Contributed by Blankfiend, of Fibs and Waves.
Ever since Draghi announced his Outright (ILLEGAL) Monetary Transactions program, I have been hammering home the point that it is in violation of Article 123 of the TFEU. I won't rehash my arguments here. Rather, I'd like to explore the potential for an actual legal challenge being mounted against OMT, how it might arise, and how it might play out.
As you know, Jens Weidmann, the President of the Bundesbank, has been rather vocal in his dissent since OMT was announced. Is he doing this just to be a thorn in Draghi's side, or does he have further plans that may go beyond just talking?
Well, I certainly do not know the answer, but I suspect we will find out soon enough - probably when Spain is granted access to an Enhanced Conditions Credit Line (ECCL). Once this occurs, the ECB will then be in a position to actually launch its first bond purchases under the OMT program. As a member of the ESCB, the Bundesbank will be required to participate in accordance with its capital key. Hence, it will have to buy 27% of whatever amount of short maturity Spanish debt the ECB decides to buy under OMT.
Will Weidmann just roll over and allow this? Does he have a choice? Why has he not done something already? I'll address these in reverse order.
Really, he has done something already. He has set the stage for a potential legal challenge to OMT, without actually bringing a suit. I am quite sure he has not set this stage in order to encourage Merkel to bring suit against the OMT, as she would never voluntarily do so. Rather, he may be waiting, hoping that the very threat of OMT alone might achieve some stabilization of sovereign debt markets - which it in fact has. However, this can only last so long, and sooner than later the market is going to demand that OMT actually be employed. If Weidmann intends to act, that will be the time.
As to how he might act, he really has only one choice. To the best of my limited knowledge, the Bundesbank acting alone could not bring a legal challenge against the ECB. The German government would have to do so. However, the Bundesbank very well could refuse to participate in OMT due to its illegality.
Such a refusal would undoubtedly bring the ECB to launch its own suit with the ECJ to try to enjoin Bundesbank participation. On legal grounds alone, my opinion is that this would be a case that the Bundesbank should win. However, with the ECJ, things are rarely decided on legal grounds alone. The legal argument would be that OMT establishes a "credit facility ... in favor of central governments" in violation of Article 123. My fear is that the ECJ could severely narrow the definition of a credit facility so as to exclude the OMT program. For example, they could say that a credit facility has to be an open ended, unconditional source of direct lending, which the OMT is not. Of course, this would seem to blend what are currently two separate and unrelated prohibitions in Article 123 - one against credit facilities, and the other against direct purchases. It would also be an unwarranted narrowing of the definition of a credit facility. Nevertheless, I expect that the political animals at the kangaroo court known as the ECJ would find some way to justify OMT and mandate Bundesbank participation.
However, that might not be the end of the story. The German Constitutional Court has vowed to review the constitutionality of OMT in December. Given the jurisdictional restrictions of the GCC, such a review would almost necessarily have to confine itself to the question of whether OMT violates Article 88 of the German Constitution, which I quote below:
The Federal Bank – The European Central Bank
The Federation shall establish a note-issuing and currency bank as the Federal Bank. Within the framework of the European Union, its responsibilities and powers may be transferred to the European Central Bank, which is independent and committed to the overriding goal of assuring price stability.
Here, the legal arguments would become much more subjective. Does the ECB retain independence by making OMT conditional on the actions of governments? Does it retain its independence by reserving the right to reverse OMT if governments fail to comply with guidelines? Is it still committed to price stability in the Eurozone as a whole? Draghi, naturally, is very careful to say yes. At the September 6th press conference, he stated "Let me repeat what I said last month: we act strictly within our mandate to maintain price stability over the medium term; we act independently in determining monetary policy; and the euro is irreversible." However, arguments to the contrary are beginning to take shape. I covered Weidmann's viewpoints on the subject in a previous post. Another post examined others, some of which are worth taking a second look at as they relate directly to the case being built against the ECB having retained its independence.
"The ECB's argument that the bond purchases have to do with monetary policy is a pretext," says Jürgen Stark, the central bank's chief economist until the end of last year. "If the transmission mechanism of monetary policy is indeed disturbed, the ECB must intervene, irrespective of whether or not a country has subjected itself to a bailout program."
For Stark, who resigned in protest over the ECB's first bond-purchasing program, a red line has been crossed once again. "We are talking about the financing of governments here," he says. That, he points out, is in violation of European Union treaties. "The ECB is operating outside its mandate," he concludes.
Academics share his assessment. "Common sense tells us that the ECB, with its purchasing program, is doing something completely different from expressing its concern over price stability," says Clemens Fuest, a professor of economics at the University of Oxford. According to Fuest, the ECB, following the example of the International Monetary Fund, is upgrading itself to a European bailout institution, which provides assistance based on certain conditions. It loses its independence as a result, says Fuest, because it can hardly refuse to provide assistance if its conditions are met. "The ECB has overstretched its mandate," Fuest believes.
Even supporters of the bond-purchasing program are critical of Draghi's approach. "The ECB should have continued to cite market failure as justification for its purchases," says Peter Bofinger, a monetary expert at the University of Würzburg in southern Germany and a member of the German Council of Economic Experts which advises the government on economic issues. "Then it could have intervened whenever it felt it was appropriate."
Instead, says Bofinger, the central bank is making itself dependent on the decisions of politicians and on the bailout fund. "In doing so," Bofinger explains, "the ECB is increasingly getting into dangerous territory."
Now, we see even more such arguments emerging. Thanks to Rik, who pointed me in the right general direction, I bring you an article from Handelsblatt entitled "Minister brings a Bundesbank boycott against the ECB into Play." The minister in question is Jörg-Uwe Hahn, an FDP leader in the state of Hesse. Back in July, he urged the German Federal government to bring suit against the ECB. Obviously, that went nowhere. Now, he is suggesting the idea I mention above, of a Bundesbank refusal to participate in a known illegal act - namely OMT.
"If the Bundesbank's lawyers conclude that paritcipation in these purchase would be contrary to the German Constitution, as hinted at by the German Constitutional Court, then it would be understandable for me, as a consequence, to not be involved in these purchases."
Furthermore, Hahn finds it despicable that no one objects when an unelected body of the EU makes an illegitimate decision that changes the entire nature of the European Union.
"It is a significant contradiction that a national Parliament would sue over a draft law that might violate the Susidiarity Principle, but not over the repudiatory actions of an organ of the European Union which could alter the entire construction of the Union."
Yet another Handelsblatt article is boldly titled "ECB Violates European Law." Here, German economist Roland Vaubel attacks on the price stability front. The Google translation of this article is quite good, so I leave it to you to pursue if you are interested.
So, to recap how things might transpire.
- Spain gets an ECCL.
- The ECB starts OMT.
- The Bundesbank refuses to participate.
- The ECB obtains an emergency injunction from the ECJ mandating Bundesbank participation.
- The German Constitutional Court finds the ECB no longer fulfills the separate independence and/or price stability conditions that permit the Bundesbank to transfer its powers to the ECB under Article 88.
What we wind up with is a direct conflict between the ECB and ECJ on the one side, and the Bundesbank and German Constitutional Court on the other. At this point, Bundesbank participation in OMT, and perhaps in the Eurosystem at large, becomes an unavoidable election year political issue for the German leadership under Angela Merkel.
In the words of Hessian Minister Hahn
"We come now to a choice, to sell Europe for the sake of the Euro or to remain a community under the rule of law."
I agree! Cross posted from Fibs and Waves.
Also by Blankfiend: The ESM, when combined with the OMT program, could have some very adverse consequences: drive private sector investors out of long duration European sovereign debt. Read... A Toxic Mix: ESM + OMT.