The German Federal Constitution Court this morning referred the challenge to the legality of the ECB’s OMT bond purchase program to the Court of Justice of the EU in Luxembourg (the CJEU, or as is sometimes referred, the ECJ).
Markets and analysts, initially shocked, are interpreting this as a victory for the ECB and its OMT program. The assumption is that even though a final outcome on the validity of the all-important, promised bond stabilization program will yet again be delayed for a very long time, the CJEU will undoubtedly be more favorable in reaffirming the OMT program than the German court of Karlsruhe would have been.
*** That positive interpretation of the punt to Luxembourg, which was quickly cheered by the EU, is narrowly correct, and repeats precisely the main points we made last month in flagging this hand-over as a possibility (see SGH 1/29/14, “Germany: The ECB OMT Constitutional Court Challenge”). And beyond the OMT itself, this punt is now much more broadly an historic passing of the legal baton that could eventually present a final precedent for clarification in the German court of public opinion on the jurisdiction of EU legal institutions over national courts. ***
*** But that may be a double edged sword. We also warned in that report that Karlsruhe may be tempted to take a political stance in protecting its relevance on EU matters as it affects Germany and assert some of its clout, even if beyond its jurisdiction, and the way it has held its nose as it kicked over the matter to Luxembourg has done exactly that. If the CJEU wants to protect the OMT, it will have to go as far as to affirm that the Treaty “covers” this as an act of monetary policy, something that will be in itself a political statement. ***
*** The CJEU will therefore most likely need to find a way to address the real issues that were raised by the German Court – which stated in no uncertain terms that if it was up to them to decide they would suspect the OMT as constructed could in fact potentially constitute an act “ultra vires” and therefore outside of the scope of monetary policy and into the more political – and reserved to the national sphere – issue of fiscal and economic policy. That raises the possibility that the CJEU may indeed not fully back one side over the other, but possibly look for some small adjustments to the structure of the OMT, if not just for Germany, also to ensure to its own satisfaction that the program is in compliance with EU Treaties. ***
Furthermore, even if the OMT is, as expected, fully, or as we warn here, with potential amendments, affirmed by Luxembourg, the reality is that a new, long interim delay in reaching that judgment could also in the meantime put a freeze on the ECB’s willingness, as an institution created under EU law, to implement OMT purchases if and when they may be needed.
The Risks of a Victory
The CJEU, while clearly representing EU laws and thus by definition sympathetic to EU powers, is a serious institution and by no means a simple, rubber stamp court. So while Luxembourg will almost certainly be friendlier to the ECB than Karlsruhe, there is by no means any guarantee that the eventual CJEU Court ruling will be an unmitigated slam dunk in affirming the OMT program as it stands.
And the stakes are enormous, because the case – other than addressing the legality of the OMT itself – reverts on the existence itself of the European Union. If, indeed, the CJEU will state that the Treaty “protects” the OMT tout court, it will state that the ECB enjoys a level of discretion that will forever change the balance of power in the EU. It will be an outright scolding of Member States who failed to ensure that the EMU was accompanied by a fiscal and economic union, which is what triggered the ECB to act to protect the Euro as an element of the foundation of the EU.
Ultimately the Court could interpret the Treaty in many different ways, protecting the ECB, attaching conditionality (provided that it is as required by the Treaty) or even – a remote possibility – ruling against the OMT.
In fact, the CJEU decision could look like this: “Articles 119, 123 and 127 of the Treaty and article 17 and 24 of the Statute must be interpreted in the sense that it does not forbid the ECB to implement an act that allows for the (limited?) purchase of bonds on the secondary market…” Even if the CJEU enjoys a certain level of discretion, it will have to give some level of consideration to the points raised by the FCC in its preliminary reference.
That could address one potential point of clarification raised by Karlsruhe, namely in the way President Mario Draghi has referred to “unlimited firepower” and “whatever it takes” in touting the ECB’s ability and tools to deal with crises (and specifically in relation to OMT bond purchases).
The motivation for that bold language is obvious, and Draghi has had enormous success in selling the OMT to markets. But we initially, and have always, winced every time he has used these words, and those chickens may now come home to roost.
In its non-binding “opinion,” the Karlsruhe court specifically pointed to the need to affirm the rather different assertion the ECB has been making legally, that the liability “transfer” of risk to the EU and amounts involved with an OMT are in fact limited – purportedly to half the total issuance of Eurozone government bonds.
And in reality, the argument that the program is limited to 500 billion Euros because the ECB would only limit itself to buying half of all government issuance may reflect current conditions, but is simply a statement of a limit as the market currently stands in time, and avoids the question of what would happen if a member state were to suddenly blow up its domestic bond issuance.
The ECB has argued that there is of course also conditionality attached to any purchases, it would buy short term paper only, it could always stop the program, and so on. But Karlsruhe is not completely buying those arguments yet.
The main point here is that the CJEU is a serious Court and is going to conduct a thorough analysis of what is a crucial problem of EU legislation. It, however, does have to rule and the stakes, as well as the pressure for a judgment that will have tremendous political meaning, are enormous.
And the good news there is that in practical terms, as we understand it, the FCC could not, despite what is being asserted by some experts, simply “negate” the CJEU ruling if it feels it does not appropriately address the three main points it has raised to its satisfaction: that the OMT is not an unlimited liability, that purchases would not allow for haircuts (and thus financing) to borrowers, and that the ECB action would not interfere with markets beyond its jurisdiction.
Once the interpretation of EU law is clarified by the CJEU and the case reverts to the FCC, the latter will issue the final judgment based on the findings of the CJEU. In the unlikely event it does choose to disregard them, it could potentially be subject to another CJEU scrutiny (and Germany will be fined). All in all, enormous potential frictions could lie ahead if the CJEU does not adequately address – or give enough political cover to – Karlsruhe’s issues. We expect they will.
The CJEU, Process, and Jurisdiction Law
The CJEU is composed of 28 judges and nine advocate generals – the latter write opinions that the judges tend to follow. The nine AGs come from the main countries (Italy, France, Germany, UK, Spain and Poland, plus three chosen amongst the other 22 countries) and are extremely influential.
The Court sits normally in a three to five judge composition. However, it sits as a Grand Chamber (15 judges) if a Member State or an institution so requests. It can sit also as a full Court (28) when the matter is of utmost importance (that could happen in this case).
Under a procedure that is called “preliminary reference,” the CJEU will have to interpret the Treaty and ECB Statute and clarify if they constitute sufficient coverage for the ECB in its OMT decision. It will deliver its preliminary ruling, and then send the case back to the German FCC after giving it the instruments to make a decision.
The FCC will, however, be “tied” to the CJEU interpretation of the Treaty, which means the responsibility is now all on the CJEU. The jurisdiction issue is essentially over. The punt to Luxembourg is a request by the FCC for interpretation, thus an admission that the CJEU is hierarchically superior and the only court that is competent to judge if there has been a decision “ultra vires” because it is the only one that can judge the “extension” of the Treaty. The CJEU will judge on matters of EU law, and the FCC will continue to monitor further integration attempts by the German government – starting with the ESM final ruling coming next March 18th.
And the Court of Justice’s reply is not merely an opinion, but takes the form of a judgment or reasoned order. The national court to which it is addressed is, in deciding the dispute before it, BOUND by the interpretation given. The Court’s judgment likewise binds other national courts before which the same problem is raised.
From the Court’s website: The Court of Justice’s reply is not merely an opinion, but takes the form of a judgment or reasoned order. The national court to which it is addressed is, in deciding the dispute before it, bound by the interpretation given. The Court’s judgment likewise binds other national courts before which the same problem is raised.
The political battles, however, will be far from over.
Opening the Political Can of Worms
A positive CJEU judgment could very well come with negative political consequences that could be felt in Germany, and in other creditor states, especially if it was felt the CJEU were in effect “rolling” Karlsruhe.
The judgment could come as late as mid-to-end 2015, and almost definitely well after the EU Parliamentary elections this May. But the FCC has nevertheless given a strong assist, and platform, for all Eurosceptic populist parties in Germany, and elsewhere, in the meantime.
In fact, you may recall that in our last report (SGH 1/29/14. “Germany: The ECB OMT Constitutional Court Challenge”) we also noted suspicions that the plaintiffs in Karlsruhe were well aware of the legal holes in their court case (including on the critical jurisdictional issue), but were proceeding with it anyway as simply keeping the challenge alive would serve their important political goals of highlighting EU “power creep” to the German electorate.
The FCC has helped them, and other northern and creditor Eurosceptic parties, (Germany, Netherlands, Finland, the UK), in spades.
However, it is worth noting the political consequences of an ultimate affirmation of the OMT could be felt in exactly the opposite way in the periphery and debtor countries. There, it would strengthen the hands of the embattled pro-integration groups by affirming EU assistance to their countries, while taking the wind out of the sails of their own Eurosceptic groups (Syriza, 5SM, etc.).
Meanwhile, the circumstance that the CJEU will have to essentially give a political statement will bring us back to square one: and namely, the ball will be in the Member States’ courts to build a fiscal and economic coordination that would avoid such situations in the future.
And in EU capitals, governments are very shy on the matter because they know the truth very well: and that is that the ECB ended up having to cover for them, and did what the Member States themselves should have done a long time ago.