Submission to EU justice court on ECB monetary transactions

Ireland is among the states making a submission to the European Court of Justice on the ECB’s outright monetary transactions programme, credited with halting the euro crisis but questioned by the German Constitutional Court.

The German court referred a number of issues about the transactions to the Court of Justice in Luxembourg, after finding it was not in line with German law.

The referral was seen as something of a win for the ECB since this was the first time Germany’s highest court has asked the court for its opinion.

It has asked whether the transactions comply with the EU’s own primary law. A “yes” would solidify the bank’s powers to intervene for goals other than just price stability, while a defeat would have profound implications for the ECB’s operation in the future.

The ECB in September 2012 said it would make unlimited purchases of the sovereign debt of governments under pressure from the markets — known as outright monetary transactions. ECB president Mario Draghi said at the time he would “do whatever it takes to preserve the euro” within the bank’s mandate.

The German court found that the transactions were a form of monetary financing of governments, which is banned under the EU treaties, and have said that the ECB should not be on an equal footing with private creditors; should avoid interfering with price formation, and should be limited.

When the Court of Justice makes its ruling, the German court will give its final judgment on whether the transactions are contrary to German constitutional law, known as the basic law.

If it does, the danger is that it could then prevent the German Bundesbank from participating in the transactions were it ever used. Or the worst case scenario would be if the Court of Justice rejected the case saying there was nothing to decide.

It would then go back to the German court with the risk that it would set up its own legislation on the basis that it was incompatible with the constitution. Other courts could come to a different conclusion and there could be 28 different frameworks for one, centralised European institution.

ECB sources said the German court is seeking a legal opinion on a decision that does not exist and that it remained to be seen if in fact the European Court of Justice will go into it.

The court has appointed a Spanish advocate general and the reporter is Danish. As many members of the court are due to be replaced next October, it is expected they will release an opinion by then.

The ECB was only a witness in the case before the German court but will now have a much more active role and has appointed a German lawyer and one of its own in-house experts.

“We are confident that our views will be vindicated,” a senior ECB source said.

The ECB’s defence will be purely technical dealing with the issues relating to their mandate. They will make the point that even monetary policy has distributional consequences and if, as the German court said, distribution should be purely done by governments, it would mean the ECB would not be able to move interest rates.

“That will be the defence,” said the source adding that they will not pretend to be the lender of last resort to governments, but are to the banking sector.

Outright monetary transactions would never be unlimited other than within a frame, he said.

Among the other states making submissions are Cyprus, Portugal, Greece, Spain, the Netherlands, France, and Italy. Belgium and Slovenia are said to be considering action.