German court could re-ignite euro flames with Bundesbank ban
THE risk is rising that the German constitutional court will severely restrict the eurozone bond rescue scheme for Italy and Spain, and may reignite the euro debt crisis by prohibiting the German Bundesbank from taking part.
The 'Frankfurter Rundschau' reports that the verdict has been delayed until April due to the complexity of the case and "intense differences of opinion" among the eight judges.
The longer the case goes on the less likely it is that the court – or Verfassungsgericht – will rubber stamp requests from the German government for a ruling that underpins the agreed bail-out machinery.
"This is potentially very serious, particularly at a time when people are already worried about emerging markets," said one expert close to the case.
"We doubt that the court will ban bond purchases outright but they could demand changes that greatly complicate the picture."
The European Central Bank's back-stop plan for southern Europe – known as the OMT – has never been activated or tested. The mere pledge to do "whatever it takes" was enough to calm the bond markets in July 2012. However, this rhetorical effect works both ways.
If markets start to doubt whether the OMT really exists, confidence could evaporate again.
Bank of America says there is a "relatively high" risk that the court will rule that the OMT is illegal as designed. "The Bundesbank might be prohibited from participating," said the bank's German analyst Tobias Blattner in a report.
While the Verfassungsgericht has no jurisdiction over the ECB, it can force German institutions to withdraw support for EU operations, which amounts to the same thing. The ECB's rescue policies would lose all market credibility instantly without German backing.
Bank of America said the court was unlikely to pull the plug altogether on the OMT, but a negative ruling would strengthen the position of eurosceptics in Germany and risk a fresh bond sell-off.
"Any market reaction will necessarily depend on the details. Even in an extreme scenario we would expect the ECB to calm the markets by announcing alternative tools," it said.
Five expert witnesses argued in public hearings last year that the ECB's bond rescue plan violates the EU's Lisbon Treaty and Germany's Basic Law, or Grundgesetz. Bundesbank chief Jens Weidmann testified that the ECB was breaching its own mandate by submitting to a political "conditionality" trigger decided by EU parliaments.
A leaked draft of the Bundesbank's submission to the court systematically unpicked every line of argument used by the ECB's Mario Draghi to justify the bond plan, concluding that the ECB has no mandate to uphold the "current composition of monetary union" or to "rescue states in crisis".
The text said the OMT entails the purchase of "bad bonds", violates ECB independence and entails a high risk of heavy losses in the "not unlikely" event that debtor states are forced out of EMU.
The Frankfurter Rundschau said it would be a "spectacular" reversal of prior rulings if the court agreed to any arrangement that eroded ECB's independence, especially its seminal ruling on the Maastricht Treaty in the 1990s.
While the German court has at each stage endorsed further steps in EU integration and backed euro bailout measures, it imposed restrictions that further narrowed Berlin's room for manoeuvre.
The court authorised the original EMU bailouts in 2011 but crucially ruled that the budgetary powers of the Bundestag cannot be alienated to any supra-national body, effectively killing off any hope of eurobonds or EMU debt mutualisation.
The judges issued a thundering verdict on the Lisbon Treaty in July 2009, reminding Brussels that the nation states are the "masters of the Treaties" and not the other way round.
It set out limits to EU integration and warned that whole areas of policy – including budgets – "must forever remain German". In an epic shot across the bows it ruled that Germany must be prepared to "refuse further participation in the European Union" if the drift of EU affairs starts to erode German democracy.
Chief justice Andreas Vosskuhle says Germany has exhausted the scope for further EU integration under German constitutional law.
If it wishes to take revolutionary steps towards fiscal union, it must equip itself with a "new constitution". This would require a referendum.
(© Daily Telegraph, London)