OMT ruling: Karlsruhe says no, refers to ECJ and suggests ECB should always be preferred creditor

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OMT ruling: Karlsruhe says no, refers to ECJ and suggests ECB should always be preferred creditor

The German constitutional court (Karlsruhe) has just released the pre-announcement of its ruling on the legality of the ECB’s OMT programme. A nu

Publishing date: 15 October 2014
Authors: Guntram B. Wolff

The German constitutional court (Karlsruhe) has just released the pre-announcement of its ruling on the legality of the ECB’s OMT programme. With a majority of 6 against 2 judges, it has decided that – “subject to the interpretation by the Court of Justice of the European Union, the Federal Constitutional Court considers the OMT Decision incompatible with primary law“. As a result, the ECJ will now have to analyse the legality of OMT according to EU primary law, a process that will likely last for 18 months or more. In the unlikely case that the ECJ was to decide along the lines of Karlsruhe, the ruling would require German authorities to refrain from implementing OMT related acts.

A number of quick observations on this ruling are in order.

First, I disagree with the assessment of Karlsruhe that OMT is in breach of primary EU law. The OMT programme was a necessary step for the ECB to fulfil its monetary policy mandate, an argument I made in detail last year in 'The ECB's OMT Programme and German Constitutional Concerns'.
Karlsruhe leaves the door open to a possible interpretation by the ECJ that would be in conformity of the primary law. In particular, if conditionality of an ESM programme is met and if losses on the bond purchases are excluded, then it might be seen as an appropriate measure of support of the general objectives of the Union. As an ESM programme can legally only be given if debt is estimated to be sustainable, OMT could be allowed in such a circumstance. Yet, this does not mean that ex-post losses could not happen, if for example the macroeconomic situation deteriorates more than expected. According to Karlsruhe, those losses should then be restricted to the official financial assistance and to private creditors.
De facto, Karlsruhe therefore suggests that the ECB is a preferred creditor. A priori, this appears to be a sensible point as otherwise the likelihood of monetary financing could increase. However, it could also mean that the exit from an ESM/OMT programme could be very difficult. In fact, private creditors would understand that they are subordinate to the ECB and would require a much higher yield depending on the relative size of the ESM programme, the OMT purchases and the remaining debt in private hands. De facto, this could mean that even if overall debt is sustainable, a programme exit is not possible because the subordination precludes market access. As a result, PSI or an OSI on the official lending may become more likely in order to bring a country back to the market. It will be of central importance, whether the ECJ confirms the seniority of the ECB.

Read more on Outright Monetary Transactions

The ECB's OMT Programme and German Constitutional Concerns

A press review ahead of the German Constitutional Court decision

Overview of the Karlsruhe Hearing on OMT – Summary

In defense of OMT ahead of Karlsruhe

Blogs review: OMT - Has the ECB solved the Euro Crisis?

The SMP is dead. Long live the OMT

The OMT programme was justified but the fiscal union question remains

Did the German court do Europe a favour?

About the authors

Guntram B. Wolff

Guntram Wolff is a Senior fellow at Bruegel. He is also a Professor of Economics at the Université libre de Bruxelles (ULB).

From 2022-2024, he was the Director and CEO of the German Council on Foreign Relations (DGAP) and from 2013-22 the director of Bruegel. Over his career, he has contributed to research on European political economy, climate policy, geoeconomics, macroeconomics and foreign affairs. His work was published in academic journals such as Nature, Science, Research Policy, Energy Policy, Climate Policy, Journal of European Public Policy, Journal of Banking and Finance. His co-authored book “The macroeconomics of decarbonization” is published in Cambridge University Press.

An experienced public adviser, he has been testifying twice a year since 2013 to the informal European finance ministers’ and central bank governors’ ECOFIN Council meeting on a large variety of topics. He also regularly testifies to the European Parliament, the Bundestag and speaks to corporate boards. In 2020, ranked him one of the 28 most influential “power players” in Europe. From 2012-16, he was a member of the French prime minister’s Conseil d’Analyse Economique. In 2018, then IMF managing director Christine Lagarde appointed him to the external advisory group on surveillance to review the Fund’s priorities. In 2021, he was appointed member and co-director to the G20 High level independent panel on pandemic prevention, preparedness and response under the co-chairs Tharman Shanmugaratnam, Lawrence H. Summers and Ngozi Okonjo-Iweala. From 2013-22, he was an advisor to the Mastercard Centre for Inclusive Growth. He is a member of the Bulgarian Council of Economic Analysis, the European Council on Foreign Affairs and advisory board of Elcano. He is also a fellow at the Kiel Institute for the World Economy.

Guntram joined Bruegel from the European Commission, where he worked on the macroeconomics of the euro area and the reform of euro area governance. Prior to joining the Commission, he worked in the research department at the Bundesbank, which he joined after completing his PhD in economics at the University of Bonn. He also worked as an external adviser to the International Monetary Fund. He is fluent in German, English, and French. His work is regularly published and cited in leading media.