The German Federal Constitutional Court (FCC) has begun to hear the case against the ECB’s OMT program. The two day-long hearing is unusually long and signifies the importance of the subject matter. According to the FAZ, this is one of the most important cases in history.
At the heart of the hearing is the ECB’s controversial OMT program. In essence, two views prevail over how to interpret the OMT program and reconcile it with the ECB’s mandate and existing EU law. Proponents of the program argue that it is yet another instrument in the arsenal of monetary policy tools that is geared towards stabilizing interest rates across the euro zone. By contrast, critics like Peter Gauweiler, a CSU backbencher, the interest group “Mehr Demokratie”, and Jens Weidmann, President of the Bundesbank, argue that the program is rather an instrument of fiscal policy because it essentially provides funding to ailing governments through the purchase of government bonds.
Before the hearing started, the FCC’s President, Andreas Voßkuhle, reminded the audience that the court shall not consider the purpose and significance of the rescue policies and the ECB’s policies. This remains the task of policymakers. Nor shall the Court use the success of the instrument as guiding benchmark to judge the legality of the instrument. Otherwise the goal would justify the means. In a democracy, Voßkuhle argues, policymaking has to be guided by commonly agreed basic rules instead of daily politicking. Rather, the question is whether the ECB has, through the OMT program, overstretched its mandated judged by the German basic law. The predicament of course is that the ECB is only subject to EU law. Voßkuhle concludes by suggesting that the Court will have to decided to what extent the ECB is assuming powers that it has never has been granted or it should never have been granted in the first place by the German Bundestag. In turn, the question then becomes whether (national) citizens can accuse the ECB of unlawful action on these grounds through a constitutional complaint.
Two issues were debated in the public that bear importance for the hearing. First, the selection of the expert witnesses by the Court was considered by some commentators (for example Mark Schieritz here) as unbalanced because most of the experts, which include Hans-Werner Sinn (Ifo), Kai Konrad (Max Planck Institute), Harald Uhlig (HU Berlin), Franz-Christoph Zeitler (former board member of the Bundesbank), Clemens Fuest (ZEW), and Marcel Fratzscher (DIW), have a critical view on the ECB’s OMT program. Only Fratzscher’s views allegedly side more with the ECB.
Second, in an interview with the German channel ZDF Draghi affirmed yesterday that the ECB will not intervene in order to safeguard a government’s solvency in general. In principle, a government could become insolvent. This is an important statement in line of newspaper interpretations of the ECB’s statement before the FCC. According to that statement, which was drafted by the German law professor Frank Schorkopf (German version here), the OMT program contains a natural cap because it is limited to the purchase of short-term bonds with a maturity of less than three years. For example, the total value of those outstanding bonds for Portugal, Italy, Spain, and Ireland amounts to 524 bn EUR, says the FAZ. In practice, however, the ECB will have to buy much less because the overarching aim of the program is to safeguard the transmission mechanism, not deficit financing. The ECB immediately issued a denial of this interpretation.