As we get deeper into 2014 markets are starting to focus again on the upcoming German Federal Constitutional Court (FCC) ruling on the challenge to the legality of the European Central Bank’s yet to be triggered OMT bond purchase program.
That ruling was originally expected to come in the fall of 2013, but was pushed to the beginning of this year. The delay and uncertainty over timing, exacerbated by numerous inaccurate blog and press pieces, has raised further speculation and nervousness over a decision that, if it goes wrong, could have enormous implications for the stability of European peripheral bond markets.
Ongoing uncertainty over the Karlsruhe court ruling is also seen, rightly or wrongly, as a potential political impediment to effective ECB action if left unresolved, weighing not just on ECB Council Members’ willingness to take controversial steps if needed, but also tempering their freedom to talk more openly about more controversial and aggressive, potential non-conventional policy options.
*** While it is always dangerous to predict court rulings, according to former judiciary officials in the German courts, including with responsibility for European affairs, despite the delays that are alarming markets, the challenge to the OMT program is likely to be ruled legally unsubstantiated and rejected, albeit possibly with what could be some caveats on future decisions (more on that below). ***
*** The way the case is structured and argued by the plaintiffs, it is seen to be clearly aimed at changing and interfering in policy matters and lacks legal consistency in doing so. And although it is expected to be rejected, the date for a final decision has not been set, beyond expectations of a ruling sometime in the first quarter. The public should, however, be given a notice of a ruling in advance, an invite for the court convening to explain their findings, of about one or two weeks. ***
*** Only if Karlsruhe were to decide to pass on making a judgment and kick the case to the jurisdiction of the Court of Justice of the European Union in Luxembourg (CJEU) would markets find a surprise press release, as opposed to a preannounced ruling time, on the OMT case in their inboxes. Of course, that would mean a further period of still no clarification, and yet more waiting time. It would, however, also raise the probability of a decision in favor of the OMT: after all, what are the chances the CJEU rejects the OMT as an overstepping of the ECB Treaty provision mandates? If anything, it could serve to even further reinforce that mandate. Regardless, a punt to Luxembourg is seen as highly unlikely. ***
The Risks to the FCC Ruling Itself
The risk to the FCC ruling itself is in the court’s increasing realization and sensitivity to how far it has in fact gone down a path of gradual oblivion in defending German commitments to pan-European developments. It is becoming increasingly obvious to judicial observers how proud the court is of its mandate to uphold Germany’s Basic Law, and there is some concern it may be tempted to make a stand resisting further devolvement of powers to the CJEU.
Since opening the political window of devolvement of power with the FCC decision upholding the Maastricht Treaty
that included the establishment of the independence of the European Central Bank in 1993, the Court might highlight that power has clearly been shifting further from the national to European level, but that the latter still lacks sufficient legitimacy due to a “democratic deficit.”
We might therefore see a favorable ruling by the FCC that the ECB’s OMT program is not in violation of the German Basic Law, but that any further evolution of powers to the EU level, whether in the ECB or elsewhere, must be preceded by greater clarity and authorization of such a transfer of power by the Bundestag, and which could even include a more explicit call for a national referendum.
In other words, the FCC’s ruling may be favorable to the ECB as we expect, but one where its “yes” falls somewhat short of meeting market expectations and the “but” becomes potentially problematic.
That, however, would be a political statement more than a legal ruling, and the legal case to do so is broadly seen by German jurists to be unfounded.
In order to address this power shift legally, the FCC must respond to the argument that the OMT poses a potential danger for democracy and not just on its potential financial risks to Germany. In other words, only a case that argues the lack of a constitutional foundation for not just Germans, but for all the people of the Union, would legally achieve that.
No one and no legal case has done that until now, which is why all FCC decisions so far have been effectively in favor of the EU. But, again, because this has been shifting the leverage so much onto the EU level and away from the national level, it has dawned on the German FCC justices that they might be sealing their own irrelevance if they outright reject the case with no caveat at all.
A specific concern would be that the court verdict may go beyond expressing a warning without real practical implications on the potential dangers of further integration, as it did in its decision on the Lisbon Treaty in November of 2009 where it named a core of none-transferable policy fields. Instead, this time the FCC may in theory draft a specific blueprint that would lay out the pre-conditions to close the democratic deficit at the EU level before there is any further power shift away from Berlin and the Bundestag (and by extension, the court in Karlsruhe) to Brussels and Luxembourg.
But again, a case highlighting that a shifting of power to the ECB has effectively occurred would have to be phrased differently, and namely that such power transfer, even if negotiated by governments, and confirmed/ratified by parliaments, would however fall short of a necessary public referendum. The present case does not do this.
It effectively acknowledges the existence of Supra-national structures, and more narrowly just wants a stronger say for the German parliament in the details of decisions of those matters.
Because, beyond political concerns, the legal concern would be to stress the lack of fundamental constitutional provisions which the people (of Germany) could appeal to, the court could decide to “explain” the dangers of further devolvement of power to Brussels (and Luxembourg and Frankfurt). But anything much beyond that type of reach would almost be an unheard of first.
Protections Already in Place
And so German judicial experts do not believe this specific “blueprint” is likely to happen. And the fact is that European legislation already provides for the national parliaments to request prior control over EU primary laws such as Directives or Regulations, and Bundestag approval is of course already required for all potential Treaty changes.
For its own part, the FCC in its previous decision on the Lisbon Treaty stopped short of calling for a referendum and it has already said, rebus sic stantibus (as things stand), the German Constitution does not allow for further transfers of power to the EU level.
Furthermore, German Finance Minister Wolfgang Schaeuble has gone out of his way to reassure his domestic constituency that he would push for Treaty changes should the current one not guarantee the legal basis for what he genuinely believes could constitute (hidden) power transfers with, specifically, the Single Resolution Mechanism and Fund’s banking union file.
And of course the court will only rule on German law, and not opine on EU jurisdiction issues. The court, specifically the Court’s “Second Senate,” is therefore heavily debating how to solve this riddle. That might even result in a further prolongation of a decision.
But any ruling on the rejection of the OMT itself would nevertheless take a majority of 5 out of 8 Justices to favor the plaintiff’s concern, and nobody we have spoken to sees that happening.
In fact, there are even some suspicions that the plaintiff (Peter Gauweiler) and his legal Counsel (Professor Murswiek) are well aware of how they would have needed to shape the case in order to actually succeed. And as they did not do that, it implies they may simply expect the case to bring political prominence to their cause, one that could perhaps even play a role influencing the upcoming European Parliamentary elections, without causing any serious legal, and with it economic, harm. We will, however, refrain from any further speculation about the plaintiffs’ motives.