Europe News

Germany will send bond-buying program to European court

European court to rule on OMT legality

One of the key components of future euro zone rescues is under threat after Germany's constitutional court decided it might violate European Union law and referred it to the region's highest court.

The euro plunged against the initially following the announcement Friday that the Germany's Constitutional Court had called on the European Court of Justice (ECJ) to decide whether the European Central Bank had exceeded its authority when it offered to help out struggling euro zone countries. The euro then regained ground after some currency traders argued that the move made it more probable that the measure would be passed, because the ECJ was more likely to declare it legal.

(Read more: 'Battle Lines Drawn' in German Court Over ECB Bond Buying)

The Judges of Germany's Constitutional Court
Uli Deck | AFP/GettyImages

In September 2012, ECB President Mario Draghi backed up his promise to do "whatever it takes" to save the euro by unveiling Outright Monetary Transactions (OMTs), which would allow the bank to buy up the bonds of distressed euro zone countries if they rose to a level where they couldn't pay down their debt.

The mere announcement of the plan helped diffuse the euro zone financial crisis and lower the borrowing costs of countries such as Spain and Italy. Investors and markets are worried that without OMTs, crisis would return to the eurozone.

OMTs have proved controversial because some of the stronger countries in the euro zone, such as Germany, may have to pay out more to prop up the weaker economies. A legal case, backed by 35,000 Germans, disputing the right of the ECB to offer the program was brought before the country's constitutional court, which is similar to the U.S. Supreme Court, last year.

(Read more: Will the Euro Zone's Bailout Firepower Ever Be Enough?)

"There are important reasons to assume that it exceeds the European Central Bank's monetary policy mandate and thus infringes the powers of the Member States, and that it violates the prohibition of monetary financing of the budget," the German Constitutional Court said in a statement Friday.

Six out of eight judges on the court voted that OMTs were potentially illegal under EU law. However, they said that it was possible they might be legal if another interpretation of the EU Treaties was used.

The case will now go to the European Court of Justice where a preliminary ruling will be made, before the case comes back to the German court, which is based in Karlsruhe.

In a statement following the ruling, the ECB insisted that the program, designed as a back-stop against future crises, fell within its mandate.

Even though previous euro zone rescue schemes, such as the European Stability Mechanism, have previously been approved by the German and European courts, analysts have warned that the OMT might not get the go-ahead.

"It is not a given that the European Court of Justice will only rubber-stamp the OMT program," Carsten Brzeski, senior economist at ING, warned in a note.

"Today's announcement therefore could either be a sign that the Court has reached its legal limits on European issues or that the issue is so tricky and touchy that it is better to pass it on."

Follow us on Twitter: @CNBCWorld

Related Tags