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'Battle Lines Drawn' in German Court Over ECB Bond Buying

The Judges of Germany's Constitutional Court
Matthias Hangst | Getty Images | Getty Images News
The Judges of Germany's Constitutional Court

Germany's constitutional court began its hearing over the legality of the European Central Bank's bond buying program on Tuesday and the head of the court said the success of the program wouldn't be relevant.

Professor Andreas Vosskuhle, president of German federal constitutional court based in Karlsruhe said before the hearing began that the success of ECB measures were not relevant to the case. "Otherwise, the end would justify the means."

Speaking in court, the German Finance Minister Wolfgang Schaeuble said that the German government sees "no signs that measures taken by the ECB so far violate its mandate." Schaeuble said he did not think the ECB's policy was subject to German or national jurisdiction.

Strategists told CNBC that the hearing on the Outright Monetary Transactions (OMT) could reflect a deeper power struggle between Germany and the euro zone.

(Read More: Will Germany's Top Court Disarm ECB's 'Big Bazooka'?)

Peter Frank, global head of G10FX at BBVA said the court hearing was really about a post-crisis power struggle with the rest of the "European community."

"We have the OMT program now which has really been a screaming success if you look at where bond yields are now relative to a year ago, so stability has been returned to the markets. But Germany now wants some conditionality on that OMT – possibly a cap on how much it could be, but it wants some safeguards," Frank told CNBC Europe's "Squawk Box."

Indeed, the court hearing on Tuesday has only come about after the court received several complaints from a number of German lawyers, citizens, and even the country's own central bank, the Bundesbank, that the ECB was over-stepping its mandate.

A court decision is not expected before Germany's national elections in September, but the bond-buying program is already a hot-button political issue because it could expose German taxpayers to further losses.

According to a survey published by German business paper Handelsblatt on Tuesday, half of all Germans want the constitutional court to stop the ECB's OMT program with only 31 percent believing that complaints against the policy are unfounded.

In an interview with Germany's public broadcaster ZDF on Monday, ECB President Mario Draghi defended his bond-buying plan, reiterating that it was the central bank's "most successful monetary policy measure to date," voted by 22 out of 23 members of the ECB's governing council.

He added that he had sympathy for German savers who have felt the squeeze of low interest rates as a result of record low ECB rates.

"We have all in our minds the concerns of the savers. Low interest rates hurt savers, but this is true all around the world. Why are they so low? Because we've been having a crisis…They will go up when trust in the recovery regains ground," Draghi said.

"Mario Draghi is standing up to Germany reasonably well saying that on the one hand we'll give you extra conditions and safeguards and on the other, saying well we do have to keep this unlimited basis for the OMT. That's where the battle lines are drawn," BBVA's Frank said. "There's a tug and pull going on – Germany certainly doesn't get it all its own way."

(Read More: Mario Draghi Goes on a German Charm Offensive)

Both the Bundesbank's President Jens Weidmann and the ECB's German executive-board member Jörg Asmussen are expected to testify on opposite sides of the argument during the hearing, pitting the ECB directly against the German central bank, which has been overtly critical of OMT.

Marc Oswald, strategist at Monument Securities, told CNBC Europe's "Squawk Box" that the judges could "simply" decide to refer conditions to the German parliament on an individual basis, should the yet-unused OMT program be requested by any struggling euro zone country.

"As much as Draghi is desperately defending it – as was Asmussen this weekend- and pointing to the dangers of dismantling the OMT- I think it's simple for the German judges. They can just say any conditionality has to be referred to parliament and obviously that stymies the efficacy of the OMT but it doesn't throw it out of court and it's still there."

(Read More: Three Bullets for Draghi as ECB Set to Downgrade Growth)

"As everyone knows the most effective part of the OMT is it being there and not being used - if it were ever used, you'd put a whole different set of forces into play in the euro zone."

(Read More: Happiness Matters, Merkel Tells Germany)

- CNBC's Carolin Roth contributed reporting to this story.

- By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt

Contact Europe: Economy

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