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.
- 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'.
- 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.
- 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.
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