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27th May 2018

German top court to rule on whether ECB can buy bonds

  • The German Constitutional Court is expected to rule on the ECB's bond-purchasing scheme in April (Photo: Al Fed)

Germany's constitutional court is expected to rule this spring on the legality of the European Central Bank's bond purchases, a scheme that has eased the eurozone crisis by calming markets.

Udo Di Fabio, who served as constitutional judge between 1999-2011, told an audience at the Berlin-based Stiftung fur Familienunterhmen on Wednesday (29 January) that the court is "deliberating at the moment if the ECB can buy bonds at all."

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According to EU laws, the ECB is prohibited from direct government funding, meaning direct bond purchases when a national government tries to sell debt on the markets.

But in the past years, the eurozone bank has engaged in "secondary bond purchases" which are bought from investors and considered an investment by the ECB.

These bond purchases helped lower Spanish and Italian borrowing costs, which had spiked in 2011, prompting fears that the third and fourth largest economies in the euro would also be forced to apply for a bailout.

One year later, when borrowing costs were on the rise again, ECB chief Mario Draghi came out with an even bolder promise.

He said his bank would buy as many bonds as necessary to help a troubled country, provided it signs up to a reform programme.

The so-called Outright Monetary Transactions (OMT) scheme has never been used. But its calming effect on markets lasted throughout 2013 and helped the eurozone regain relative stability.

Bond purchases were already deemed "unconstitutional" in a preliminary verdict by the Karlsruhe-based court in 2012.

Back then, it spoke only about direct purchases which would have been in breach of EU law.

More than 35,000 Germans have since filed complaints against the OMT, with the Constitutional Court expected to deliver a verdict in April or refer the case to the European Court of Justice.

Di Fabio said it was unlikely for the court to reject the entire scheme and cause a "firebrand in Europe."

But, as was the case with previous verdicts on the eurozone bailout fund and the Greek bailout, Karlsruhe is likely to boost the rights of the German Parliament were OMT to be activated.

"The particular issue Karlsruhe will be looking at is national budget sovereignty, as enshrined in German law. Budgetary self-determination of a nation is fundamental and cannot be transferred," he said.

"Parliaments were put in place so monarchs cannot use people's money as they please. National parliaments have to be sovereign in controlling the use of taxpayers' money.

If Rome decides on an expenditure, it cannot be that the Netherlands and Germany are held liable for it. If that were the case, then Dutch and Germans should also be able to vote in Italian elections for the parliament," he added.

Di Fabio said the current EU treaties also pose limitations on how many tasks the ECB can take on.

"EU treaties don't foresee a common bank supervisor and even less for the ECB to be it," he said.

The former judge said the treaty needed to be added to in light of the ECB new future role of supervising the eurozone's largest banks.

He also raised questions about the yet-to-be-established bank resolution fund, which foresees banks chipping in to a common pot to be used if one of them needs bailing out.

"European banks are heterogeneous. In some countries, banks are aggresive and oversized. If there was joint liability, it would force the less risk-taking banks - like the ones in Germany offering low interest rates to their customers - to guarantee the other banks in other states where interest rates are higher because risks are higher," he said.

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