The Federal constitutional Court in Karlsruhe is considering arguments against the ECB's offer to buy government bonds and lower borrowing costs for indebted countries.
Opponents of the bond-buying program say the program oversteps the ECB's mandate, which forbids it from financing governments.
The arguments against the program, known as Outright Monetary Transactions, or OMTs, have been added to another challenge against Germany's backing of the emergency bailout fund for the 17 European Union countries that use the euro.
The current challenges — brought by a disparate group of Germans including conservative lawmaker Peter Gauweiler, a team of professors, a citizens' organization and Germany's Left Party — claim both measures are unlawful as both EU laws and the German constitution say that only the elected national parliament can decide how taxpayer money is spent.
Dietrich Murswiek, one of the plaintiffs' attorneys, argued that the bond purchase program exposed taxpayers to hundreds of billions of euros in potential losses if the bonds are not repaid — without any democratic authorization from national parliaments.
"The ECB is turning the currency union into a liability union, without asking member states and their parliaments," he said.
In Berlin, Chancellor Angela Merkel signalled that she's confident the outcome will be favourable.
She noted that every eurozone rescue measure so far has been discussed and approved by the supreme court. Some have come with conditions, such as a strengthening of parliamentary powers in Germany.
"We will argue today that the ESM is important and that the European Central Bank is doing everything necessary to secure price stability," Merkel said at a conference organized by Germany's main industry lobby group.
EU efforts to rescue financially troubled countries have run into popular opposition in Germany, the biggest financial backer of any bailout or financial backstop due to its status as the largest eurozone economy.
A sweeping ruling against the OMT would likely effectively torpedo the OMT. Analysts say that an outright rejection is highly unlikely but markets are watching to see if the judges attach any conditions that might raise doubts about its effectiveness. It's also possible that some issues could be referred to the EU's own court. Karlsruhe judges will hear oral arguments Tuesday and Wednesday; a decision might not come for several months.
The OMT program was created after ECB President Mario Draghi dramatically vowed last July 26 to "do whatever it takes" to save the euro. The ECB hasn't bought any bonds. But the program's mere existence has helped lower countries' borrowing costs in bond markets and eased fears the euro union might break apart. To take part in the scheme, a country would have to commit to reduce its debts and deficits, as well as accept a bailout loan or credit line from the European Union's financial rescue fund, the European Stability Mechanism.
By buying up a country's bonds, the ECB program would help drive up the bonds' price, lowering the interest yield demanded by investors. Lower yields would mean lower interest costs for governments the next time they borrow money by selling new bonds.
A key aspect behind the program's success so far is the ECB's statement that there wouldn't be any limit on the amount of bonds it could buy. That has kept markets wary of going against the central bank and its financial firepower.
The ECB sent Joerg Asmussen, a former German finance ministry official who has since been appointed to the ECB's six-member executive board, to defend the program.
Also testifying is OMT critic Jens Weidmann, the head of Germany's national central bank, the Bundesbank. Weidmann, who sits on the 23-member ECB rate-setting council by virtue of his job as Bundesbank head, was the only member to vote against setting up the OMT program on Sept. 6 last year.
Michael Wohlgemuth, an economist with the Open Europe Berlin think-tank , said Asmussen would face a balancing act, needing to both argue that the program remained within legal limits while taking care not to give the impression such limits would undermine its potential effectiveness.
"That is the trade-off that has to be made somehow — appease the constitutional court without getting financial markets in a panic," said Wohlgemuth.
Geir Moulson contributed to this story from Berlin.