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Germany sends ECB's crisis-killing action to EU court

Germany's highest court expressed doubts on Friday about the European Central Bank's bond-buying programme, credited with stopping the eurozone crisis, and sent the case to the European Court of Justice.

FRANKFURT: Germany's highest court expressed doubts on Friday about the European Central Bank's bond-buying programme, credited with stopping the eurozone crisis, and sent the case to the European Court of Justice.

Some analysts suggested that the decision might turn out to be helpful to the central bank.

Back in September 2012, the Constitutional Court had rejected legal challenges by a group of eurosceptics to the two key eurozone crisis tools -- the European Stability Mechanism (ESM) and the European fiscal pact.

As a result, German President Joachim Gauck was able to sign those two crisis tools into law.

But the eurosceptics also filed a last-minute challenge to the ECB's OMT bond purchase programme, arguing that it amounted to monetisation of sovereign debt and overstepped the central bank's mandate.

The OMT stands for outright monetary transactions, and monetisation of debt is controversial because it is seen in some quarters as being one step away from creating money directly to finance public spending, which is banned by the Maastricht Treaty.

ECB chief Mario Draghi unveiled the programme in August 2012, which would allow the central bank to buy up unlimited amounts of the sovereign debt of crisis-ridden countries.

While the programme never actually been put into use so far, its mere existence has proved to be the most effective weapon against the crisis and has effectively defused fears of an imminent break-up of the eurozone.

The constitutional court, based in Karlsruhe, said it would issue its final ruling on the ESM on March 18.

But it also decided to consult the European Court of Justice with regard to the OMT because the ECB as a European body comes under the jurisdiction of the Luxembourg-based court.

It would be the first time that the constitutional court has passed on a case to the European court.

In the court's opinion, "there are important reasons to suggest that it goes beyond the ECB's monetary policy mandate and infringes on the powers of the member states and contravenes the ban on monetary deficit financing," it argued.

Nevertheless, "the senate believes it is possible" that limitations could be imposed on the OMT programme in such a way as to make it compatible with EU law, the court added.

Good for the euro?

European sources told AFP that the decision to send the case to Luxembourg was actually good for the euro, because the ECJ as a European body was unlikely to overturn an anti-crisis measure which has been instrumental in restoring calm to the markets.

"It's the solution we wanted," the source said.

For its part, the ECB said that it "takes note of the announcement made today by the German constitutional court."

But it reiterated that the OMT programme "falls within its mandate".

Analysts also appeared to welcome the decision, albeit cautiously.

ING DiBa economist Carsten Brzeski said it was exceptional for the German court to pass matters on in this way.

"Today's announcement therefore could either be a sign that the court has reached its legal limits on European issues or that the issue is so tricky and touchy that it is better to pass it on.

"As regards the short-term outlook, the announcement should clearly reduce the Karlsruhe fear factor for the ECB. But not entirely. It is not a given that the European Court of Justice will only rubber-stamp the OMT programme," Brzeski warned.

Natixis economist Johannes Gareis was more optimistic.

"The decision of the German constitutional court to pass the ECB/OMT case to the European Court of Justice should clear the way for the ECB's most powerful rescue mechanisms, which stopped a vicious spiral of spreads on sovereign bonds since its announcement in August 2012," Gareis said.

"It is very unlikely that the European Court will rule against the ECB's bond-buying programme," Gareis said.

"In fact, the German court admitted in its statement that it also considers that if the OMT decision were interpreted restrictively, it could conform with the law," Gareis said.

But Berenberg Bank economist Christian Schulz was cautious.

"The euro crisis has always been mostly about confidence and investors may not wait for the final technicalities to make up their mind," Schulz said.

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