Will Germany's Top Court Disarm ECB's 'Big Bazooka'?

The judges of Germany's constitutional court.
Michael Latz | DDP | Getty Images
The judges of Germany's constitutional court.

The European Central Bank's bond buying program, widely credited with drawing a line under the region's crisis, is to undergo scrutiny in Germany's top court this week, prompting fears that the judges could pull the plug on a policy that has played a big part in calming financial markets.

Germany's constitutional court in the south-western city of Karlsruhe is set to hold a public hearing on Tuesday and Wednesday on the legality of the European Central Bank's bond buying plan after receiving complaints that the ECB was over-stepping its remit from, among others, the country's own central bank, the Bundesbank.

The case pits the ECB directly against Germany's central bank. Bundesbank President Jens Weidmann, a vocal critic of the ECB's bond buying plan, and the ECB's German executive-board member Jörg Asmussen are both expected to testify on opposite sides of the argument during the hearing, according to various media reports.

(Read More: Hearing Pits German Monetary Heavyweights Against Each Other)

Germany's central bank has criticized the "Outright Monetary Transactions" (OMT) program announced in August 2012. In December, it sent a 29-page report report to the court warning that buying government debt could compromise the independence of the ECB, undermine German budgetary sovereignty and be difficult to wind up once implemented.

The panel of eight judges are not expected to give their ruling until later this year and the case could yet be referred to the European Court of Justice. In an extreme case, the case could ultimately cause the collapse of the euro zone, according to one former constitutional court judge.

"In so far as the ECB is acting 'ultra vires', and these violations are deemed prolonged and serious, the court must decide whether Germany can remain a member of monetary union on constitutional grounds," Udo di Fabio wrote in a report for the German Foundation for Family Businesses.

Chris Scicluna, head of Economic Research at Daiwa Capital Markets said in a note on Monday that while the Court is unlikely to dismiss the case out of hand, most German constitutional law experts also do not expect the Court to rule explicitly that the OMT program breaches the German constitution.

"Instead, most Court observers expect the judges to define explicitly which monetary policy measures it considers in line with the European Treaty and the German constitution, thereby possibly constraining the scope of the OMT program," he wrote.

Germany Hesitant

With national elections due in September, the bond buying program and the fact that it could expose German taxpayers to further losses is a hot-button issue.

The program requires struggling euro zone countries to request a credit line and accept stringent conditions in return for bond purchases by the ECB. So far, countries such as Spain have resisted requesting financial assistance.

Still, its presence alone has helped shore up confidence in the region's economies and the yet-unused program is widely seen as a "backstop" for market confidence in the single currency. Guntram Wolff, acting director of international think tank Bruegel defended the ECB program on Friday.

"Is the ECB acting beyond its mandate? The answer is clearly no. The situation in the euro zone was dramatic before the announcement of the OMT program. Nominal interest rates had hugely diverged, banks' access to finance was severely hampered, and the euro zone's financial system was deeply fragmented," he wrote in an online "defense" of OMT.

(Read More: Kuroda to Bernanke: My Bazooka Is Bigger Than Your Bazooka)

"The pure announcement of a potential OMT program helped to reduce fiscal risks and to coordinate markets in a good equilibrium… Once investors start losing trust in the government's fiscal sustainability, they will start selling bonds and push up interest rates," he added.

In an interview with the Germany's Bild newspaper on Monday, ECB's Jorg Asmussen defended the central bank, saying it was not "in the dock."

"When we announced the program, the euro zone was nearing the uncontrolled decomposition. Serious business and banks began to prepare for it. At this time, the ECB was the only European institution capable of acting fully and had to make clear to everyone, speculators: do not mess with the ECB. The euro is defended," he said.

"The markets have learned this lesson. We have no need to actually buy bonds. The program was economically necessary, lawful and efficient of the effect here," he added.

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