German Constitutional Congestion

By Ben Walsh
February 10, 2014

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Is the European Central Bank behaving in a constitutional manner? On Friday, the German Constitutional Court said no — but declared that the European Court of Justice should have the final say in the matter. At issue is a key weapon in the ECB’s crisis-fighting arsenal.

In the midst of the European sovereign-debt crisis, the ECB announced it would buy unlimited amounts of member states’ bonds, if needed. ECB chief Mario Draghi famously said he would do “whatever it takes”, and that promise has, so far, been enough: the ECB hasn’t needed to actually use the bond-buying program, called Outright Monetary Transactions.

German citizens appealed to the Constitutional Court, saying the program, which Draghi laid out in this 2012 statement, amounted to economic, not monetary policy. (The ECB is barred by the Lisbon Treaty of 2007 from making economic policy). Now the German Court has decided that the program violated the EU treaty, but has referred the case the to the European Court of Justice to have the final say.

FT Alphaville says that court’s ruling is based on a pretty basic misunderstanding of how the OMT works: the Court seems to think that OMT calls for debt restructuring and/or haircuts, when in fact the ECB said it would buy bonds on their standard, pre-existing terms.

Nevertheless, Alphaville seems to think the German court will be overruled and OMT will live on: “the arc of the ECJ’s justice is long, turgidly written, but ultimately quite friendly to pieces of bailout architecture that have an odd relationship to the treaties”.

Marcel Fratzscher is more concerned. The “objections of the Court apply”, he writes, “to almost all measures of the ECB, and thus raise the possibility that the ECB will be challenged repeatedly about its actions in the future”. The ruling, in other words, doesn’t just create uncertainty about a specific ECB action, but about the ECB’s ability to act.

Der Spiegel says the ruling is, “once again, the German hardline… The German court, after all, has reserved the right to reject a European court ruling should it not fulfill the legal standards applied in German jurisprudence”. Hans-Werner Sinn gets into the details of what exactly the German Court is asking the ECJ to do, and sees a clever legal strategy. “If it finds that the ECJ is interpreting the treaty in a way that violates the German constitution, it has the power to force the German government and parliament to renegotiate the treaty or ask for a referendum”.

Wolfgang Münchau concludes that “the eurosceptics won” the case emphatically:

If you look back to all the previous German constitutional court cases on the euro, the answer was always a variant of “Yes, but”. This ruling was the legal equivalent of “No, no, no” – with one important addition. The court is asking the ECJ to clarify important points of European law…

Bloomberg View’s editors think the ECB should “examine how far the legal envelope can be pushed to allow programs that go further”. The most effective ruling from the ECJ would “give the ECB the power to save Europe’s economy”. The European Central Bank, in other words, should fight for its ability to be Europe’s central bank. — Ben Walsh

On to today’s links:

Alpha
The world’s most successful hedge fund is not a hedge fund – Dan McCrum
Does trend-chasing explain our financial markets? - Noah Smith

Startups
“Most startup mixers are like, ‘Let’s go to a bar and get f—ed up.’ Here, there’s a mechanical bull” – Nellie Bowles

Wonks
Death by finance: How governments let the emerging market mess happen - Dani Rodrik

Must Read
That ‘distressed baby’ whom AOL’s CEO blamed for benefit cuts? She’s my daughter – Deanna Fei

Popular Myths
The myth of Obama’s part-time America – Derek Thompson
Saving on health care will hurt the economy, but that’s mostly ok – Binyamin Appelbaum

JPMorgan
A Chinese insurance regulator asked Jamie Dimon to hire his interpreter, via his interpreter – DealBook

Primary Sources
The CBO will now tell you how to read plain-English sentences about Obamacare – CBO

Alternative Currencies
“The Bitcoins can be thought of as existing nowhere except in the mind of the holder’ - bitcoin.it

Declines
The fall of Abercrombie & Fitch – The Cut

Twitter
4 out of 5 Americans don’t use Twitter – WSJ
Twitter just needs to convince people they never need to tweet – Herb Greenberg

Tax Arcana
Michael Jackson’s estate may have understated his net worth by more than 100 timees - Jeff Gottlieb

Risk Factors
“Prescription opioids are killing Americans at more than five times the rate that heroin is” - WaPo

Long Reads
Is Amazon any good for books? – George Packer

The Fed
Goldman: The Fed should focus on wage growth, not inflation – Matthew Boesler
Be happy that the Fed’s new number 2 worked at Citigroup – Felix

Housing
California’s $2 million+ home market has fully recovered; the rest of the market hasn’t - Conor Dougherty

Ya Think
Chinese economic data “present a smoothed version of reality” – NBER

Just An FYI
Marriage makes you richer – Bryan Caplan

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