Rescues Violating the German Constitution:The Federal Court Decides on a Theory of Finance

The Federal German Constitutional Court has made it clear that it considers the OMT program to be in violation of the ECB’s mandate. This paper argues that the Court’s decision reflects an endorsement of the efficient-market hypothesis. If financial markets are efficient, interference of any kind in these markets cannot be regarded as monetary policy and hence violates the ECB’s mandate. In 1962, Helmut Schmidt, who was then Minister of the Interior of the city-state of Hamburg, violated the German constitution by making use of the Federal Armed Forces [Bundeswehr] within the country’s borders in a non-military context, specifically to rescue fellow citizens during the great North Sea flood of that year. However, despite acting unconstitutionally he was seen as being in compliance with his mandate. This contrasts with Mario Draghi who – without having yet bought a single sovereign bond – has been accused of violating the German constitution because the Court ignored alternative theories of finance which have been put forward in the debate among economists about the proper conduct of monetary policy in a financial crisis.