The battle over the European Central Bank's controversial OMT bond-buying scheme takes center stage at Germany's top court. The stakes are high. The outcome could raise questions about the country's judicial credibility.
It was always about the principle. Sure, the OMT - or Outright Monetary Transactions - was never implemented. But that didn't stop some of Germany's top political figures from filing a constitutional complaint. The OMT, they argued, posed an existential threat to the eurozone.
The plaintiffs include former conservative Bundestag member Peter Gauweiler, former Social Democratic Justice Minister Herta Däuble-Gmelin, the Left's parliamentary faction and pro-democracy group "Mehr Demokratie" (literally, "More Democracy"). Soon, more than 12,000 people had lined up to join the lawsuit. But how did an innocent-looking, three-letter acronym end up causing such an outrage?
It began in the summer of 2012, when European Central Bank (ECB) chief Mario Draghi vowed to do "whatever it [took]" to save the euro. At the time, all bets were against the common currency, which was threatening to crumble under the weight of the Greek debt crisis. The off-the-cuff comment came after months of uncertainty. Like valium, it calmed markets almost instantly. But soon, investors wanted more - a lasting fix.
That came two months later, on September 6, when the ECB's Governing Council announced the OMT. The program would allow the bank to buy up unlimited amounts of sovereign debt on bond markets to keep teetering, debt-laden member countries from falling out of the eurozone, and possibly dragging down the rest of Europe with it.
Anticipating opposition, especially from Germany's fiscal hawks, the OMT came loaded with ifs and buts. For instance, the ECB pledged to only buy bonds of countries that had secured a bail-out agreement under Brussels' European Stability Mechanism (ESM) program, which required governments to implement much-needed economic reforms. The ECB also reserved the right to turn off the tap, once it felt it had accomplished its goal, or if a government failed to live up to its part of the agreement.
But these conditions were exactly what landed Draghi in hot water. Critics were quick to attack "Super Mario" for overreaching. By attaching reform requirements to the OMT, opponents argued the ECB was effectively prescribing economic policy - a violation of the bank's mandate under the European treaty. They also claimed that by buying bonds from a sovereign country, the ECB was essentially propping up that government's budget by lowering interest rates and reducing its financial burden. This, too, would amount to a violation of the bank's mandate.
Among the OMT's main critics is Germany's central bank, the Bundesbank, whose president, Jens Weidmann, has was one of the key witnesses in the plaintiffs' case against Draghi and the ECB. Weidmann was the only member of the ECB's Governing Council to vote against the OMT.
Weidmann got a taste of vindication in February 2014, when the court in Karlsruhe appeared to side with the complainants. But the language of the judges' ruling was vague, reflecting a concern that striking down the ECB's rescue policy with too much force would also deal a serious blow to financial markets' confidence in the stability of the eurozone.
Playing it safe, the German justices decided to pass the case on to the European Court of Justice (ECJ) before issuing its final ruling. For nearly 18 months, Mario Draghi held his breath. Then, in June 2015, a sigh of relief as the Luxembourg-based court upheld the ECB's bond-buying plan, saying the OMT did "not exceed the powers of the ECB." It was not the first time Europe's top court had moved to expand the purview of an EU institution.
Although the ruling was not a blank check, the ECJ's wording offered little in the way of comfort to critics wary of ECB overreach.
Eight months later, the ball is back in Karlsruhe's court. On Tuesday, the eight judges will again hear arguments as they weigh their final decision on Germany's role in the OMT program. If they stray too far from their first ruling, they are likely to be seen as toeing Luxembourg's line, which would damage their credibility. But it seems just as unlikely that they will run roughshod, shooting down the OMT entirely. Rather, their decision is likely to fall somewhere in the middle.
According to some of Germany's leading economic experts, such as Clemens Fuest, incoming head of the Ifo Institute for Economic Research, and Lars Feld, member of the German Council of Economic Experts, the best-case scenario would be if the justices issued a ruling that complemented the ECJ's decision without mirroring its reasoning. This way, they argue, Germany would not hand over the reins to the ECB completely.
The final decision is not expected for months. In the meantime, Draghi has moved on to another, less controversial bond-buying scheme, known as quantitative easing, to jumpstart the eurozone economy. Launched last March, that program has even won the backing of Bundesbank President Weidemann.
The OMT may be part of the ECB chief's toolbox, but as long as it remains unused, it's likely to be considered a victory for its opponents - regardless of how the court in Karlsruhe rules.