stake this time around.
When Draghi recently visited French President François Hollande in Paris, the main topic of discussion was not the state of the French economy or Southern Europe, but rather the question of what will happen in Karlsruhe. Only one hour by train away from Frankfurt, a conflict is brewing that already appeared to have been resolved last autumn.
"This is good, very good news," then-Italian Prime Minister Mario Monti said in response to the announcement that the Federal Constitutional Court had refused to issue a temporary injunction against the permanent European bailout fund known as the European Stability Mechanism (ESM) and the fiscal pact. Over the following days, the euro climbed to its highest exchange rate in months. The court still had to decide on the main constitutional complaint, but a pragmatic decision in favor of the bailout measures seemed to be nothing more than a technicality.
Now, it appears they were celebrating too soon.
'People at the ECB Are Really Afraid'
The plaintiffs in Karlsruhe -- led by euroskeptic Peter Gauweiler, a member of parliament with the conservative Christian Social Union, the Bavarian sister party to Chancellor Angela Merkel's Christian Democrats -- returned with a more comprehensive constitutional challenge to Draghi's unlimited bailout pledge. The battle over the euro resumed. For the last few days, ECB head Draghi has constantly consulted with his aides on the latest developments of the debate in Karlsruhe and what people in Germany are saying about it. Insiders in the southwestern German city have picked up on this frantic need for information: "The people at the ECB are really afraid," says an official in Karlsruhe.
As well they should be. Indeed, leading authorities on this area of German law say that the European Central Bank's bond buying program is barely covered by the ECB's mandate -- and thus exceeds the constitutional limits established for Germany's role as a member of the euro zone. The critical view of the legal experts is largely shared by the German central bank, the Bundesbank, which says the ECB is overstepping its authority. According to one Bundesbank official, decisions to bail out EU states or even rescue the monetary union "are reserved for other actors, primarily governments and parliaments."
The fact that the three letters "ECB" play a central role in a decision by the German Constitutional Court is in itself a historical turning point for Europe. This is the first time that the constitutional judges are taking a critical look at the work of a key European institution. Previously, only the role of the German parliament or the German government had come under fire. "There is no way to avoid this," according to the official in Karlsruhe.
Concerns for German Taxpayers
The fact that the announced bond-buying program could involve hundreds of billions of euros for which -- if things go wrong -- German taxpayers could also be held accountable makes an examination of the independent central bank's actions unavoidable.
According to the EU treaties, it is not explicitly prohibited for the bank to purchase sovereign bonds as long as they are not bought directly from the issuing states themselves, but rather from financial service providers. But already back in its decision last September the Federal Constitutional Court declared: "An acquisition of government bonds on the secondary market by the European Central Bank aiming at financing the members' budgets independently of the capital markets" is "prohibited."
The European Court of Justice (ECJ) in Luxembourg, the European Union's high court, also recently ruled that monetary policy does not include supporting the budgets of ailing member states -- and monetary policy, not financial policy, is the domain of the ECB. "Bailing out countries is not part of the ECB's mission," says Freiburg law professor Dietrich Murswiek, who represents Gauweiler's complainants.
Murswiek contends that the key difference between permitted monetary policy and prohibited national budget financing lies in the goal of a given initiative. "Does it safeguard price stability? This indicates monetary policy," he says. "Or is it designed to help one or more countries by creating financing conditions that do not reflect current market prices? This would then be a prohibited type of state financing," he concludes. The professor's views on this issue are backed by most experts on European law.
Criticism from Bundesbank President
Even Draghi basically admitted that the goal of the initiative is not price stability when he said that he wanted "to do everything necessary to save the euro." And isn't it perfectly normal, pragmatists at the ECB may ask, that their bank be able to do everything in its power to prevent individual countries from exiting the common currency? Still, Bundesbank President Jens Weidmann also opposes such pragmatism. In a statement submitted to the court, he chose clear and critical words: "In view of the fact that it still consists of sovereign nation states, the current composition of the monetary union cannot be guaranteed -- at least not by the central bank."
The ECB has appointed Frank Schorkopf, a professor of European law in the central German town of Göttingen, to present its view of the matter in Karlsruhe. He argues that the common currency has been established for an unlimited amount of time, and that this forms the basis of the objectives and mission of the ECB and the national central banks of the euro system. Schorkopf concludes that there can be no objection to Draghi's initiative.
He goes on to say that the ECB's bond-buying program merely aims to counteract disturbances on the financial markets. The idea, he insists, is to prevent "excessively high-risk premiums" that are introduced when market players fear a "collapse of the monetary union." Furthermore, he argues, there simply aren't that many junk bonds that could be purchased by the ECB on today's market.
By contrast, the experts at the Bundesbank point out that crisis-ridden countries could be encouraged to launch more sovereign bonds on the market "because financial market players can be sure that they can sell newly issued securities for a minimum price to the euro system." They argue that trading would heat up even more if the ECB "directly" purchased bonds.
Potential to Blackmail System
Bundesbank experts are highly critical of Draghi's by-any-means-necessary pledge. They say that merely suggesting a guarantee for the continued existence of the monetary union gives governments a certain potential to blackmail the euro system. The Bundesbank officials say that this could have a dramatic impact and jeopardize the independence of monetary policy.
According to the plaintiffs, these are not academic questions posed by monetary bankers. Murswiek argues that the purchasing program to date has already allowed banks to dump junk bonds on the ECB, transforming the central bank into "Europe's bad bank," as he calls it. Furthermore, the Bundesbank, and thus the German national budget, will be partly responsible for covering losses that the ECB has to absorb.
Unlike the central banks in many countries, such as the United States and Japan, the ECB is allowed "to target the acquisition of bonds from countries with poor credit ratings." This leads to significant risks on the bank's balance sheets. Large losses by the ECB, though, would place a burden on the budgets of the member states. The Bundesbank has already increased its level of risk provisioning, which will diminish the returns enjoyed by the German government.
Consequently, on Tuesday and Wednesday of this week there will be a European family row of sorts before the court in Karlsruhe, with the ECB pitted against the Bundesbank. One thing is certain, the judges are likely to ask endless questions.
- Part 1: High Court Considers ECB Bond Buys
- Part 2: An Air of Secrecy