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| Court Challenge on Bond Buying Poses Test for Central Bank, and for E.U. | Court Challenge on Bond Buying Poses Test for Central Bank, and for E.U. |
| (7 months later) | |
| FRANKFURT — Courts are normally supposed to resolve disputes. But a decision last week by the Federal Constitutional Court in Germany has raised more questions than it has answered about the legality of a financial weapon that many analysts say saved the euro in its darkest hour — without even firing a shot. | |
| In the view of the German court, Mario Draghi, the president of the European Central Bank, made a promise he could not legally keep in the summer of 2012, when he resolved to do “whatever it takes” to preserve the euro currency union. | In the view of the German court, Mario Draghi, the president of the European Central Bank, made a promise he could not legally keep in the summer of 2012, when he resolved to do “whatever it takes” to preserve the euro currency union. |
| By doing so, the court inadvertently exposed another weakness in the construction of the European Union, which remains a relatively feeble federation compared with its strongest member states. The decision suggests that the European court system suffers from the same kind of turf battles that have often hampered political decision-making in the euro zone and prolonged the crisis. | By doing so, the court inadvertently exposed another weakness in the construction of the European Union, which remains a relatively feeble federation compared with its strongest member states. The decision suggests that the European court system suffers from the same kind of turf battles that have often hampered political decision-making in the euro zone and prolonged the crisis. |
| Mr. Draghi stepped in at a critical time for the European Union. During the summer of 2012, the high levels of borrowing costs of some of the euro zone’s weakest members, as measured by the interest rates on their bonds, were unsustainable. The specter of big bailouts for Italy and Spain was looming, and no one believed the euro zone could possibly afford such rescues. | Mr. Draghi stepped in at a critical time for the European Union. During the summer of 2012, the high levels of borrowing costs of some of the euro zone’s weakest members, as measured by the interest rates on their bonds, were unsustainable. The specter of big bailouts for Italy and Spain was looming, and no one believed the euro zone could possibly afford such rescues. |
| The Draghi vow alone helped to start easing the crisis. And soon after, the European Central Bank announced a plan to buy huge quantities of euro zone government bonds, which would ensure enough demand to keep the rates reasonably low. | The Draghi vow alone helped to start easing the crisis. And soon after, the European Central Bank announced a plan to buy huge quantities of euro zone government bonds, which would ensure enough demand to keep the rates reasonably low. |
| Having brandished the weapon, Mr. Draghi never needed to use it. Market interest rates for Spanish and Italian bonds plummeted and the euro zone crisis receded. That rendered any argument about the legality of the bank’s bond buying to be largely theoretical. | Having brandished the weapon, Mr. Draghi never needed to use it. Market interest rates for Spanish and Italian bonds plummeted and the euro zone crisis receded. That rendered any argument about the legality of the bank’s bond buying to be largely theoretical. |
| Still, thousands of Germans, fearful that they would have to bear the cost of rescuing Italians and Spaniards, petitioned the Constitutional Court to declare the program illegal. After deliberating for seven months, the court, which meets in the southwestern city of Karlsruhe, ruled Friday that purchases of euro zone government bonds would violate a provision in the bank’s charter that prohibits it from financing member governments. | Still, thousands of Germans, fearful that they would have to bear the cost of rescuing Italians and Spaniards, petitioned the Constitutional Court to declare the program illegal. After deliberating for seven months, the court, which meets in the southwestern city of Karlsruhe, ruled Friday that purchases of euro zone government bonds would violate a provision in the bank’s charter that prohibits it from financing member governments. |
| But rather than blocking any future bond buying, a move that might have caused havoc in financial markets, the court punted to the European Court of Justice in Luxembourg. | But rather than blocking any future bond buying, a move that might have caused havoc in financial markets, the court punted to the European Court of Justice in Luxembourg. |
| Some analysts saw the decision as little more than a way for the German court to express its disapproval of any bond purchases, without the risk of reigniting the euro zone crisis. The German court even reserved the right to block a higher court decision. | Some analysts saw the decision as little more than a way for the German court to express its disapproval of any bond purchases, without the risk of reigniting the euro zone crisis. The German court even reserved the right to block a higher court decision. |
| “They want to appear true to their legal principles, but they don’t want to go where that takes them,” said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington. | “They want to appear true to their legal principles, but they don’t want to go where that takes them,” said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute for International Economics in Washington. |
| Many experts say the muddled decision places no immediate restraint on the European Central Bank, a view expressed Wednesday by Benoît Coeuré, a member of the bank’s executive board. | Many experts say the muddled decision places no immediate restraint on the European Central Bank, a view expressed Wednesday by Benoît Coeuré, a member of the bank’s executive board. |
| “The status of the O.M.T. is not changed,” Mr. Coeuré said in an interview with Reuters, referring to what the bank calls the bond purchases, the outright monetary transactions. “It is ready to be used, but it is highly unlikely it would have to be used at the moment.” | “The status of the O.M.T. is not changed,” Mr. Coeuré said in an interview with Reuters, referring to what the bank calls the bond purchases, the outright monetary transactions. “It is ready to be used, but it is highly unlikely it would have to be used at the moment.” |
| Many outside analysts agree, and there has been little market reaction to the decision. | Many outside analysts agree, and there has been little market reaction to the decision. |
| “I don’t think the E.C.B.’s room to maneuver will be limited by this decision,” Michael Heise, chief economist of the German insurer Allianz, told a small group of reporters on Wednesday in Frankfurt. If the central bank had not promised to intervene in bond markets last year, he said, the euro might have collapsed, with grave economic consequences. | “I don’t think the E.C.B.’s room to maneuver will be limited by this decision,” Michael Heise, chief economist of the German insurer Allianz, told a small group of reporters on Wednesday in Frankfurt. If the central bank had not promised to intervene in bond markets last year, he said, the euro might have collapsed, with grave economic consequences. |
| But the German court decision has been fodder for euro-skeptics, confirming their view that the bank has illegally grabbed power. And the decision highlights a major unresolved question of jurisprudence in the region: Does the European Court of Justice reign over national supreme courts? | But the German court decision has been fodder for euro-skeptics, confirming their view that the bank has illegally grabbed power. And the decision highlights a major unresolved question of jurisprudence in the region: Does the European Court of Justice reign over national supreme courts? |
| Mr. Kirkegaard predicted that the European Court of Justice, which could take more than a year to issue a decision, will find language that addresses the concerns of the German court and avoids a crisis. | Mr. Kirkegaard predicted that the European Court of Justice, which could take more than a year to issue a decision, will find language that addresses the concerns of the German court and avoids a crisis. |
| Still, the dispute creates uncertainty. | Still, the dispute creates uncertainty. |
| Treaties give the European Court of Justice the final say in matters of European law. But the German Constitutional Court has a history of insisting on its right to decide whether European law violates the German Constitution, according to Franz Mayer, a professor at the University of Bielefeld. In its decision on Friday, the German court reiterated that it had the right to block policies that would expand the powers of the European Union beyond what has been agreed to by treaty. | Treaties give the European Court of Justice the final say in matters of European law. But the German Constitutional Court has a history of insisting on its right to decide whether European law violates the German Constitution, according to Franz Mayer, a professor at the University of Bielefeld. In its decision on Friday, the German court reiterated that it had the right to block policies that would expand the powers of the European Union beyond what has been agreed to by treaty. |
| The German court also effectively told the European Court of Justice how it should rule. The bond-buying program would be legal, the German court said, only under certain conditions: if the amounts were limited; if the central bank insisted that bonds it buys be paid in full by the issuing governments; and if the bank did not distort market prices for the bonds. Analysts say that imposing limits on bond buying would encourage speculators to challenge the bank’s resolve. | The German court also effectively told the European Court of Justice how it should rule. The bond-buying program would be legal, the German court said, only under certain conditions: if the amounts were limited; if the central bank insisted that bonds it buys be paid in full by the issuing governments; and if the bank did not distort market prices for the bonds. Analysts say that imposing limits on bond buying would encourage speculators to challenge the bank’s resolve. |
| The German decision was controversial within the court, as well. Two of the eight judges who considered the case issued unusually sharp dissenting opinions. | The German decision was controversial within the court, as well. Two of the eight judges who considered the case issued unusually sharp dissenting opinions. |
| “In an effort to secure the rule of law, a court may happen to exceed judicial competence,” Judge Gertrude Lübbe-Wolff wrote in dissent. “In my view, this has occurred here.” | “In an effort to secure the rule of law, a court may happen to exceed judicial competence,” Judge Gertrude Lübbe-Wolff wrote in dissent. “In my view, this has occurred here.” |
| Michael Gerhardt, the other judge who dissented, said the complaints against the European Central Bank filed by thousands of individual Germans were inadmissible. It is the responsibility of the elected members of the German Parliament, not ordinary citizens, to challenge the bank’s decisions, Mr. Gerhardt said. Parliament has not tried to block the bank’s policies because most legislators favor them. | Michael Gerhardt, the other judge who dissented, said the complaints against the European Central Bank filed by thousands of individual Germans were inadmissible. It is the responsibility of the elected members of the German Parliament, not ordinary citizens, to challenge the bank’s decisions, Mr. Gerhardt said. Parliament has not tried to block the bank’s policies because most legislators favor them. |
| The German Constitutional Court’s condemnation of bond buying has no legally binding force. But it could act as a constraint on the bank if, as some economists fear might still happen, the euro zone slipped into a broad decline in prices. Such deflation could be ruinous for consumer spending, corporate profits and jobs. | The German Constitutional Court’s condemnation of bond buying has no legally binding force. But it could act as a constraint on the bank if, as some economists fear might still happen, the euro zone slipped into a broad decline in prices. Such deflation could be ruinous for consumer spending, corporate profits and jobs. |
| One obvious strategy against deflation would be the wholesale purchase of government bonds, the same tool that the Federal Reserve has been using to stimulate the United States economy. | One obvious strategy against deflation would be the wholesale purchase of government bonds, the same tool that the Federal Reserve has been using to stimulate the United States economy. |
| Mr. Coeuré said on Wednesday that the European Central Bank saw no sign of deflation at the moment, though it was alert to the risks of very low inflation. Bond purchases remain an option as a monetary policy tool, he said. | Mr. Coeuré said on Wednesday that the European Central Bank saw no sign of deflation at the moment, though it was alert to the risks of very low inflation. Bond purchases remain an option as a monetary policy tool, he said. |
| And Mr. Kirkegaard of the Peterson Institute said he did not think that Mr. Draghi was worried about the German court. On the contrary, Mr. Draghi, a master of using words and veiled threats to impose discipline on politicians and financial markets, may find the German howling about his policies to be useful. The complaints give Mr. Draghi a counterweight to the majority of members of the bank’s governing council who would like to open the monetary policy floodgates. | And Mr. Kirkegaard of the Peterson Institute said he did not think that Mr. Draghi was worried about the German court. On the contrary, Mr. Draghi, a master of using words and veiled threats to impose discipline on politicians and financial markets, may find the German howling about his policies to be useful. The complaints give Mr. Draghi a counterweight to the majority of members of the bank’s governing council who would like to open the monetary policy floodgates. |
| “It’s always useful to have a mad dog on your team,” Mr. Kirkegaard said. “It intimidates the opposition.” | “It’s always useful to have a mad dog on your team,” Mr. Kirkegaard said. “It intimidates the opposition.” |