Shifting Power Between Creditors And Debtors In EMU

The key axis is Europe is between creditors and debtors. Each pushes their own interests. The regime of austerity in Europe indicates that the creditors have had the upper hand. However, there have been two developments in the last two days that suggest the tide is turning. 

Today’s preliminary, non-binding opinion by Advocate General of the European Court of Justice rules in favor of the Outright Market Transaction facility that had been challenged in a German court. The key element of the opinion was that the ECB should be given extensive leeway in conducting monetary policy. There should not be a pre-determined cap on its purchases. It can buy bonds with lower credit ratings. The ECB does not necessarily need to be a “preferred creditor” in case of debt restructuring; thus endorsing the financial principle of pari passu. 

The clear implication is that a sovereign bond purchase program, which the ECB is expected to launch at one of its next two meetings does not violate the controlling treaties. ECB President Draghi could have hardly hoped for a more favorable opinion. It is true that the final decision in 4-5 months may be different than the Advocate General’s opinion, but this is not often the case. The German Constitutional Court, where the case was first heard, could also decided differently. However, as it referred the case to the European Court of Justice, it would seem to have to respect what it says about the ECB.  The German court may add some requirements for the role of the German parliament.

Monetary union is still a relatively new development.  The institutional relationships are still being developed. The US had a similar experience after it was founded.  It was not clear the relative power of the judicial branch or its authority to review the constitutionality of legislative or executive actions.  It took several years to work this out (see Marbury vs.Madison), and even then it did not go unchallenged.  Much of the New Deal was ruled unconstitutional, and Franklin Roosevelt tried to dilute the Supreme Court’s hostility by expanding its size.  He was defeated in this attempt.