The European Central Bank vigorously defended its bond-buying programme in a German courtroom on Tuesday, arguing that the scheme many credit with saving the euro from collapse was within its mandate and had not spawned unlimited risks.
ECB policymaker Joerg Asmussen, who put the case for the central bank, received strong backing from the German government. But he had to watch as his colleague Jens Weidmann, president of the Bundesbank, attacked the plan in a rare public clash between Germany’s top monetary policymakers.
The two-day hearing of Germany’s Constitutional Court was called after more than 35,000 Germans filed complaints against the ECB’s plan to buy up the debt of stricken euro zone member states.
The plaintiffs argue that the programme, announced last year by ECB President Mario Draghi, violates the bank’s mandate of achieving price stability and amounts to illegal back-door financing of governments.
The court cannot revoke the ECB scheme and in any case is not expected to reach a final ruling until after German parliamentary elections in September. But in considering whether it violates parliament’s right to control the budget, it could block German participation or challenge certain aspects of the programme, such as its “unlimited” nature.
This could wreck the effectiveness of the “Outright Monetary Transactions” (OMT) scheme, which has worked largely by giving investors the confidence to buy bonds, safe in the knowledge the ECB would intervene on the secondary market if any government were at serious risk of defaulting.
In earlier rulings the court has approved euro zone bailout schemes while insisting the Bundestag, or lower house of parliament, be consulted more fully.
Asmussen, who sits on the ECB’s six-member board, tried to strike a balance, saying that although the bank has described the programme as “unlimited”, there were constraints on how much debt it could buy up.
“We announced that our OMT interventions would be ex ante unlimited,” said Asmussen. “We have no doubt this strong signal was required to convince market participants of our seriousness and decisiveness in pursuing the objective of price stability.”
But the scheme is “effectively limited” by the fact that it is restricted to bonds with a short maturity, he said. Analysts say the scheme applies to about 524 billion euros ($695 billion)of outstanding short-term debt of Italy, Spain, Portugal and Ireland.
Weidmann, speaking after Asmussen, said the programme risked slowing reform efforts in euro zone states and harming the credibility of monetary policy.
He has denounced the programme as tantamount to printing money to finance struggling euro states. This is considered taboo in Germany where fears of inflation run deep nearly a century after runaway prices under the Weimar Republic devastated the economy, which helped the Nazis rise to power.
Regardless of the court’s verdict, J.P. Morgan economist David Mackie said Weidmann’s stance “makes life very difficult for Draghi” as the ECB searches for ways to get Europe’s struggling economy back on its feet.
Despite their policy differences, Asmussen and Weidmann sat next to each other in court and left the building together at the lunch break. Court President Andreas Vosskuhle even mistakenly called Asmussen “Mr Weidmann” when thanking him for his testimony.
Close in age, the bankers both studied in Bonn and worked closely together on Berlin’s response to the 2008/9 financial crisis, when Asmussen was Finance Minister Wolfgang Schaeuble’s top deputy and Weidmann an adviser to Chancellor Angela Merkel.
Draghi, who unveiled the OMT programme as fears of a euro breakup flared, has called it “probably the most successful monetary policy measure undertaken in recent time”.
The crisis has subsided significantly since he first sent signals about the scheme, promising in a speech in London last July to do “whatever it takes” to save the euro.
Even though the ECB has not bought a single bond of any distressed euro zone government under the programme, yields on 10-year Spanish bonds have fallen from 7.6 to 4.6 per cent, while their Italian equivalents have dipped from 6.6 to 4.3 per cent.
In introductory remarks, Vosskuhle said the success of OMT would play “no role” in the court’s view of its legality.
But experts say the judges will be reluctant to do anything that seriously endangers the OMT programme and risks another flare-up of the crisis. The court could even decide to refer the case to the European Court of Justice in Luxembourg.
Although the ECB is based in Frankfurt, it is bound by European Union law, raising questions about whether the German court has jurisdiction.
Vosskuhle described this as “the most difficult legal question” facing the eight red-robed judges, whose rulings on euro zone bailouts have been closely watched by financial markets since the debt crisis broke out over three years ago.
Legal experts believe the European Court is much more likely to give a green light to the OMT, though the German court could attach recommendations if it did refer the case.
Making the case for the German government, Schaeuble said at the hearing: “I find it hard to imagine that German courts would decide directly on the legality of the ECB’s actions”.
If they did so, he said, there was a risk that courts in all 17 euro zone member states would try to weigh in, giving the ECB contradictory legal orders.
The complaints against the OMT reflect fatigue in Europe’s largest economy at funding the lion’s share of successive sovereign bailouts. Outside court, dozens of protesters demonstrated, including members of Germany’s new anti-euro party, “Alternative fuer Deutschland”. ($1 = 0.7533 euros)