KARLSRUHE, Germany (Reuters) - Germany’s Constitutional Court will refer a complaint against the European Central Bank’s flagship bond-buying scheme to the European Court of Justice, removing the prospect of it curbing the programme.
In an apparent attempt to set the terms of the European Court’s deliberations, the German court in Karlsruhe said on Friday there was good reason to think the plan exceeded the ECB’s mandate and violated a ban on it funding governments.
However, it said in a statement which marks the first time it has passed a case on that it could conform with the law “if the OMT decision were interpreted restrictively”.
The ECB’s Outright Monetary Transactions (OMT) programme, announced by President Mario Draghi in September 2012 at the height of the sovereign debt crisis and as yet unused, is widely credited with pulling the euro zone back from the brink.
Its power lies in the promise of potentially unlimited sovereign bond purchases - a prospect that calmed fears about the currency area zone falling apart and backed up Draghi’s vow to do “whatever it takes” to save the bloc.
Any restriction would unnerve investors but the history of the ECJ has not been to scupper such bloc-wide measures.
The case was lodged in Germany by more than 35,000 plaintiffs.
The ECB took note of the German court’s announcement and stood by its measure, saying in a statement: “The ECB reiterates that the OMT programme falls within its mandate”.
ECB board member Yves Mersch, who is in charge of legal services at the bank, said the court’s decision did not affect the plan’s credibility. “We are very confident,” he said.
In Brussels, the European Commission welcomed the German court’s decision to refer the case to the ECJ. The EU’s executive has long supported the ECB’s game-changing initiative.
Others took a different view.
German conservative lawmaker Peter Gauweiler, one of the most prominent plaintiffs in the case, said the court decision was an “interim success in our fight against infringements of our constitutional democracy via supranational institutions”.
But the ECJ has a reputation for giving federalist rulings that take a broad interpretation of European institutions’ powers. Analysts said there was less risk that it will obstruct the OMT policy.
“The (OMT‘s) chances are better in Luxembourg than in Karlsruhe,” said Bert Van Rossebeke of the Centre for European Politics in Freiburg, calling the court’s decision to refer to the European Court for the first time “historic”.
University of London European law expert Gunnar Beck agreed the ECJ would likely back the OMT. That could take up to two years, though, so uncertainty will linger for some time yet.
“Practically speaking, the Court of Justice is not an independent organisation but is pre-disposed to interpret legal questions in the interest of the European Union,” he said.
“The court of justice doesn’t take account of national sensibilities ... there is no doubt of the outcome now.”
Karlsruhe’s decision is a defeat for the Bundesbank, whose president, Jens Weidmann, was the only member of the ECB Governing Council to oppose the plan.
The German central bank, which challenged the legality of the ECB decision in testimony given by Weidmann last year, declined to comment on the court’s decision on Friday.
The euro fell to a session low against the dollar in response to the court’s ruling while German government bond futures rose to day’s highs and Italian bond yields reversed earlier falls, suggesting some disquiet about the decision.
While the ECB has no immediate need to use the bond-buying plan, the lack of final clarity over its legality may still crimp its room for manoeuvre on other measures while it awaits a ruling.
The ECB has been considering suspending operations to soak up money it spent buying sovereign bonds during the euro zone debt crisis under its Securities Markets Programme, a previous bond-buy plan that it has now terminated.
That would inject about 175 billion euros (145 billion pounds) of liquidity into the financial system.
One argument against doing so would be to avoid raising questions about ECB policy ahead of a ruling by the European court.
The ECB has already used other measures in its toolbox, such as interest rates cuts and liquidity injections with long-term funding operations, and could deploy them again.
Even if the European Court were to act on Karlsruhe’s doubts and restrict the power of the OMT, that could increase the likelihood of the ECB turning to full-blown quantitative easing, or money printing.
“Ironically, depending on the exact decision, the court may have made a much more wide-ranging quantitative easing programme at the ECB more likely,” said Christian Schulz at Berenberg bank, a former ECB economist.
The German court said it will rule on the legality of the currency bloc’s permanent bailout scheme, the European Stability Mechanism (ESM), on March 18.
Writing by Stephen Brown/Paul Carrel. Editing by Mike Peacock