Hearing Pits German Monetary Heavyweights Against Each Other

European Central Bank
Hannelore Foerster | Bloomberg | Getty Images
European Central Bank

One of the bitterest fights in monetary policy lands in court this week as Germany's highest legal authority hears evidence over whether the European Central Bank's pledge to save the euro last year undermined the constitution.

The hearing comes as crisis-weary Germans prepare to vote in a September general election that for the first time includes a euro skeptic party. But also of note are the star witnesses, two longstanding friends who have risen through the ranks to become arguably Germany's most powerful unelected officials. Both have been instrumental in framing the response to the euro zone crisis but are now fighting from opposing corners.

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The court's judgment will not come until later in the year and it is far from clear how it could influence the independent central bank, but inside the ECB the prospect of losing out in Germany's court of public opinion is not taken lightly. As the euro zone's biggest economy, Germany, via the Bundesbank, is the ECB's biggest shareholder.

From the outset Jens Weidmann, the Bundesbank president who sits on the ECB's governing council, opposed the ECB's Outright Monetary Transactions policy – under which the ECB would buy the bonds of countries subject to speculation that they might leave the euro zone. But, outside Germany, he failed to win the argument that such bond buying would be tantamount to funding governments by printing money, risking hyperinflation.

His testimony to the constitutional court in Karlsruhe will be challenged by Jörg Asmussen, a member of the smaller inner sanctum at the top of the ECB – the executive board, whose task will be to make the case to the court, and a skeptical German public, that such bond buying is within the bank's remit.

Both are good communicators, with Mr. Weidmann's iron reasoning set to clash with the political negotiating skills that puts Mr. Asmussen in the room for most big decisions made in Brussels when dealing with bailouts.

Mario Draghi, the ECB president whose pledge last July to do "whatever it takes" to save the euro and who then spearheaded the creation of OMT last September, went out of his way at his monthly press conference last week to frame the courtroom argument for a German audience.

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"Frankly when you look at the data, it's really very hard not to state that OMT has been probably the most successful monetary policy measure undertaken in recent times," Mr. Draghi said. "Ten-year sovereign bond yields declined spectacularly in several countries but went up in Germany. And that's very important for the saver, for the German saver, for insurance companies and pension funds."

The ironies around the case are layered almost as thickly as the accumulation of legal precedents and cross references contained in a typical constitutional court ruling.

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First of all, as Mr. Draghi was not shy to point out, the financial markets have already pronounced OMT a success, with sovereign bond yields in stressed countries falling and stock markets rising. And this has all happened without the purchase of a single bond, since no country has applied for an OMT program which would come with fiscal conditions attached.

Second, although concern about the case at the ECB is genuine and deep, the constitutional court has no jurisdiction over the central bank.

It is only looking into OMT because a complaint against the policy was added to an already running case brought by 35,000 plaintiffs, including a conservative Bavarian politician, the leftwing Left party and academics, concerning the constitutionality of the EU's permanent bailout fund, the European Stability Mechanism. Although the court stopped short of blocking the €500 billion ESM last September, it is still hearing evidence in that part of the case too, so Wolfgang Schäuble, finance minister, will also make an appearance on Tuesday, the first day of the hearing.

Since it has no jurisdiction over the ECB, the court is considering whether the German government should have taken the ECB to court "or used other means to effect the repeal of these measures". The ECB is, however, set up to be independent of government oversight. And the Bundesbank, which would conduct much of the bond-buying under OMT as a euro system central bank, is also independent of the German government.

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Furthermore, there is little publicly available material on the exact workings of OMT, much of which remains shrouded in ambiguity since it has never been used. The ECB has published a short press release on the subject, which runs to less than 500 words, and Mr. Draghi has answered questions, but he has on at least one occasion appeared to change his stance on a technical feature.

Asked about the publication of the legal documentation underpinning OMT, Mr. Draghi said on Thursday that the documentation was ready "and is about to come out", without specifying a date.

The lack of detail to attack has made the Bundesbank's criticism philosophical, bordering on polemical, in nature. Its leaked written submission to the court talks in terms of potential risks to the German taxpayer and seeks to question the ECB's justification for needing to take any action as based on "strongly subjective" judgments about the reason for bond markets to turn on some euro zone countries.

As for the court's eventual judgment, close observers of the court point out that it has a long history of backing rather than blocking moves towards EU integration, starting with the 1992 Maastricht Treaty. In some cases it has added conditions, such as the requirement that the Bundestag in Berlin sign off on any euro zone bailout. The question with OMT will be what if any additional conditions it could attempt to impose.