Law Meets Economics in the German Federal Constitutional Court: Outright Monetary Transactions on Trial

Abstract

The Eurozone banking and sovereign debt crisis has brought the fragility of European monetary union into sharp focus and exposed the lack of effective instruments at the European level to maintain financial stability. The policy responses of the European and national institutions included an announcement made by the European Central Bank (ECB) in September 2012 in which the ECB envisages purchasing bonds issued by certain Eurozone countries in so-called “Outright Monetary Transactions” (OMT). The announcement of OMT has had a profound stabilising impact on financial markets, and has widely been regarded as a turning point in the Euro crisis.

The OMT Decision has been challenged before the German Federal Constitutional Court (Constitutional Court) for exceeding the ECB’s mandate and violating the prohibition on monetary financing under the Treaty on the Functioning of the European Union.

This article discusses critically the OMT Decision and the decision of the Constitutional Court. For the first time in its history, the Constitutional Court has made a reference to the Court of Justice of the European Union for a preliminary ruling, but also expressed the view that the OMT Decision is likely to be in violation of the principle of conferral, and hence of German constitutional law, unless it complies with precise conditions as to its scope, duration, and technical features set out in the Constitutional Court’s decision.

We argue that the potential constitutional conflict invoked by the decision of the Constitutional Court is largely based on an incomplete understanding of the economic rationale and intended functioning of the OMT Decision. We draw on the economics of monetary union to show that the OMT Decision is intended to address deficiencies in the design of European monetary union and market distortions created by investor behaviour that is individually rational, but suffers from a failure of coordination. We argue that in light of the economic rationales of OMT, the Constitutional Court’s conclusion that the OMT Decision constitutes an illegal act by the ECB is unconvincing.

Keywords: Case C-62/14, Gauweiler, BVerfG 2 BvR 2728/13, monetary policy, central banks, outright monetary transactions, OMT, multiple equilibria, incomplete monetary unions, German Federal Constitutional Court, Bundesverfassungsgericht, European Monetary Union, ultra vires review, identity review

JEL Classification: E52, E58, K39