Some sovereignty obsessed people with little practical economic sense are preparing to make a decision with the potential to seriously spook European markets. And no, we don’t mean the Brexit referendum.
In a few hours Germany’s highest court will rule on the legality of the European Central Bank’s most contentious weapon in fighting the financial crisis. At 10am local time, Mario Draghi’s ‘whatever it takes’ scheme will meet the ‘whatever we say’ of the Karlsruhe.
This is the finale of a long legal saga that has dogged the ECB’s Outright Monetary Transactions programme for most of its 4-year existence. Mr Draghi’s promise to, if necessary, buy unlimited eurozone bonds has never been used, but its effects were palpable. Mr Draghi challenged the speculators to bet against him, and they blinked.
The FT’s ECB watcher Clare Jones does a fine job of explaining the issues and the ping-pong between the Karlsruhe and the European Court of Justice that preceded this decision. The bottom line is that the Karlsruhe has already voiced reservations about the design of OMT – and may today take a stricter line than the ECJ. At worst it could legally hobble the scheme.
The timing is extraordinarily. On an economic level, markets are already fretting over the referendum. The ECB and the Bank of England are preparing to flood the market with liquidity and take some edge off a negative reaction. But if investors seriously turn against the eurozone periphery – as officials in Brussels and Frankfurt fear – OMT could be crucial. Its credibility matters.
On a political level, too, this is an unusually sensitive moment. What are the implications of a national court thumbing its nose at the ECJ on such an important EU policy decision? For decades the Karlsruhe has coexisted with Europe’s highest court in an uneasy legal truce, with each one claiming supremacy and the final say on law but never testing the premise to the point of destruction.
If the Karlsruhe imposes its will – and takes back control, as the Brexiters would say – what will British eurosceptics think? It could certainly inspire some interesting lawmaking in Westminster, even if there is a Remain vote on Thursday.
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