The differences in interpretation of the recent German Constitutional Court ruling on the legality of “bailouts” by the ECB have been extraordinary. In part this is understandable: the court, in effect, ruled that bailouts via OMT are illegal under German law, but then nullified its own decision by – for the first time ever – referring the question “upstairs” to the European Court of Justice (ECJ).
On the one side is the immediate reaction of some pundits (and financial markets) who appear to believe that this ruling removes a major obstacle to crisis recovery. In this view, since the ECJ would be unlikely to rule against OMT (as it is presumably less obsessed with issues of German constitutionality), the ruling effectively resolves the matter.
On the other side are various degrees of panic. Some commentators have argued that until the ECJ actually rules one way or the other, an OMT bailout would be impossible. Perhaps the most extreme reaction comes from Wolfgang Munchau of the Financial Times, who initially argued that the Eurozone would break up, then argued that it would stay together, and now, on the basis of this ruling, has gone back to arguing that the Eurozone’s institutional problems are unfixable.
On the face of it, this reaction is particularly odd. Whatever else one might think about the ruling, Germany’s Constitutional Court is leading by example. It is generally agreed that a lasting resolution to the Eurozone crisis will come when Eurozone economic institutions are created that stand above national governments – i.e., a banking union, fiscal union, and perhaps a common debt.
In declaring that the ECJ, rather than a national court, should rule on the legality of the ECB bailouts, the German Constitutional Court is surely, if nothing else, taking a step in precisely this direction?