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OMT ruling: Karlsruhe says no, refers to ECJ and suggests ECB should always be preferred creditor

The German constitutional court (Karlsruhe) has just released the pre-announcement of its ruling on the legality of the ECB’s OMT programme. A nu

Publishing date
15 October 2014

The German constitutional court (Karlsruhe) has just released the pre-announcement of its ruling on the legality of the ECB’s OMT programme. With a majority of 6 against 2 judges, it has decided that – “subject to the interpretation by the Court of Justice of the European Union, the Federal Constitutional Court considers the OMT Decision incompatible with primary law“. As a result, the ECJ will now have to analyse the legality of OMT according to EU primary law, a process that will likely last for 18 months or more. In the unlikely case that the ECJ was to decide along the lines of Karlsruhe, the ruling would require German authorities to refrain from implementing OMT related acts.

A number of quick observations on this ruling are in order.

  1. First, I disagree with the assessment of Karlsruhe that OMT is in breach of primary EU law. The OMT programme was a necessary step for the ECB to fulfil its monetary policy mandate, an argument I made in detail last year in 'The ECB's OMT Programme and German Constitutional Concerns'.
  2. Karlsruhe leaves the door open to a possible interpretation by the ECJ that would be in conformity of the primary law. In particular, if conditionality of an ESM programme is met and if losses on the bond purchases are excluded, then it might be seen as an appropriate measure of support of the general objectives of the Union. As an ESM programme can legally only be given if debt is estimated to be sustainable, OMT could be allowed in such a circumstance. Yet, this does not mean that ex-post losses could not happen, if for example the macroeconomic situation deteriorates more than expected. According to Karlsruhe, those losses should then be restricted to the official financial assistance and to private creditors.
  3. De facto, Karlsruhe therefore suggests that the ECB is a preferred creditor. A priori, this appears to be a sensible point as otherwise the likelihood of monetary financing could increase. However, it could also mean that the exit from an ESM/OMT programme could be very difficult. In fact, private creditors would understand that they are subordinate to the ECB and would require a much higher yield depending on the relative size of the ESM programme, the OMT purchases and the remaining debt in private hands. De facto, this could mean that even if overall debt is sustainable, a programme exit is not possible because the subordination precludes market access. As a result, PSI or an OSI on the official lending may become more likely in order to bring a country back to the market. It will be of central importance, whether the ECJ confirms the seniority of the ECB.

Read more on Outright Monetary Transactions

The ECB's OMT Programme and German Constitutional Concerns

A press review ahead of the German Constitutional Court decision

Overview of the Karlsruhe Hearing on OMT – Summary

In defense of OMT ahead of Karlsruhe

Blogs review: OMT - Has the ECB solved the Euro Crisis?

The SMP is dead. Long live the OMT

The OMT programme was justified but the fiscal union question remains

Did the German court do Europe a favour?

About the authors

  • Guntram B. Wolff

    Guntram Wolff is the Director of Bruegel. Over his career, he has contributed to research on European political economy and governance, fiscal, monetary and financial policy, climate change and geoeconomics. Under his leadership, Bruegel has been regularly ranked among the top global think tanks and has grown in influence and impact with a team of now almost 40 recognized scholars and around 65 total staff. Bruegel is also recognized for its outstanding transparency.

    A recognized thought leader and academic, he regularly testifies at the European Finance Ministers' ECOFIN meeting, the European Parliament, the German Parliament (Bundestag) and the French Parliament (Assemblée Nationale). From 2012-16, he was a member of the French prime minister's Conseil d'Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed to the G20 high level independent panel on pandemic prevention, preparedness and response. He is also a professor (part-time) at the Solvay Brussels School of Université Libre de Bruxelles, where he teaches economics of European integration.

    He joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he was coordinating the research team on fiscal policy at Deutsche Bundesbank. He also worked as an external adviser to the International Monetary Fund.

    He holds a PhD in economics from the University of Bonn and studied in Bonn, Toulouse, Pittsburgh and Passau. He taught economics at the University of Pittsburgh and at Université libre de Bruxelles. He has published numerous papers in leading academic journals. His columns and policy work are published and cited in leading international media and policy outlets. Guntram is fluent in German, English, French and has good notions of Bulgarian and Spanish.

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