By Paul Taylor
PARIS (Reuters) - By referring a complaint against the European Central Bank's bond-buying policy to the European Court of Justice, Germany's constitutional court has sidestepped a crucial dispute over who has ultimate authority in the European Union.
The issue is highly sensitive at a time when Eurosceptical parties that seek to roll back the EU's powers are gaining ground in many member states ahead of direct elections for the 28-nation European Parliament in May.
By a 6-2 majority decision, Germany's top judges asked the European court in Luxembourg for a preliminary ruling on whether the ECB breached its mandate when it agreed to do "whatever it takes" to preserve the euro.
A ruling could come this year if the ECJ decides to use a fast-track procedure. Otherwise it could take up to 18 months to rule on the complaint brought by more than 35,000 plaintiffs, with Eurosceptical politicians and academics prominent amongst them.
At issue is the so-called Outright Monetary Transactions (OMT) policy under which the ECB would buy unlimited amounts of bonds of a government that sought a loan from the euro zone's rescue fund and accepted an internationally supervised economic reform program.
ECB President Mario Draghi's announcement of the decision in 2012 was a turning point in the euro zone's debt crisis. It calmed turmoil in European bond markets within weeks by removing fears of a break-up of the single European currency.
The German court spelled out its view that the ECB plan, although not yet implemented, is probably illegal because it would violate a ban on monetary financing of governments.
It was the first time the judges in Karlsruhe had referred any case to the ECJ for a preliminary ruling, but in doing so they avoided acknowledging the supremacy of European treaty law over the national constitutions of member states.
They did not spell out what they would do if the European court determines that the ECB was within its rights, as German Finance Minister Wolfgang Schaeuble and the ECB both argued in testimony at a Karlsruhe hearing last year.
If the OMT plan were ruled illegal in Germany, the court could bar the German Bundesbank from participating by buying its share of bonds.
That would not stop other central banks doing so, but it would cause a severe crisis of confidence between Europe's biggest economy and the rest of the euro zone, and would be bound to rattle financial markets.
The European Union operates on the basis that treaties are "primary law" that takes precedence over national law, and that the ECJ is the arbiter of compliance with the treaties.
"It's clear that EU law has primacy over national law, but as to whether it has primacy over national constitutions, that question has always been avoided," said Michel Petite, a former head of the European Commission's legal service now in private law practice in Paris with Clifford Chance.
Only the Dutch constitution explicitly recognizes the supremacy of international law, said Franz Mayer, professor of public and European law at Bielefeld University.
However, the German court has challenged that hierarchy in a series of judgments beginning with a 1993 ruling which upheld the legality of the Maastricht Treaty that created the European monetary union but said the EU could not go much further in integration without greater democratic control.
A subsequent 2009 ruling on the Lisbon Treaty sought to tighten those limits by asserting that the European Parliament was less legitimate than national parliaments because it was not elected on a one-man-one-vote basis, with smaller countries having a disproportionate number of seats.
In the 2010 Honeywell case, the German court established a procedure under which it must refer a disputed European measure to the ECJ and, if the latter does nothing, only declare the measure illegal if the illegality is serious and manifest.
In Friday's ruling, the court said that a very restrictive version of the OMT policy, with limited bond buying and ruling out any debt reduction, might be considered legal.
However such a watered down policy might be ineffective and Guntram Wolf, director of the Bruegel economic think-tank in Brussels, said it would amount to making the ECB a preferred creditor, which would raise the borrowing costs of a country in trouble and make it harder to access capital markets.
LENDER OF LAST RESORT?
Legal and political analysts say the European court is far more likely to rule in the ECB's favor than the German judges.
Bert Van Rossebeke of the Centre for European Politics (CEP) in Freiburg called the decision to refer to the European court for the first time "historic".
"The (OMT's) chances are better in Luxembourg than in Karlsruhe," he said.
Gunnar Beck, a Eurosceptical German expert on European law at London University, said: "This surrenders German sovereignty to a European Union court.
"Practically speaking the (EU) Court of Justice is not an independent organization but is pre-disposed to interpret legal questions in the interest of the European Union."
Whether the German court would go as far as to overrule such an interpretation remains to be seen. German legal experts said the Karlsruhe judges are clearly divided on how far to undermine the EU and some are worried about the economic and political consequences of any legal confrontation.
Mayer said that if the ECJ, as he expects, rules that the ECB has not acted illegally, the German court could in theory stick to its initial view, declare the OMT plan "ultra vires" and bar German authorities from implementing it.
But it was more likely to save face by accepting the Luxembourg court's interpretation, he said.
However, another European law professor, Damian Chalmers of the London School of Economics, said the German court had made clear that if the ECJ does not rule the plan illegal, it will.
(Additional reporting by Alexandra Hudson and Annika Breidhardt in Berlin; Writing by Paul Taylor; Editing by Giles Elgood/Ruth Pitchford)