Commenting on a landmark decision in constitutional (and, indeed, institutional European) law may not be the wisest thing to do for a financial lawyer, for what will he or she be able to say? A cobbler should stick to his trade, which certainly applies also to the recent decision of the German Constitutional Court (the ‘Constitutional Court’) of 21 June 2016 regarding the constitutionality of the European Central Bank’s Outright Monetary Transactions (‘OMT’) programme (the ‘Decision’, available in German here; for a detailed account in English, see the Court’s press release). As his or her qualifications (if any) are in entirely different fields, a financial lawyer is no more qualified than any other layperson to offer any views on most of the arguments laid down in what is certainly an impressively thorough and, with no less than 220 paragraphs, complex judgment.

Of course, like any other reader with or without a background in law, the financial lawyer may have second thoughts, for example, about enforceable rights for individual citizens to fight ultra-vires acts – real or alleged – by European institutions: a position endorsed in much detail in the Decision and derived from the principle of sovereignty of the people and the fundamental right of all citizens to participate, through general elections, in the legitimisation of political power. Likewise, one may wonder what would have happened if the Constitutional Court, in line with its earlier referral for preliminary reference to the European Court of Justice (‘ECJ’) in the same case (of 14 January 2014), had ruled against the ECJ’s own decision in the matter of 16 June 2015 (Gauweiler and Others v. Deutscher Bundestag, Case C-62/14, EU:C:2015:400, commented also here), which had essentially rubber-stamped the OMT programme and rejected all but very few of the Constitutional Court’s grave concerns about its legality. What would the sanctions have been – or, in the Constitutional Court’s words, what would the requirement that national institutions ‘use legal or political means to work towards the revocation’ of the relevant measures, and ‘take suitable measures to restrict the national effects of such measures as far as possible’ have been? Would the Bundesbank have been ordered to withdraw from the decision-making processes in the Eurosystem, to burn the financial bridges between Germany and the rest of the Eurozone by leaving behind the established processes for the execution of the common monetary policy and the technical framework for cross-border payments both among the member institutions of the Eurosystem and among private parties? And would the ECB itself have shot back by triggering infringement proceedings against Germany before the ECJ? Would the German army ultimately have been ordered to shell the Eurotower in Frankfurt?

These questions probably are not for the financial lawyer to answer. Yet, they certainly do not just indicate that the range of possible consequences, had the Constitutional Court ultimately held otherwise, may not have been too well thought through (which, incidentally, had been one of the key arguments put forward by Judge Lübbe-Wolff in a minority vote in the Constitutional Court’s first decision for preliminary reference back in January 2014). Leaving aside the satirical finale – outright war against the ECB’s bulwarks –, the questions raised above clearly illustrate also the potentially dramatic economic implications that would have followed a decision along the lines sketched out in that first decision, ie, a decision that had declared the OMT programme to be ultra vires and, therefore, in violation of the German Constitution as well.

It is in this regard that a financial lawyer actually should be entitled to say a word or two about the case and, ultimately, the Decision of 21 June 2016. First and foremost, despite all the elaborate arguments of the Constitutional Court on what the ECB’s role can, and should, be under the European Treaties, one may well question the underlying traditionalist concept of a monetary institution as an organisation restricted by law to combat inflation but without any meaningful role in the protection of systemic stability. This, to be sure, is how central banking traditionally has been conceived in the German political debate, as well as in conservative economic and legal scholarship within the country. And it is reflective of the German Bundesbank’s self-definition, as it has evolved (in times of general economic stability) after World War II and as was never tested in times of stress commensurate with the global financial crisis or the Euro crisis). This, in turn, has influenced not just the German understanding of the relevant Treaty provisions but also the formulation of the complaints by significant numbers of citizens and politicians that triggered the OMT litigation in the first place. From a financial law (and financial stability) point of view, however, the entire concept seems to be somewhat out of tune with what we have learned throughout the global financial crisis: that central banks should not stand by and merely monitor developments lest they turn into inflation, but that they can, and should, make full use of their armoury to put out the fire before it is too late. In fact, one may wonder if financial markets (not just) in Europe might have collapsed, once again, in the aftermath of a more restrictive judgment – if, in other words, the Constitutional Court might have triggered yet another global Lehman event, with massive consequences not just for banks and investors but also for the economy at large.

There are more technical reservations too. As has been argued by a number of authors with regard to the preliminary reference of January 2014, the Constitutional Court may simply have misinterpreted some of the design features of the OMT programme, its rationale, and its potential economic consequences.[1] Last but not least, the very fear that losses generated through the programme could trigger the insolvency of the ECB as well as of the national central banks participating in the Eurosystem may well turn out to be ill-founded. To be sure, this belief clearly has inspired commonly held reservations against the ECB’s actions in recent years, especially among Germans for whom the concept of an active central bank engaging in non-standard monetary policy transactions has come as an unwelcome surprise. Concerns that the resulting losses would backfire directly into national budgets of Member States, which might jeopardize the ability of national legislators to define, and execute, economic policy in the interest of their respective peoples, have also been a key motive of the constitutional complaints triggering the OMT litigation. On closer inspection of the financial arrangements between the ECB and the Eurosystem central banks and of the technical aspects of central bank balance sheets, however, such fears are, at best, wildly overstated.[2]

From a financial law perspective, in short, Karlsruhe’s OMT decision reveals a rather striking gap between orthodox constitutional (and European) doctrine, and a modern, state-of-the-art understanding of the role of central banks in the preservation of financial stability. This is certainly something to be concerned about – for financial lawyers as well as for those better qualified to evaluate the constitutional doctrine on its merits.

Jens-Hinrich Binder is Professor of Private Law, Commercial and Securities Law at the University of Tuebingen, Germany.

 

[1] Carsten Gerner-Beuerle, Esin Küçük and Edmund Schuster, ‘Law Meets Economics in the German Federal Constitutional Court: Outright Monetary Transactions on Trial’, in German Law Journal 15:2 (2014), 281.

[2] Cf. (in German) Jens-Hinrich Binder, ‘Drohende Zentralbankinsolvenz?’, in Juristenzeitung 70 (2015), 328.