The Bundesbank Hits Back
Germany's constitutional court in Karlsruhe is traditionally buried in complaints with every major new decision concerning the bailout regime and every major new policy initiative by the ECB. The court's modus operandi hitherto has been to largely adopt the position of the German government, but it will now and then add certain conditions. These conditions usually seek to ensure greater parliamentary oversight and/or attempt to ensure that government won't agree to anything on the European level that is clearly in conflict with the German constitution.
If one looks at these proceedings from outside, it seems obvious that the court wants to avoid handing down any rulings that might exacerbate the crisis. In fact, the government's arguments and briefs always stress the possibility that an uncontrollable crisis situation may result and that consequently Germany would suffer great economic damage if the court were to substantially interfere with its course.
On the other hand, the complainants are not exactly dummies. Not only do they usually wield very strong legal arguments, they are also favored by the fact that their predictions regarding the euro have all come true. And so the court is walking a fine line – neither does it want to completely upset the European applecart, nor does it want to be seen as simply rubber-stamping the government's agenda.
Following Mario Draghi's OMT announcement, more complaints were filed. In June the court will decide on the legality of the ESM and as part of the exercise has also undertaken to examine the legal standing of the ECB's OMT program – which so far exists only in announcement form.
What makes this particular decision a lot more interesting than usual is an amicus curiae brief filed by the Bundesbank. German financial newspaper 'Handelsblatt' reports that it has received a copy of the brief and its contents are quite explosive. We will summarize the Handelsblatt report below:
The Bundesbank is evidently strongly critical of the policies implemented to date in order to rescue the euro. It vehemently argues against any purchases of government bonds by the ECB.
It notes that “bonds of low credit quality are deliberately bought”, which increases the risks to the euro-system. Buying sovereign bonds might put the central bank's independence into doubt, which the BuBa considers the sine qua non for it to successfully pursue its price stability mandate.
“Once monetary policy is on this slippery slope, a reversal is difficult and only possible at great cost”, according to the BuBa. Wait, it gets even better.
'Monetary Transmission Mechanism' Broken? Tough Luck!
The BuBa notes that it doubts that purchases of sovereign bonds under 'conditionality' will actually include strict reform demands of the countries concerned and points to Greece as a bad example that has shown that conditionality does not preclude sizable purchases in extremely dubious cases, which teds to redistribute risk across the balance sheets of the euro-system. Moreover, the BuBa has grave doubts about the justifications for the putative bond purchases.
