ECB still has ‘big bazooka’ to defend euro despite court ruling

The European Central Bank still has a “big bazooka” with plenty of ammunition to preserve the euro despite a German constitutional court statement that its bond-buying plan is probably illegal, EU economics chief Olli Rehn said today.

Mr Rehn also urged the ECB to act to ensure that abnormally low inflation in the euro zone rises towards the bank’s target of just below two percent.

Speaking at a Reuters summit on the euro zone, the European Commissioner for Economic and Monetary Affairs said it was right that a European court, not a national court, should have the final say over the ECB’s actions.

The German court last Friday referred a complaint by eurosceptical lawyers against the ECB’s 2012 Outright Monetary Transactions policy, which calmed the euro zone debt crisis, to the European Court of Justice in Luxembourg for a preliminary ruling on the legality of the bank’s scheme.

However it clearly stated that it believed the plan, which has not yet been put into use, violated the ECB’s mandate and would constitute illegal monetary financing of governments.

Asked whether the German court had emasculated the ECB’s ultimate weapon, Mr Rehn said in an interview: “In my view the ECB certainly has its big bazooka and plenty of ammunition for the bazooka if needed. “I find it is both appropriate and fundamentally legitimate that the European Court of Justice scrutinises and finally rules on the competences of another European institution,” he said via video link from Finland.

The German constitutional court has only suspended its case, reserving the final say for itself, leaving some doubt at to how this may play out.

Mr Rehn said that “in the real world”, the ECB’s intervention had been a “crucial turning point” to stabilise financial markets, along with an agreement by euro zone governments to create a banking union and to implement stricter fiscal discipline. “In my view the ECB has definitely worked within its mandate and has done so wisely by taking decisive action,” the Finnish commissioner said.

He said he trusted the central bank to continue to actively pursue policies that support growth and employment in line with its mandate by ensuring price stability and meeting its inflation target.

“I might remind you that inflation in the euro zone for the moment is 0.8 per cent, which is quite far from the self-set inflation target of the ECB which is close to but below 2 per cent,” Mr Rehn said. He reiterated his concern, voiced last month in Davos, that a prolonged period of low inflation would make it harder to rebalance the euro zone economy.

Reuters