ECB ‘Brexiteers’ face final ruling on OMT challenge

Bloomberg

It’s not quite Brexit. But just two days before the UK goes to the polls, a throng of German academics, politicians and ordinary citizens are pinning their hopes on a different breakaway.
Germany’s highest court will deliver judgments today in five separate cases seeking to stop the country from participating in a controversial bond-buying plan that underpinned European Central Bank President Mario Draghi’s 2012 vow to do “whatever it takes” to save the euro.
While plaintiffs want to mend the EU rather than split from it, their cases echo the “taking back control” motives that Brexit supporters have raised.
The suits at the Federal Constitutional Court in Karlsruhe argue that democratic self-control must trump illicit usurpation of powers. Their supporters say the ECB blatantly violated the EU treaties when it came up with the program, known as Outright Monetary Transactions or OMT.
While OMT has never been called upon, a negative ruling would be a blow to the ECB. The program gives it a tool to address a breakdown in monetary-policy transmission in specific countries. In contrast, its current program of quantitative easing buys debt across the entire currency bloc in proportion to the size of each nation’s economy.

‘Similar Motives’
“The Brexit movement and the plaintiffs in this case have similar motives, no question about it,” said Christoph Schalast, law professor at the Frankfurt School of Finance. “There’s a certain anti-EU sentiment resonating here. Some of the plaintiffs have been suing for years against each step of integration.”
Markus Kerber, a lawyer teaching finance in Berlin and a plaintiff in many cases over European issues, said in February that the ECB “is like a
financial dictator.”
Another plaintiff is Roman Huber, head of the campaign group Mehr Demokratie e.V., which advocates nationwide referendums in Germany and represents 37,000 people supporting one of Tuesday’s lawsuits.
“For us, the issue of democratic control is central,” said Huber, who denies similarities with the Brexit movement. “We wouldn’t suggest leaving the European Union, but rather to rethink Europe.”
List of Demands
The cases, part of a long-running national dispute over the ECB’s role, were filed in 2012 after the OMT was announced. The court in Karlsruhe sent them to the EU’s highest tribunal in early 2014 with a list of demands to curb the OMT to make it compatible with the rules governing the ECB. Without them, the plan can’t be cleared under the German constitution, the judges said.
The OMT foresaw potentially unlimited purchases of bonds of debt-stricken countries that sign up to adjustment programs. Conceived as yields on Spanish and Italian 10-year bonds exceeded 7 percent, its announcement helped to calm financial markets and has helped to decrease the cost of borrowing for these nations.
The European Court of Justice last year backed the OMT with much fewer strings attached than asked for by the German court. The national judges now have to rule whether the guidelines from Luxembourg are acceptable under the country’s constitution.
Binding Orders
The constitutional court has no power to regulate European institutions, but it can issue orders binding the German government, including the Bundesbank which is implementing ECB actions on the national level.
Court President Andreas Vosskuhle said at the February hearing that the central issue of the case will be whether the Bundesbank could participate in the OMT and whether the government or parliament must take action against it.
New suits against the QE program are already pending at the German court.
“The problem of the ECB’s programs is exactly this democratic control,” said Huber. “We don’t say the ECB’s policy is wrong per se. Above all we say the ECB may not arbitrarily expand its powers without the consent of parliament and voters.”
Should the German top judges overrule their EU colleagues, the judgment would be explosive for the bloc’s stability, as other national courts could opt to follow the example, according to Schalast, the law professor.
“But I don’t expect the court to use the OMT for such a step — the court will formally pass it, but draw a few red lines for the ECB,” he said. “And based on that, it will instruct the Bundesbank how it has to act within quantitative easing.”