As to the substance of the case, the German court is right to argue that the OMT program may lead to a significant redistribution of wealth among euro zone member states if the acquired bonds are held until maturity. Write-off losses on such bonds would hit taxpayers in other countries, owing to the erosion of national finance ministries' profits from lending self-printed money (seigniorage). And,obviously, any fiscal transfers needed to prevent such write-off losses would also hurt taxpayers.
Yes, the ECB's market-calming gimmick of shifting default risk from clever investors to trusting taxpayers worked. The OMT scheme amounts to free insurance against a default by southern euro zone countries, thereby subsidizing the return of private capital flows to places where they were squandered before. But that is not enough to legitimize the program.
The German court is also right to argue that purchases of troubled countries' government bonds cannot be considered monetary policy – and thus exceed the ECB's mandate. No counterpart to the ECB's lender-of-last-resort policy for a currency union's regional political units can be found, for example, in the United States or the Swiss Confederation. The US Federal Reserve buys federal government bonds; it does not buy the bonds of financially troubled states like California or Illinois.
(Read more: Will the Euro Zone's bailout firepower ever be enough?)
Finally, the Court is right to object to the ECB's goal of reducing interest-rate premiums on government bonds. The ECB argues that it wants to improve the transmission of monetary policy. But interest-rate premiums are the main mechanism by which excessive debt in the eurozone can be avoided. If states borrow too much, the probability that they will be able to repay falls, and creditors demand higher interest rates in exchange. This, in turn, reduces their inclination to borrow.
The economic crisis in southern Europe stemmed from an inflationary credit bubble that resulted from the absence of interest-rate premiums, and that robbed the afflicted countries of their competitiveness. Interest-rate differentials – including premiums reflecting the heightened risk of a euro zone exit and exchange-rate realignment to re-establish competitiveness – are crucial for the monetary union's long-term existence, stability, and allocative efficiency.
Hans-Werner Sinn is Professor of Economics and Public Finance, University of Munich, and President of the Ifo Institute.
Copyright: Project Syndicate, 2014.