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Why The ECJ Should Reject The German Constitutional Court’s Ruling

De Grauwe, P. (2014) “Why the ECJ Should Reject the German Constitutional Court’s Ruling“, Social Europe Journal, 11 March 2014.

Despite having a positive effect on the economic situation within the Eurozone, the European Central Bank’s Outright Monetary Transactions (OMT) program has proved controversial, with the German Constitutional Court in Karlsruhe recently deeming it illegal under EU law. Paul De Grauwe argues that the ruling reflects a serious misunderstanding of central banking on the part of the German Court, and that the European Court of Justice should reject its conclusions. Failure to do so would undermine the effectiveness of the OMT program and risk reigniting the Eurozone crisis.

Two weeks ago the German judges of the Constitutional Court in Karlsruhe came to a preliminary conclusion: the European Central Bank’s government bond buying program (OMT) is illegal according to EU law. The judges referred the case to the European Court of Justice asking the Luxembourg judges to add conditions to the OMT program to make it possible for them to reconsider their judgment. These conditions, if implemented, would in fact rob the OMT program of its effectiveness and make it totally useless. This would create the risk of repeated crises in the government bond markets of the Eurozone.

The main argument used by the German judges, which was very much influenced by the Bundesbank advice on OMT, can be summarized as follows. When the ECB buys government bonds it mixes monetary and fiscal policies. The fiscal component of OMT arises from the fact that the government bonds bought by the ECB can lose value if the governments whose bonds are bought default. If that happens the ECB will incur a loss that can wipe out its equity. As a result, governments of the member countries will have to use taxpayers’ money to recapitalize the ECB. Thus, by buying government bonds the ECB puts future taxpayers at risk. The latter may be forced to pay taxes, without due democratic process. Indeed decisions to tax can only be taken by national parliaments, and not by a politically irresponsible bureaucracy like the ECB.

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